Catch a Crisis by the Horns

The Economic Times     10th September 2020     Save    
QEP Pocket Notes

CONTEXT: The latest Gross Domestic Product (GDP) figure decline present Government an opportunity for reforms rather than demonstrating its incapability by terming the crisis as an “act of God”.

Hurdles to Economic Recovery

  • Crisis Hypothesis Disproven: 
    • Crisis Hypothesis postulates that reforms can only happen in the face of a very severe crisis. For, E.g. the 1992 liberalization was enacted in a similar backdrop; reasons being-
      • Widely discredited socio-economic paradigm during the crisis, which prevents resistance to the successful execution of reforms.
      • The phenomenon of opportunistic Government finding political cover to enact reforms behind external agencies like the International Monetary Fund (IMF).
    • Terming the crisis as ‘act of God’: absolves the Government of its responsibilities and need to push for reforms, disproving the crisis hypothesis.
  • Reliance on the piecemeal approach: Changes introduced in the economy post-COVID19 were temporary and targeted only for new investors.
    • For, E.g.  Temporary relaxation on labour laws by the states like Uttar Pradesh and Madhya Pradesh.
    • Investors are unlikely to sink money into projects where the restrictive laws are slated to reappear in three years.
    • Relaxing laws only for new investors is distortionary since it penalizes existing businesses.
  • Preponderance of small firms: The economy is dotted with low-productivity enterprises operating in the informal sector with very few workers. Firms remain small in order to
    • Avoid labour regulations that become onerous with size.
    • Avoid land acquisition, which is often subjected to regulatory hurdles.
  • Depressed state of credit markets: Inefficient public sector banks (PSBs) overrun with non-performing assets (NPAs).
    • Regulatory oversight: of bankruptcy proceedings has disabled the intermediary functions of the financial sector.

Way Ahead

  • Need for 2nd generation reforms: the gains of the 1992 reforms have been exhausted.
    • Without a second-generation of reforms, sustaining growth above 5% will become increasingly difficult.
    • Structural reforms: Covering land, labour, financial markets and banking.
  • Regulatory reforms: 
    • Political capital needs to be expended to push through regulations.
    • Surgical removal of business-impeding regulations is required.

Conclusion: The talent pool of India is immensely overwhelming, with a bright future, sans government intervention/impediments. ‘Reforms Now’ has to be the mantra.

QEP Pocket Notes