Reform imperatives

Greater focus on state-level reforms needed

At the World Economic Forum's annual meeting last week, Finance Minister Arun Jaitley reiterated his government's commitment to economic reforms. India could defy the global economic slowdown by continuing reforms and responsible economic planning, Mr Jaitley said. The statement could not have come a day too soon. It is reassuring that, just five weeks before the Budget, the government's earlier ambivalence towards reforms has given way to categorical assertions that they are needed to fight an impending economic slowdown. This is no time to just rue the legislative logjam in Parliament, where Opposition political parties, in particular the Congress, have stalled the passage of key reform bills. Hopefully, the government will realise that quite apart from the need to build political consensus over reforms envisaged through legislation like the launch of the goods and services tax regime or the bankruptcy code, there are a host of other measures that could be pushed through executive action and by persuading states to undertake reforms in areas to help improve the ease of doing business.

One area that needs urgent attention is the financial sector, which is weighed down by non-performing assets and the need to increase banks' capital adequacy in accordance with the Basel-III norms. The finance minister has talked about fresh allocation of resources for recapitalisation of the stressed banks over and above what has been provided in the current year's Budget. Prudence demands that recapitalisation be linked to their financial performance and measures to pare down bad debts through credible action. Allocation of capital without performance-linked conditionality will be a short-term palliative and should be avoided. Simultaneously, public sector banks should be encouraged to access capital markets to beef up their equity base. This will reduce the strain on government finances, without requiring any legislative change.

There are two other areas where reforms could be expedited. The finance ministry is now in its possession a set of recommendations made by the Expenditure Management Commission, whose formation was announced by Mr Jaitley in his first Budget in 2014. The ministry would do well to make the report of the Commission public so that the recommendations therein can be debated and the ministry could finalise those that need to be implemented. Reforms of expenditure on subsidies and centrally sponsored schemes need to be undertaken so that the Budget for 2016-17 can rein in its revenue spend and give a boost to capital expenditure. Tax reforms is the other area that must get a fillip in the coming Budget. The Eswaran Committee has made many sensible suggestions on streamlining the procedures on tax deduction at source, among many other things. Implementing its recommendations would be a good start for a government that had promised an end to tax "terrorism".

The government's legislative obstacles in reforming land and labour laws are understandable. But it is now time the Centre persuaded more states to reform labour laws to facilitate easy exits for companies. Also, if an exit policy could be announced for start-ups, the government could surely consider extending the same policy for all companies and encourage states to follow suit. Similarly, the government must expedite the proposed land leasing law to facilitate use of farm land for agricultural and non-agricultural use. States will have to be asked to frame relevant laws so that the stringent tenancy rules do not come in the way of land leasing. The government must recognise that one of the goals of reform is to improve the ease of doing business.