Second Generation Reforms: It’s time to stop dithering

reformsHelming the country for the last nine years, Prime Minister Manmohan Singh must be now preoccupied with thoughts of his lasting legacy. For the man who liberated the Indian economy over two decades ago, the current impasse over the second generation reforms must be a source of deep anguish to him. The complicated political arithmetic has only added to his woes – reduced to a minority with the withdrawal of support by the Trinamool Congress and the DMK, his government is now fighting with its back to the wall to restore its shattered credibility and its tag of non-performance.

There was a time when his government could carry through reforms, but today when it is keen to bounce back into the international reckoning by kick-starting the second generation reforms, it finds that it is handicapped by lack of numbers in Parliament, which makes any legislative action an uphill task.

In a self-appraisal mode, Manmohan Singh admitted the shrinking room for manoeuver while returning from Tokyo. “Reforms certainly have to take into account the fact that we don’t have the majority to get Parliament to approve some of our reform proposals. So, we are dependent on the goodwill of our allies and I would be the last one to deny that there are uncertainties,” he said. “But even then, we are confident the reforms that matter, and which are going to yield results in the next few months, we will be able to push them”, he added.

High hopes indeed, but the hard reality is that with international credit rating agencies like Standard & Poor and Moody’s having sounded the warning bells, India cannot wait much longer for the second generation reforms to take off. The policy paralysis that has gripped the Manmohan Singh government has caused a deceleration in the growth rate and a precipitous slowdown in economic activity that cannot but cause grave concern. The spate of financial scams, the endemic bureaucratic delays and the poor governance threaten to roll back the ‘India Story.’

Euphoria evaporates

Even making allowance for the compulsions of coalition politics, the government has been weak to the point of being timid. Decision-making is virtually at a standstill.

The S&P prescription for India is to ‘unleash’ public and private investments (for example, by enacting the land acquisition bill), implement a nationwide government sales tax, and further trim fuel and fertilizer subsidies. But with general elections only a year away, there is no political will to take the bull by the horns.

Even when the going was good, all the concentration of the government was directed towards FDI reforms. It allowed 51 per cent FDI in multi brand retail subject to approval by individual states, the latter rider acting as a major dampener. Nine months after the policy was announced it has found no takers due to lack of clarity on the numerous conditions imposed on investments. The government has received a flood of queries from foreign investors including Walmart, Carrefour, Auchan and others seeking clarity on the FDI norms. The government has also approved 49 per cent FDI in scheduled and non-scheduled air transport services. Both these reforms have been interpreted by experts as a case of too little, too late.

Insurance Reforms

The most vital reforms – opening up foreign direct investment in insurance and in pension funds have merely been cleared by the Union Cabinet, which means nothing until these are legislated by Parliament. The ceiling that the Cabinet envisages is 49 per cent FDI in insurance and 26 per cent in pension funds. This level of investment is unacceptable to many foreign direct investors who have seen the red carpet being rolled out for foreign investors in some other countries.

The last session of Parliament was frittered away and while the annual budget was passed as a constitutional necessity without any debate as the Opposition stayed away except during voting, other bills were stymied. It was not as though the opposition alone was to blame. The UPA was unrelenting when the opposition parties were gunning for sacking two Cabinet ministers — Ashwani Kumar and Pawan Bansal. But after the session ended in complete non-achievement, both ministers were given the marching orders. The result of all this procrastination has been that other than limited action in attracting FDI, there has been no serious thrust towards second generation reforms. We have structural issues in our economy which need to be first removed but there are no signs of those.

Land bill, GST in limbo

Clearly, more needs to be done on the ground. Experts have identified second generation reforms as including: Land Acquisition Bill, Mines and Minerals Bill, Goods and Services Tax and Direct Taxes Code.

Meaningful reform measures like the clearance of land acquisition bill have to be passed by Parliament. The Bill, which is critical for the development of industrial, agricultural, and infrastructural land, is also still hanging fire. A consensus appeared to have been reached on the bill after the government agreed to some amendments put forth by the BJP and the Left.

The BJP had been demanding that when the government acquires land, half the compensation must go to the original owner-farmer. The Left’s amendment regarding the rights of tenants was also conceded. Yet, in a climate of lack of trust between the UPA and the opposition, one can never be sure that these would finally go through. In a new development, the BJP has struck a conciliatory note, and said it wants the monsoon session of Parliament to be advanced in order to debate and pass the food security and land acquisition bills with some amendments.

The Goods and Services Tax is a value added tax that is pending for long. It will replace all indirect taxes levied on goods and services by the Indian Central and State governments. It seeks to cover most goods and services and would thus be implemented concurrently by the central and state governments as the Central GST and the State GST respectively. It is considered to be a major improvement over the pre-existing central excise duty at the national level and the sales tax system at the state level. The new tax will be a significant breakthrough and the next logical step towards a comprehensive indirect tax reform in the country.

The Direct Taxes Code is slated to replace the existing Income Tax Act 1961 and has some worthy provisions which would be of benefit to the middle class in terms of simplification of rules.

The Way Ahead

The second generation of reforms, according to experts, would require further freeing of sectors like insurance, banking and retail, strengthening of infrastructure, streamlining of the legal system, removal of corruption, improvement of the public delivery system and creation of credible social infrastructure.

Much water has flowed down the Ganga but the situation can still be salvaged by some vigorous steps.  Lacking a majority in Parliament is a sure handicap, but the administration can be activated and at least some reform measures can go through. But the government seems keen only on populist measures like the Food Bill. If it continues to dither, the economy will drift further downhill and investment into the country would be hard to find.

(The views expressed in this column are personal reflections of the author on the state of second-generation reforms in India).