Focus on micro, not just macro, reforms–07.11.2017

By Anil K Kanungo,

Why is the Indian economy currently looking gloomy? Many believe that the necessary macroeconomic structural reforms were not in place and some that were implemented were half-baked and wrongly implemented. Much has been said relating to demonetisation and the implementation of GST, which may have contributed to this downslide in the last two quarters’ economic growth.

The Economist recently commented about Prime Minister Narendra Modi not being a good reformer and lamented that his government had missed a significant opportunity — namely the low international prices of oil, which is an important component of India’s import basket — to scale up the economy. Continued low commodity prices, especially of crude oil, could have helped the Indian government contain the fiscal deficit and rein in inflation further.

The issue here is not only of macroeconomic reforms that are essential for the Indian economy to perform well and remain stable. What is more important is how microeconomic reforms are being handled in the economy, to make it land in a safer place.

Progress is currently lacking on the microeconomic reform front. Microeconomic reforms such as sectoral and second-generation reforms encompassing vital sectors such as banking, bureaucracy, judiciary and industry which are primarily related to governance and institutions, are hardly visible in the operational sense. They loom large in discourse only.

Public enterprises in India incur chronic losses, require state financed equity injections and credit from the banking system. Privatisation, which is used to mean the transfer of both ownership and control of the firm from the public sector to the private sector, has been viewed as a possible remedy to overcome the malaise of the public sector.

But such process of privatisation of state-owned enterprises has been slow. The government has also lagged in the provision of basic services to the private sector, such as an efficient and clean public administration system, education, healthcare and a functioning market for land and labour.

A new bankruptcy law, introduced in May 2016, is an area where some action has occurred. But even this law cannot be fully effective until the judicial system is reformed. This may take some time, given that there is a backlog of 24 million pending cases, nearly 10% of which have been waiting for over a decade.

The promulgation of the Banking Regulation (Amendment) Ordinance, 2017, enables the RBI to direct banking companies to resolve specific stressed assets by initiating the insolvency resolution process. It is, however, making very slow progress.

The menace of NPAs will continue to grow in 2017-18. Despite a series of government measures to deal with bad loans and relentless efforts by the RBI, gross non-performing assets of state-owned banks rose to Rs 63.03 lakh crore on September 30, from Rs 55.03 lakh crore on June 30. Many analysts say that things are not so bad for private sector banks (gross NPAs for ICICI Bank stood at 6.28%, followed by Axis Bank at 4.17% compared to state-owned bank IOB at 21.7% or PNB/BOI at 13%). But private sector banks have avoided risky corporate loans, which are needed to support industrial expansion.

Minimum governance

The Modi government has done little to reform the public/police administration or the civil service system. Lack of law and order and safety is posing serious problems for society’s welfare. The concept of ‘minimum government, maximum governance’ has again come under national debate. Governance indicators published by the World Bank, which assesses government effectiveness, control of corruption, rule of law and regulatory quality, position India far behind many East Asian countries.

India’s education is also slowly losing its competitiveness as its standards fall, and the country lacks a capable and healthy workforce. Much of the education and healthcare available is provided by the private sector because of the poor quality of public services. They are not easily accessible to many.

Furthermore, in many Indian states, firms with more than 100 workers must seek government approval to hire and fire workers. As a result, many resort to contract workers or simply choose to forego economies of scale by remaining small. In 2014-15, several states sought to partially liberalise their labour markets. But now, it looks like these efforts have come to a standstill. Land issues are also yet to be addressed.

Slow progress in microeconomic reforms means that the government is not able to create an enabling environment for the private sector. This could result in private sector investment dipping further. This is particularly important, given that India’s economy grew by only 5.7% in the quarter ending June 30, the slowest growth rate since 2014.

It looks apparent that progress in microeconomic reforms is unlikely to occur at the speed required. The semblance of inefficiency may continue. The government needs to focus more on micro reforms than only looking at macro reforms.

(The author is Professor, Lal Bahadur Shastri Institute of Management (LBSIM), Delhi)

via Focus on micro, not just macro, reforms

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