Carry forward structural economic reforms

Tackling Covid-19 should open the door for urgent economy-wide reforms

I am impressed with the policy package the government has implemented under the active leadership of the Prime Minister to tackle the problems of the Covid-19 crisis. The stimulus package and monetary policy are not as bold as the US policies. But we are not an affluent country like the US, nor do we possess the global reserve currency. Our package is sufficient to support the most vulnerable population, and provide assistance to the enterprises to retain workers. What I liked about the package was that the efforts were led by the Prime Ministry himself, cutting across ministries and bureaucracies. This momentum should not be lost.

Covid-19 struck India on top of an economic downturn leading to lowest GDP growth in decades. I have argued in this paper, this downturn was the result of absence of structural reforms in a coordinated fashion. We abandoned trade reforms by continuous imposition of tariffs, making the economy not internationally competitive. We made remarkable progress in trade and logistics facilitation, but did not follow it up with full speed. We exited from RCEP since our industry was afraid to compete with the Chinese and South-east Asian companies. These led to sluggish export growth. BOP crisis was averted thanks to rapid and continuous decline of oil prices. We were fast abandoning our outward-oriented economic policy which gave us impressive results. 

Our banking policies and reform of GST are also still associated with numerous challenges. What was most striking was that there were no institutional reforms to implement policies in the present chaotic global environment. Ministries are working in isolation, with no real coordination. The PMO is fine-tuning individual ministerial policies, and the NITI Aayog is also not bestowed with power to play the coordinating role. The Economic Advisory Council of the Prime Minister (EAC PM) has three top trade policy experts, yet it is not focusing at all on trade reforms to revive the export momentum. In this scenario, I do not see any chance of an economic revival after the crisis is over.

But I am amazed at the way we designed and implemented the stimulus and monetary policy over the past two weeks. It was a complete economy-wide and global health crisis reform package. I strongly suggest that we continue and build up on this momentum to carry forward structural economic reforms after the crisis is averted, and implement the long overdue economy-wide re­forms to lead to high sustained growth, which is inclusive.

What are my recommendations?

• We should not rush to exit from the lockdown and fully or partially resume economic activities. Given our poor testing capabilities, and very high interconnectivity, we should resume economic activities when Covid-19 threat is fully removed.
• We should set up the Trade Policy Council under the Prime Minister to oversee all strategic work and provide guidance on all policy matters. I have written several pieces on this topic in this paper. The PM should move away from slogans to lead policy making, as he has done in the present crisis.
• We need to bring down our tariffs to ASEAN levels to make our economy internationally competitive and complete the implementation of the recommendations of EAC PM Report on Logistics of October 2018.
• Our big industries should be confident to play the lead role in new neighbouring value chains. This would help India to use its mature engineering sector integrated with lower cost champions of intermediates in Vietnam, Thailand and other South-east Asian countries, and do the finished products in India. Pune, Chennai, Ahmedabad innovative clusters would be able to integrate value chains across South-east Asia, and deliver value-added final products to the global markets. Automation and trade tensions, and the near collapse of global value chains will certainly move the world fast towards neighbouring value chains, at least for a while.
• We should join RCEP soon and not give up our Act East policy. We should also be involved only in deep bilateral FTAs. In this context, we need to understand that both EU and the USA will treat us as equals, and not provide us with special concessions. Hence for our proposed FTA with the USA, we need to look at the demands of the USA in the US-Mexico-Canada Agreement, and EU-Canada and EU-Japan FTAs for our revised EU FTA.

I again reiterate that we should keep our policy-making engine in cruise control and even accelerate it a bit, and implement the next generation reforms immediately after the Covid-19 crisis is over. This window of opportunity should not be lost.

The writer is a former economic adviser to the Union Commerce Ministry