Reforms are Critical for Regaining Growth

Ram Narain

In early nineties India came out of the ‘Hindu Growth Rate’ (about 3.5 per cent) and moved to achieve an average growth of about 6-8 per cent. However, in last couple of years, again this growth has been gravitating towards that conservative ‘Hindu Growth Rate’. This happened irrespective of the fact that India has the potential of growing comfortably in double digit, with these tributes: a) huge potential of increasing the consumption; b) availability of unexplored natural and human resources.

The reasons of slower growth, even when purportedly growth oriented policies are adopted by Government, is lied with inherent legal, structural and regulatory defects in the system. Some of the main areas looking for slew of reforms to regain the growth are:

Firming-up Rules, Regulations and Acts

Politicians and bureaucrats are the obvious targets for most ailments of the country these days. The mass perception is like that. However, from a closer look at the profile of politicians and bureaucrats, we find that many of them are sharply different from the perception directed towards them. They enter in their field with idealistic convictions but those last—this marks, in process of adjustment with the system, they get changed for bad. So, they are equally the creator and victim of systemic ills.

The foremost drawback that is plaguing the Indian bureaucracy is persistence of impractical and outdated administrative acts, shaped to be exercise over the Indians during the British colonial time. It is since almost seven decades of India’s independence, no major moves were made to replace those nefarious laws with right ones.

Indeed, our system is replete with impractical rules, regulations and procedures, which make us corrupt and weak internally. The solution is not to make more laws to catch the culprits because there cannot be a pre-conceived standard to spot them. The sadder part is mostly those shun the wrong acts of powered people do not do things differently in case they rises to the power level. So, dubiousness in action in our country is a universal phenomenon, sans exception. But to resolve the firmed crisis syndrome, these are the areas where positive responses from all stake-holders are immediately required:

Bureaucracy

India stand at134th in ease of doing business list of 189 countries as per World Bank report 2014; 94th on Corruption Perception Index of Transparency International in the list of 177 countries in 2013; 136th on Human Development Index of United Nations Development Programme (UNDP) in the list of 186 countries in 2013. Most of the far eastern countries like South Korea, Taiwan, Malaysia, and Thailand etc. were in similar position or behind India on these indexes at the time of independence; now all are way ahead.

The per capita income of India in 1947 was $ 439, whereas that of South Korea was $770; China $619 and Taiwan $936. In 2013, per capita income of India was $1,414 as against $23,838 of South Korea, $20,706 of Taiwan, $6,569 of China--as per IMF report. India’s per capita income was 1/15th of South Korea. Sometime we tend to blame our fractured society and political system for this dismal state of affairs. We tend to give vent to our anger by voting out the incumbent political party and call it anti-incumbency factor.

The result comes out like during interludes people get able to change the Governments, but not governance that principally determined by the bureaucracy.

Skill Development

Most central government departments are headed by secretaries from generalist background—not all but significant numbers among them, lack the skill required to perform high-end administrative functions. This is something to be looked upon seriously—and solution must be apt and not something like hiring academically fit and practically very unfit candidates.

Restructuring Hierarchies

The professionals are bound to rise to top positions through a process of deeply flawed notion of meritocracy or identity-led provisions. With bureaucratic filtering, we restrict the pool of talent to a small number of officers for top positions. Ultimately, when we appoint a History expert to lead Agricultural department and an Agriculture expert to lead the Culture department--we lend virtually illiterate persons heading both departments. The net result is that we have intelligent but self-serving ineffective bureaucracy, which is reflected in our developmental parameters. A combination of leadership provided with fresh unrestricted ideas and domain expertise from bureaucracy would result far better than merely replicating the same skills under present set of centralised system.

Synergising Work Culture

The bureaucratic system is designed in such a way that one set of officers are assured the highest position whereas others are denied those positions, even when they have the expertise and domain knowledge. It is sort of apartheid system. This result in complacency in the former set of officers as they know that they would rise to the top by virtue of being part of the group and give up tendency in the other set of officers because they know that they would never rise to the top, however good they may perform. The best performance does not come from either.

Enhancing Manufacturing Capacity

Manufacturing is an area, which has the potential of generating large amount of employment. It is critical like other areas for sustainable growth-- education, agriculture, health, infrastructure etc.

In Bangalore, Indian companies are doing the design and development work for many of the famous World brands in electronics, IT and Telecommunication. They have World class testing facilities as well, but they don’t prefer to manufacture under their own brand. This is only because the environment is not conducive for manufacturing. Is it not strange that whereas intension of everyone, who matters, is to increase manufacturing, but still environment not being conducive?

This strange outcome is due to disconnect between the intent of senior Government officials and the existing laws, rules and regulation. Many analysts find that manufacturing faces disability factor at 7-8 per cent--if something manufactures in India as compared to China. In some cases it goes up to 22 per cent. We need to analyse the reasons for the disability factor and take remedial measures; mere providing incentives to compensate for the reasons of disability factor would not help much.

Restructuring Tax System

The reasons for disability factors can be divided into two categories--tax related and non-tax related. Some of the tax related reasons are: inverted tax structure, multiplicity of taxes and slow internal road transportation system due to State and city entry taxes. And few key non-tax related reasons are: bottlenecks at ports, unnecessary and complicated clearances, unreliable power supply, high interest rates, lack of availability of skilled manpower, under invoicing of imports.

Scrapping of all inverted duties should be the beginning of tax reforms. The arguments placed for inverted duties are: finished products get covered under international agreement and duty on them reduced, whereas components did not come under that ambit. Both these arguments don’t merit consideration. The benefits to the economy, including the amount of tax collected, would far exceed than the revenue collected from taxes on components, if manufacturing prospers in the country.

The dual use of components is also a bogey as wherever these are used these would be used for manufacturing of a product. As in most cases duty on manufactured products, particularly electronics and telecommunication, is low or zero. So, dual use has no meaning.

Making moves for a stable and simple tax regime is the need of hour and so is reforming the archaic road transportation system by abolishing all State entry and Octroi posts. It is strange that whereas in whole Europe, a vehicle can pass through sovereign countries, without any taxation. In India, which is single country, a vehicle has to pay taxes at half a dozen check posts of various States,

Similaly, the ports are craving for big reforms. In China, port clearance usually take not more than few days--in India, it takes months. It is also very important to make a distinction between real environmental concern and hypes.

Government can think of creating manufacturing infrastructure facilities and lease or rent these facilities rather than transfer these to private industry on ownership basis. In specified manufacturing zones where assured power supply is made available, building can be constructed either by the Government on the specifications provided by the industry or industry can make its own building and claim the construction cost from Government and pay lease rent to Government for usage of the building.

This model, on one hand, would provide the flexibility to the industry to have the building facilities as per its needs at a low cost and, on the other hand, cronyism would not go up further. This would also effect in reduction in upfront Capex cost, by which, industry can produce the products at competitive cost.

At the cusp of big changes, India is confronting with the opportunities as well as the challenges. Here, only few areas were dealt to be noticed by the policymakers, so they could usher the effective policies for making the inclusive growth scenario better.

Note: Figures and data in this article are for underscoring the point under consideration and have been largely taken from publically available sources, in case these are not mentioned in the main body of the article itself. A few have been assessed based on the discussion and inputs from various miscellaneous sources. These may not be exact but sufficiently accurate to highlight the issue in proper prospective.

Ram Narain is DDG (Security), Department of Telecom, Government of India.
(The views expressed by the author in this article are personal)

(The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of INCLUSION. Comments are welcome at info@skoch.in)

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