Expert Speak India Matters
Published on May 24, 2019
With Verdict 2019 giving a greater political force to Modi’s next five years, we hope some of them will make the grade, or at least, in experiential learnings from 70 years of India’s policymaking continuum, would sow the seeds of change for future governments to take forward.
7 economic reforms that await Modi Season 2

In his 23 May 2019 speech, one of the points Prime Minister Narendra Modi made was to rethink wealth redistribution (for the poor) and wealth creation (for those who want to end poverty). This essay explores seven big problems that Modi must initiate, if not deliver, in Season 2 of the NDA government. All are known. But with Verdict 2019 giving a greater political force to Modi’s next five years, we hope some of them will make the grade, or at least, in experiential learnings from 70 years of India’s policymaking continuum, would sow the seeds of change for future governments to take forward. Much of the thinking and some work on these reforms has been done in the form of draft legislations, Standing Committee reports and public debates. Modi will need to take decisions on these — the first two years of his new tenure should see them through; the last three will deliver outcomes.

1. Agricultural reforms

With more than half the population of India dependent on a sector that contributes less than 18% to GDP, agriculture has been a policy puzzle that has remained unresolved since Independence. Essentially, the problem of agriculture is really a problem of serial market failures. The first market failure is the State’s inability to deliver livelihood to small and marginal farmers. The second market failure is the encouragement of inefficient asset protection: convincing a farmer to sell his land for industry and shift there in person with family, is difficult due to pricing on the asset side and lack of skills on the income side — the farm remains a poor farmer’s sole dependable possession. Finally, the third market failure is the sector being plagued by the politics of entitlement of the rich, wealth and powerful farmers, who, with the help of middlemen, are able to manipulate prices of output on the one side and, in case of land sales, are able to get change of land use to their benefit on the other. The complexity of resolution, therefore, magnifies. Other issue such as farming techniques or productivity are easier to address.

By focusing on doubling farmers’ incomes by 2022, the Modi government is on the right track — it has set its eyes on delivering livelihood security to the farmer in the 21st century rather remain trapped in the 20th century idea of providing food security to the nation. The Model Agricultural Land Leasing Act, 2016, is one such step in this direction that could create the base on which to increase crop productivity. In Season 1, Modi delivered the ideas; in Season 2, he should translate them into cash. India’s political economy being what it is, the elephantine question remains unanswered: given that apart from the cultivation of opium, agriculture falls completely under the State List as per the Seventh Schedule of the Constitution, why should the Central government concern itself with this sector at all? The Centre exiting agriculture would be the best reform — let the states do their duty.

2. Infrastructure reforms

India’s infrastructure story is like a badly-written novel, with several authors across multiple ideologies scripting a patchy, chaotic path with no climax in sight. Of what we know, there are two things we are clear about. First, the government does not have the resources to build a 21st century infrastructure for India. And second, private sector money is willing to make good the shortfall. What is needed is to rethink infrastructure policymaking that takes these two sectors into account. This means, designing policies that leave room for a changing dynamic of financing patterns or technological disruptions, for instance, and allowing contractual renegotiations where necessary.

Communicating with stakeholders across the spectrum through policy disclosures and transparency (putting every rule and regulation up for public debate before enforcing it, for instance) would go a long way in building a stable consensus. Further, capacity building needs expertise, and expertise requires knowledgeable people. Finally, the regulatory environment must become an enabler rather than a hurdle. Modi must end the deterioration of regulatory bodies into sinecures for retired bureaucrats. Merit and expertise must be the dominating consideration, a cadre should be its currency of execution, youth the face of delivery. On the policy side, every rule must have a reason for existence, a logic that supports that reason, and which rests on the foundations of a cost-benefit analysis (benefits must outweigh costs). Oversight of infrastructure through a regulator is really an outsourcing of the government’s lawmaking powers to deliver outcomes. Therefore, while being independent on the functional side, regulators must remain accountable on the governance of infrastructure creation side.

