Forgotten reforms

Changes to land, labour laws needed for sustainable growth

Data for the second quarter of 2017-18 will have reassured observers that the growth slowdown is being reversed. Growth in the gross domestic product, or GDP, came in at 6.3 per cent, year-on-year, as opposed to a figure below 6 per cent in the previous quarter. Other actions by the government on pending policy problems have also been taken in the last few months. For example, there has been significant movement towards addressing outstanding issues in the banking sector, particularly the large number of bad loans associated with several big corporate houses and projects. The new Insolvency and Bankruptcy Code has been brought to bear on this problem, and the government has signalled its intention of cleaning up various sectors by excluding promoters who ran their companies into the ground from the first round of bidding for distressed assets. Concerns that were widely expressed about the implementation of the goods and services tax, or GST, have also been responded to, with some mechanisms made simpler — though this too is a work in progress. Thus it is likely that some moderate growth momentum will return to the Indian economy.

However, few will argue that the growth momentum so imparted will be anything other than moderate — far short of what is needed to touch the double-digit growth figures that will represent true job creation and transformation of the economy. For that to happen, the government cannot afford to be complacent. It will have to reconsider its decision to avoid the deep structural reform that has long been argued for as being central to India’s economic development. This reform would address, in particular, the markets associated with factors of production such as land, labour and capital. Without flexible, open and transparent markets for factors of production, economic dynamism will be difficult to achieve. The Insolvency and Bankruptcy Code deals with some issues to do with the market for capital — in particular, the inability to exit. But far too much of market capital relies even now on state-controlled banks that have proven their inability to judge risk properly. Meanwhile, large government borrowing and regulatory requirements mean that the dominance of treasury bonds prevents the development of a corporate debt market. This is an agenda for future action.

Meanwhile, unreformed central labour law is a thorn in the side of Indian manufacturing. The government seems to have decided to avoid this politically sensitive issue and has shuffled the responsibility off to states. This strategy has clearly not worked at the scale needed to really create sustainable manufacturing jobs. Hopefully, the government will have a rethink on the issue. And the market for land, too, has stayed unreformed after the government’s early effort to introduce amendments to the land acquisition law. If forcible acquisition is considered politically difficult, other models that appear to be working should be studied. The NITI Aayog has praised, for example, the “land pooling” method of land development being used by the government of Andhra Pradesh for its new capital at Amaravati. This involves voluntary donations and assembling of land into large parcels for urbanisation. Farmers keep some of the capital gains in this method. The central government should show more imagination and take up some of these forgotten reforms.