Slogans aside, the most amazing takeaway from Prime Minister Narendra Modi’s 12 May 2020 speech is that even before details have been spelt out, policy actions initiated, or even ideas about what lies ahead planted, there is hope that he will deliver the two words India has been yearning for decades now – economic reforms.
On scale, these two words were last heard in 1991, under then Prime Minister P.V. Narasimha Rao, and executed by then Finance Minister Manmohan Singh. If the 1991 financial crisis delivered first generation reforms, the hope is that Modi, with Finance Minister Nirmala Sitharaman and Chief Ministers of various states will initiate second generation reforms. We are not talking about piecemeal reforms such as the goods and services tax, Aadhaar or the bankruptcy code. We are talking of reforms that reboot the Indian economy.
In his 33:55-minute address to the nation, his economics was headlined by another slogan – Atmanirbhar Bharat, self-reliant India. This India will stand on five pillars, he said: “Economy, which brings in quantum jump and not incremental change; Infrastructure, which should become the identity of India; System, based on 21st century technology driven arrangements; Vibrant Demography, which is our source of energy for a self-reliant India; and Demand, whereby the strength of our demand and supply chain should be utilized to full capacity.” Of all these, the point that the time for incremental change is over is one that resonates with 1991. He further talked about a Rs 20 trillion economic package, about 10% of India’s GDP, which would include the past package and a new one that Sitharaman would detail.
Against this background, all eyes are now on Sitharaman, who over the next few days, will release the package that will cater to cottage industry, MSMEs, labourers, middle class and industries, and would “focus on land, labour, liquidity and laws”. Of these, the critical aspects, and on which we expect economic reforms to ride, would be around land, labour and laws. Land is a State subject (Entry 18) but acquisition and requisition of property lies in the Concurrent List (Entry 42), labour sits in the Concurrent list (Entries 22, 23 and 24), while laws reside in both, the Union and in the States. As far as liquidity goes, India does not have a liquidity problem; the problem is banks are not lending.
A clean-up of these three means a political readjustment, an economic rethink, a policy redraft and a national restart. Politically, it means that as a society we will have to start looking at entrepreneurs without contempt and perhaps with respect as individual who put their money, bring ideas, labour and other resources together to create enterprises. This is a big readjustment for a nation used to socialist dominance. This readjustment will result in a rethink of the way India does its economics: incentives should drive laws, rules and regulations rather than hurdles. This in turn means that the way we draft policy will change: it will be written to attract capital and entrepreneurs. And finally, if these are aligned and in tune, it could give India an economic restart that we last saw in 1991.
If history is any indication, there is nothing like a good crisis to get economic activity going. Given that the economy is the lifeblood of a nation that feeds all other expressions, from poverty alleviation to Mars mission, 2020 could be the year when India’s regulatory cholesterol will be fixed. We see Modi’s speech, and the expected policy actions, as an economic stent that will unclog the path for productive activities – entrepreneurs to build enterprises, financiers to invest, companies to create jobs, markets to create wealth. Since incrementalism is not the policy direction anymore, we expect sweeping economic reforms. Of course, there will be a backlash from incumbents and the Opposition. We hope Modi has factored these in and has thought-through the path forward.
Administrative drivers of Reforms 2.0
Administratively, these second generation reforms will be driven by States. Four BJP-governed states of Madhya Pradesh, Uttar Pradesh, Gujarat and Karnataka have already initiated regulatory changes. Madhya Pradesh Chief Minister Shivraj Singh Chouhan has gone about it through process reforms – registration of a business in a day, licences for 10 years instead of one, shops to be open from 6 am till midnight, reduction in registers from 63 to one and returns from 13 to one, and raising the threshold for labour inspections to factories employing 50 labourers from 20 earlier.