3. Land reforms

The foundations of all infrastructure creation and manufacturing is land. It is an economic factor of production that has become a highly politicised and emotive subject. Poorly-conceived and shabbily-executed snatching of properties of the poor has killed the credibility of land acquisition. Between 1947 and 2004, about 25 million hectares of land (more than the area of United Kingdom) has been acquired for various purposes — building dams or special economic zones. This has displaced 60 million people (about the population of Italy), a third of whom are yet to see any resettlement. As a result, the inherent suspicion of and aversion to giving up land for ‘national causes’ is backed by a cultural and inter-generational memory of exploitation. Better to hold on to land at any cost rather than to trust the state, goes the underlying thought.

Land reforms, therefore, need to keep a 21st century India in mind. They need to be driven by the need to build infrastructure and smart manufacturing that create jobs and bring prosperity to the people. In terms of public policy, first India needs to define what ‘public purpose’ is — the 31 December 2014 Ordinance attempted to narrow the definition and limit it to strategic and national security, but it has lapsed. Next, India’s land needs clean titling, for which another model law can be drafted that can be executed by States, as in the case of GST. Finally, the private sector can take over huge tracts of wastelands and convert them into connected islands of manufacturing. All along, creating infrastructure must go hand in hand with building factories, residences and towers. In Season 2, Modi can create an enabling legal infrastructure, but the execution will have to be done by the States. He must nudge the NDA-governed states to take lead.

4. Labour reforms

A Left-dominated economic discourse has created a maze of laws that capital must negotiate in order to build factories. Nobody is arguing for the absolute supremacy of capital as a factor of production over labour. But it is ridiculous for a $3 trillion economy going on $10 trillion to have 37 Central laws and six amendments — there are six laws that relate to wages alone, separate laws for disparate sectors (beedi and cigar workers, newspaper employees, working journalists, cine workers and cinema theatre workers, to list just four). This shows two things. First, our lawmakers don’t know how to draft laws based on firm principles. And second, there is an element of political grandstanding and entitlement disbursement to serve slivers of workers, lending an impression that a particular constituency is being helped rather than the entire labour force. We need a deeper study of these laws and compress them into two parts — one for physical aspects such as safety, the other for financial aspects such as wages and social security.

Such is the scale and complexity of laws that the Inspector Raj combined with litigation has become par for the course. A simple concept of wages, for instance, has as many as eleven definitions in the corpus of Indian labour legislation. Each piece of labour legislation that needs to be enforced requires the maintenance of a separate register and submission of annual returns to the authority designated in the Act and its rules. This not only wastes valuable time and costs money but also adversely affects the implementation of labour standards, besides ironically making the cost of compliance higher than the cost of violation. There are 429 different types of scheduled employments that have created more than 1,200 minimum wages. These laws belong to the colonial period, not for a 21st century India. The problem is not in redrafting laws, rules and regulations; most ideas are already on the intellectual table. The challenge is to effectively communicate these ideas to the entitled. As Modi said in his 23 May 2019 speech, he will need to reach out to trade unions and persuade them to loosen up. The window of factory-based jobs is small — robotics and artificial intelligence is disrupting this world.

5. GST 2.0

In Season 2, Modi needs to simplify the goods and services tax (GST) system — it is perhaps the lowest of the low-hanging fruit. The hard part of putting together the backend for India’s most complex single reform — one Constitutional amendment, four Central laws, 29 State laws and 1 notification for the Union Territories — is behind us. Bringing politics and economics together over three decades, making the GST one of the longest reforms in Independent India, the law brings eight Central taxes and nine State taxes under a single tax. All rates, compliance and administrative issues are decided by the GST Council — that comprises government representatives of all States sitting with the Central government. Such a wide-ranging reform brings with it its own problems, and in the case of India it was an unduly high compliance burden on small businesses and the initial sputtering of the all-digital GST Network. These cobwebs have been cleared and India’s indirect tax structure is in tune with that of 140 countries across the world. This was GST 1.0.

