Survey pushes for Big Bang reforms
by Ashok B Sharma on 28 Feb 2015 1 Comment

Encouraged by the growth projection of 7.4 per cent by the new series with a new base year, the Government think tank report ‘The Economic Survey 2014-15’ has urged for pushing forward the ‘Big Bang’ reform agenda just before the presentation of the annual Union Budget.


A few days back, the Central Statistics Office (CSO) revised the base year to 2011-12 from 2004-05 for estimation of GDP. Accordingly, it projected 7.4 per cent growth for the year 2014-15 at constant prices after revising the quarterly estimates for the year. The growth at current prices for the year is projected at 11.5 per cent.


Further, the Survey has raised the hopes of the country entering into a double digit growth trajectory as the government has got a political mandate for reforms and a benign external environment is prevailing. The deceleration in growth has ended and the economy seems to be “recovering,” and the macro-economic fundamentals are stable. 


Suggesting the government be aggressive in inviting foreign direct investment (FDI), the Survey points out the “challenges in other major economies have made India the near-cynosure of eager investors.” The advantage of the situation of falling global oil prices and expectation of a good monsoon should be seized by pushing the reform agenda coupled with easing of monetary policy.


What is the essence of this ‘Big Bang’ reforms? To give a push to the Prime Minister’s pet ‘Make in India’ programme, the Survey contemplates “What should India make? Manufacturing or Services?” As a prelude, the Survey states that, in order to bring about expansion and structural transformation, India should utilize its dominant resource of unskilled labour. 


It distinguishes registered manufacturing (formal sector) from the general manufacturing which covers informal sector as well. It says that registered manufacturing has “the potential for structural transformation”. Registered manufacturing exhibits high productivity compared to other sectors of the economy. However, the manufacturing sector has registered a declining trend due to major factors like distortions in labour, land and capital markets and specialization not being in tune with India’s comparative advantage in unskilled labour. Thus, the Survey signals the need for reforms in labour, land and capital markets.


Certain sub-sectors in services, particularly the financial services and business services, exhibit higher productivity levels than registered manufacturing. However, these sectors being highly skill intensive (excluding construction) are out of line with the skill profile of the Indian labour force. They are unlikely to generate widely shared and inclusive growth. Saying so, the Survey observes that the service sector has the potential for domestic growth convergence across regions. 


The services sector has clocked a double digit growth of 10.6 per cent and continues to dominate FDI equity inflows. Services exports grew by 3.7 per cent to $75.9 billion. Hence India should call for removing any market access barriers at the WTO and domestic regulations should be put in place to realise the full potential of the sector.

The Survey favours that growth should balance the nation’s comparative advantage in availability of low skilled labour with skill development required by future generations to take advantage of lost opportunities. The registered manufacturing must be expanded to take leverage of India’s abundant unskilled labour. While “Make in India” occupies prominence as an important goal, the future trajectory of economic development depends on both “Make in India” and “Skilling India”. 


According to the Labour Bureau Report 2014, despite the demographic dividend the country enjoys, the total skilled force is only 2 per cent, much lower when compared to other developing countries.


The Survey has noted that 3.61 crore micro, small and medium enterprises (MSMEs) contribute 37.5 per cent of the country’s GDP and have a critical role in boosting industrial growth and ensuring the success of ‘Make in India’ programme.


On investments, the Survey has significantly commented that while private investment must remain the primary engine of long-run growth, the public investment, particularly in the railways, will have to play an important role in the interim to revive growth and to deepen physical connectivity. In the long run, the railways must be commercially viable and public support for the railways should be restricted to equity support for investment by the corporatized railway entities and for funding the universal service obligations that it provides. However, any public support should be clearly linked to serious reforms of the structure of the railways, its adoption of commercial practices, rationalization of tariff and overhaul of technology.


The Survey has prescribed a golden rule for fiscal policy saying that governments are expected to borrow over the cycle only to finance investment and not to fund current expenditure. Fiscal deficit should be brought down to 3 per cent of the GDP.


The Survey has questioned the subsidies given by both the Central and State Governments on rice, wheat, pulses, sugar kerosene, LPG, naphtha, water, electricity, diesel, fertilizer, iron ore. It raised the issue of how much of these benefits actually reach the poor. It said that price subsidies are often regressive: It means that a rich household benefits more from the subsidy than a poor household. Subsidies distort market. It contributes to food price inflation that disproportionately hurts poor households who tend to have uncertain income streams and lack the assets to weather economic shocks.


High MSPs and price subsidies for water together lead to water-intensive cultivation that causes water tables to drop, which hurts farmers, especially those without irrigation. In order to cross-subsidise low passenger fares, freight tariffs in railways are among the highest in the world. This reduces the competitiveness of Indian manufacturing and raises the cost of manufactured goods that all households, including the poor, consume. Benefits from fertilizer price subsidies probably accrue to the fertilizer manufacturer and richer farmer, not the intended beneficiary, the farmer. Leakages seriously undermine the effectiveness of product subsidies.


As an alternative, the Survey has suggested direct transfer of cash benefits through JAM trinity, viz., Jan Dhan Yojana, Aadhar platform, and Mobile phone number. It suggested creation of common markets for farm commodities and also extensive use of IT technology. It suggested imposition of carbon tax in lieu of carbon subsidy and promotion of clean energy. For reforms in financial sector, the Survey suggested 4Ds – deregulation, differentiation, diversification and disinter (better bankruptcy laws) — to push growth

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