Uttar Pradesh Chief Minister Yogi Adityanath’s reform attempt is a little confused – the state plans to suspend all but three labour laws, which will neither get the Presidential assent nor judicial go-ahead; we believe, UP will have to modify its ambitions. The policy from Gujarat Chief Minister Vijay Rupani is not yet out but seems to echo Uttar Pradesh’s without suspension of minimum wages or safety laws. Finally, Karnataka Chief Minister BS Yediyurappa is making his moves, first by allowing industry to buy land from farmers directly; and second by setting up a committee (that institution that delivers little but never dies) for investment promotion. Among other things, all four states hope to invite global companies exiting China to their geographies.
Constitutional drivers of Reforms 2.0
Constitutionally, these reforms will be created by both the Union and the States. One of the big changes India needs, and which Modi mentioned in his speech, is around labour laws. There are 51 Central labour laws – three for industrial relations, four for wages, 22 for service conditions including safety, two for women, three for deprived and disadvantaged sections of society, and 17 around social security. Their sole accomplishment seems to be to protect less than a tenth of India’s workers. Reforms here need to be to include those outside the purview of these laws on the one hand, and simplifying them and making them flexible for entrepreneurs on the other. Take Minimum Wages Act, 1948. One of the first laws to be enacted in Independent India, the law, when executed by States, has gathered 1,915 minimum wages across India. How is an entrepreneur expected to negotiate this web?
But labour sits in the Concurrent list. As long as States draft rules under the Act enacted by Parliament they are in tune with the Constitution; the moment they overstep that authority, it needs the President’s assent, under Article 254(2). If labour reforms of the sort we need are to be ushered in, the first stop is Parliament; once amended, or repealed and re-enacted, only then can States draft their own rules. If Modi feels that this is the moment for labour reforms, and is confident of ensuring they are enacted in Parliament, then it would be a perfect reform under distribution of powers between the Union and the States.
Between the process reforms of the sort that Chouhan has brought in and expectations of new reforms ahead, lies the inspector raj – the deadliest virus that has infected the Indian economy. The best of laws have been twisted, the simplest of outcomes, say safety of workers or minimum wages, have been made excessively complex. So convoluted is the drafting, so well-hidden the fine print, that even PhDs in law would not be able to be fully compliant. The only institution profiting from this complexity is the inspector, who uses the law to extract rents and bribery. From the entrepreneur’s side, this is a cost of doing business, against which there is no appeal, no hearing, no justice. Modi can end this extortion, not only in labour laws but on the tax terrorism front as well, by using the troika of simplification of laws and digitisation of processes. Giving tax “targets” to tax bureaucrats is a practice whose time has gone.
Political drivers of Reforms 2.0
Politically, these reforms will ride the expectations of the people, for whom the neighbourhood will need to become an economic hub. COVID19 has made it clear that in a crisis, the Indian State is unable to handhold them. The mass migration, from factory-towns and large cities back to the villages, that has left a trail of anguish in our hearts and lumps in our throat. It will have economic repercussions too. Neither is the health crisis going to end soon nor will the labour be back in a hurry. As a result, if and when factories restart, there will be a shortage of workers, and this exodus can be seen as a tool that raised wages. But if laws are simplified and infrastructure delivered closer to the villages, the same workers can cart their portable skills within the neighbourhood. How this plays out remains to be seen. But it is clear that the socio-economic fabric has been torn and it will take regulatory tailors to fix it. Leaders who are able to deliver jobs in the neighbourhood will continue their political tenures; others will fall by the wayside.
The COVID19 crisis is the perfect storm for economic reform. We see this crisis as a moment in time that can transform India. Economically, Covid-19 is a 1991 moment. Geopolitically, Covid-19 is a Balakot moment. Constitutionally, Covid-19 is abrogation of Article 370 moment. This is a time for other related reforms too. The entire edifice of the State needs to be rethought – debates around administrative reforms, legislative reforms and judicial reforms have to return on the policy table.
While we now wait for Sitharaman to disclose to us what the government has in mind, the one indication that is as clear as the newly-discovered blue skies above us is this: COVID19 could be Narendra Modi’s P.V. Narasimha Rao moment, his last chance to do something big, his lasting legacy.
This article first appeared in ORF.