Stability and growth: India needs to accelerate its pace of reforms

Nearly 35 years after India embarked on the path of economic reforms, much still remains to be done to enable the country’s economy to achieve its full potential. NITI Aayog Member Rajiv Gauba rightly described a major shortcoming of the Indian policy establishment in his remarks this week at the Confederation of Indian Industry’s Annual Business Summit: “The 1991 reforms dismantled industrial licensing, but not the Licence Raj.” The level of engagement between businesses and government, along with the numerous permissions, licences and compliances required to start and run an enterprise, often discourages entrepreneurs. To be fair, the government has been working on this front. It has eliminated thousands of compliance requirements and decriminalised a large number of provisions.

 

Clearly, a lot more needs to be done. It is worth recognising that the global business environment has changed over the past few years, and a country like India has to improve its business environment more proactively. India runs a current-account deficit, which is usually not very large, but it still needs stable foreign flows to finance it. The need is being felt particularly today, when it is facing capital outflows. As economists have pointed out, this financial year may be the third consecutive year with a deficit in the balance of payments. While the crisis in West Asia is currently affecting capital flows, at a net level, India has been witnessing weak flows for quite some time. A truce in West Asia will definitely provide relief in the short run, but India needs to revisit its macroeconomic management framework from a medium- to long-term perspective. This is not only important for macrostability but also for pushing up growth in the long run. However, it’s not only that foreign investors are reluctant, Indian businesses have also not been investing in a robust way despite various policy interventions.

 

There could be many reasons for this, such as domestic and international demand, but the ease of doing business is likely one of them. In this context, while the Centre has taken several steps to improve conditions, firms also have to deal with state and local governments, which may not be on the same page.  As Mr Gauba rightly noted, India needs many success stories like Apple. However, it must be recognised that Apple was facilitated in ways that may not be the case for other businesses, particularly small businesses. Therefore, to build a vibrant business environment where even small businesses, which are usually more dynamic, can also aspire to grow, India needs clear policy formulations and seamless clearances. “Permitted unless prohibited” will be the right approach.

 

Further, rules and regulations should be stable and predictable. Intervention to achieve a short-term objective must be avoided. The government, for instance, has asked Indians to reduce gold buying, which can help address stress in the balance of payments. Such a call will inevitably affect businesses in the jewellery sector and signal to other businesses that the government can actively hamper their prospects to achieve other policy goals. The government has also increased Customs duties on gold and silver. Aside from affecting the jewellery industry, it could have unintended consequences. People might buy more gold and silver at the first sign of stress because a possible increase in duties would raise the value of their holdings. Overall, it is well known what needs to be done to improve the business environment, and the government, to its credit, has been working in this direction. The pace now needs to be accelerated.