Modi’s second term requires a deeper push. GST 2.0 needs to deliver outcomes in the form of greater tax collections. There are two major changes needed. First, Modi needs to bring real estate, electricity, fuel and alcohol for human consumption under its fold. All these are revenue generators for States that will fight back, citing economic reasons and not citing political ones. Modi’s job here would be to reach out and persuade the States. And second, the number of rates. Today, we have five rates — nil, 5%, 12%, 18% and 28%. In March 2019, the GST Council introduced yet another rate of 1% for affordable housing, taking the effective total number to six. On top of this, we have a surcharge, a policy precedent that can expand endlessly. What we need is clear and unambiguous four rate-structure (counting nil, as a rate) before collapsing it to three — nil, 5% and 12%. The economic argument for such a simple structure are many; political arguments may be difficult to deliver.

6. Direct taxes reforms

Both the leading national political parties of India, the Bhartiya Janata Party (BJP) and the Indian National Congress (INC) share one thing in common: both have felt the need for, and followed it up with, legislative proposals for direct taxes reforms. And not without reason. In a country where just 46.7 million individuals and 1.1 million firms paid income tax in 2017-18, leaving a huge chunk outside the tax network, this needs a policy rethink and legislative intervention. The current tax infrastructure comprising laws, rules, regulations and the army of officials executing it — needs a reorganisation. Between the complexity of tax laws on the one side and a rent-seeking tax bureaucracy on the other, the case for staying out of the tax network and evading taxes is strong. With successive governments trying to widen the tax base, what is heartening is that a clean-up has begun on both sides.

The solution: Direct Taxes Code. While the UPA had made two attempts to bring such a law, one each in 2009 and 2013, Modi 1.0 had formed a task force to draft a new legislation. A bill that proposes to consolidate and amend the laws dealing with direct taxes — the Income Tax Act, 1961, and the Wealth Tax Act, 1957 — into a single and simple law, this is a much-needed policy intervention that has five goals. First, to make taxation more predictable than it is. Second, to reduce the cost of compliance and administration. Third, to minimise exemptions that serve a particular constituency and create a base for their expansion. Fourth, to reduce the ambiguity that facilitates tax avoidance. And fifth, to check tax evasion. Sitting on these five legs, the bigger goal is to increase the tax-GDP ratio. Above all, the approach to taxing citizens needs to be more respectful to the honest mass, even as the hard force of law must fall on evaders.

7. Financial sector reforms

As a consumer of financial services, we don’t think in regulatory silos, created to gift sinecures to retired bureaucrats. For instance, if we want to create long term wealth, we don’t ask whether we are buying a mutual fund, an insurance policy or a pension plan — all three deliver the same product, packaged differently, with different costs, and varying levels of transparency and disclosures. For each of these we have a separate regulator, established by law, writing rules and regulations, with fuzzy objectives. On the other side, it is essential for the government to attract capital into the economy through financial products, convert savings into investments, and drive India towards a $10 trillion economic powerhouse. The financialisation of the economy stands on the shoulders of financial products, from banking and funds to insurance, pensions and securities. In Season 2, Modi needs to bring these together into a new and elegant financial architecture.

That architecture is the Indian Financial Code (IFC), a draft law that awaits Cabinet approval and Parliament’s enactment. Conceptualised in March 2013, this law is the result of the Justice B.N. Srikrishna-led Financial Sector Legislative Reforms Commission. In a nutshell, this report and the accompanying draft law brings the consumer of financial services at the centre of India’s financial architecture. The report overturns the extant financial governance pyramid by placing the most important constituent, the consumer, at the centre. This is the first time that consumers of financial products have been given such a ‘protection’ by law. The draft law reorganises finance under nine heads — consumer protection, micro-prudential regulation, resolution, capital controls, systemic risk, development, monetary policy, public debt management, and foundations of contracts and property. And while the IFC repeals 16 existing laws and amends more than a hundred laws, this is a one-shot solution to serve India’s rising financial consumers.

As India resets its priorities and reaccelerates is growth, these are the reforms we expect Modi to initiate, as he enters his second term running.

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.


Gautam Chikermane

Gautam Chikermane

Gautam Chikermane is Vice President at Observer Research Foundation, New Delhi. His areas of research are grand strategy, economics, and foreign policy. He speaks to ...

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Guillermina French

Guillermina French

Guillermina French Fundacin Ambiente y Recursos Naturales (FARN)

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