India has an Opportunity to go in for a Crisp Set of Bold Reforms

Livemint     5th January 2021     Save    

Context: With effective vaccination, the Indian government must take advantages of converging economic circumstances to pursue bold reform measures instead of incrementalism, to quell the risk of stagflation.

Measures adopted by developed countries: to kick-start employment and demand.

  • Providing consumer stimulus (like unemployment insurance by sending cheques or gap income).
  • Government investment in infrastructure projects.

Challenges to reforms:

  • Targeting difficulties: in money distribution since a large population is outside the tax network.
  • Implementation deficit: Adding dug up roads, incomplete bridges and silted waterways to a raging virus does more to hinder the progress of the works than to stimulate the economy.
  • Threat of stagflation: India’s supply chains are weak and not fully established, and uneven demand-side stimulus could result in inflation.

Reform measures to put India back on a growth trajectory:

  • Fiscal effectiveness:
  • Effective targeting: using Below the Poverty Line (BPL) household lists maintained by state governments, cross-referenced with federal cooking gas lists.
  • Bridging the implementation deficit: A completed road means new business, fresh demand and an opportunity to employ people in building other things that feed off that road.
  • Ensuring financial closure of existing projects: through persuasion combined with innovative structures, in the form of guarantees or special provisions for equity investors.
  • For smaller projects, closure can come from domestic investors. For this, the banking sector needs to be recapitalized.
  • Revitalization of the banking sector: through recapitalization to the extent of about $100-150 billion.
  • Only after separating them into good and bad banks, and by creating a clear and time-bound plan for bad-loan resolution.
  • Good banks: should bring new talent, distancing from government interference and eventual dilution of the government’s stake in it.
  • For E.g. creating a statutory, well-staffed, Public Sector Bank (PSB)-equity-holding company that can begin the process of revitalization.
  • Increasing accessibility of PSB and Non-Banking Financial Companies (NBFCs) in Micro, Small and Medium Enterprise (MSME): by kick-starting credit-growth cycle.
  • Leveraging positive external outlook: Foreign exchange reserves are at an all-time high of $580 billion, with a strong capital account balance and great stability in remittances.
  • This means that foreign direct investors and foreign portfolio investors, along with the diaspora, remain positive on India’s growth prospects.

Conclusion: India is a young country with at least a few decades of robust growth within our grasp.

Quote:Youth means a temperamental predominance of courage over timidity, of the appetite for adventure over the love of ease,” said Samuel Ullman.