India’s Stalled Reforms

Conventional wisdom would dictate that the weakening of hard-line communist parties in recent state elections should have been a boon for the country’s reform agenda. But these polls have also reaffirmed the importance of regional parties, which retain the ability to hijack the policy agenda at the national level. These political considerations have translated into policy lethargy and complacency in the UPA government, which is manifested in the case of several recent high-profile corruption scandals and prolonged inflationary pressures.
Rather than indicating a “few bad apples” in the system, in the case of corruption woes or pressures from short-term exogenous factors in the case of inflation, these developments are instead indicative of the inability or unwillingness of the government to accelerate the much-needed second generation of reforms in India’s economic liberalisation.

The momentum of the economic liberalisation process that began during the government of Prime Minister Narasimha Rao in 1991 with the dismantlement of the infamous Licence Raj, which lowered trade barriers and liberalised the foreign investment appears to have slowed under the current Congress-led UPA government that came to power in 2004.

Several crucial bills on issues ranging from mining policy, to foreign direct investm
ent (FDI) in front-end retail, land acquisition and corporate governance remain stalled in parliament. Moreover, a false sense of security appears to have crept into the Congress since its re-election to a second consecutive term on a strengthened mandate. This complacency has been fueled in part by the more than one trillion rupees (US$22 billion) collected from the auction of spectrum for 3G telecom services in 2010, which has reduced the urgency to curtail the fiscal deficit despite the government demonstrating little restraint to spend on a growing number of social welfare programmes. Despite the presence of a prolific private sector, high savings rate and large and growing domestic market, economic exuberance is not sustainable in the absence of several fundamental reforms. These include the fact that the country still remains a largely agrarian economy held hostage to annual rainfall in the absence of much-needed investment in irrigation infrastructure.

Some 70 per cent of the workforce continues to be employed in the agricultural sector, which is not sustainable if India seeks to become a major industrialised power. The government has set a target to increase the share of the manufacturing sector from 16-17 per cent of gross domestic product (GDP) at present to 25-26 per cent by 2020. Restrictive labour laws also remain a barrier to unleashing India’s full productive capacity. This has been illustrated by the relative decline of India’s much-hailed business process outsourcing (BPO) sector amid rising labour costs, high attrition rates and skills shortages.

The number of call centres in India has halved over the past three years amid the rise of competitors, such as the Philippines, China, Sri Lanka, Vietnam and Eastern European countries. This is also a reflection of the Indian BPO sector moving up the value-chain into knowledge-process outsourcing industries, such as software development, medical record services and accountancy.

Another stalled reform is the disinvestment process, which remains slow-moving and appears to be driven more by short-term concerns over filling the government’s coffers than a genuine recognition of the need to reduce the role of the state in economic affairs. Of the government’s 213 state-owned companies (public-sector utilities), the government has pledged to divest interests in some 45 loss-making PSUs in 2011-2. The government has also failed to demonstrate any urgency to relax FDI limits in several sectors such as the $450 billion retail market, where foreign investment is barred in multi-brand retail. Similarly, the Insurance Laws (Amendment) Bill 2008 that proposes to raise FDI limits in the sector from 26 to 49 per cent has been stalled in parliament since 2008.

The amendment bill to the outdated 1894 Land Acquisition Act and the Resettlement and Rehabilitation Bill were passed by the Lok Sabha (lower house of parliament) in 2009 but lapsed without approval from the Rajya Sabha (upper house) while the Draft Mines and Minerals (Development and Regulation) Bill has also undergone several revisions.
In their absence, the country’s mining policy remains opaque, as demonstrated by the fact that it has taken six years for South Korean company POSCO to obtain clearance for a $12 billion steel plant in Orissa state, which is the single-largest foreign investment project in the country. India produces as many as 84 minerals, but is unable reach its full potential due to bureaucratic, political and regulatory gridlock.

The main problem plaguing India’s mining and infrastructure sectors is the issue of land acquisition, given the political sensitivity associated with the conversion of agricultural land for industrial use. Recent violent protests by farmers in the Greater Noida region and Uttar Pradesh state over compensation for the construction of a highway project serve to highlight the difficulties associated with land acquisition for high-profile infrastructure projects.

Amid these problems a government committee has been established to assess the pricing and allocation of national resources, such as hydrocarbons, minerals and radio spectrum, including calls to place their management under independent agencies to deter corruption and accelerate the pace of reform.

While the government continues to pledge rhetorical support for economic liberalisation, actual progress remains slow, patchy and sometimes even counter-productive. No progress is likely on implementing much-needed structural reforms in the short term. Driving the slow pace of reform in India is the consensual nature of its politics and well-ingrained socialist ideologies that still dominate political discourse.

The government appears to have become complacent under pressure from appeasing coalition partners, the presence of a weak and fractured opposition and the ruling Congress party trying to live up to its pro-poor image. India is likely to continue to be held back by a slow-moving “Indian rate of policymaking” until the next economic crisis forces to it to accelerate the next generation of reforms.

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Published in Express Buzz Dated : 14^th June 2011