Excerpts from the note “An Economic Strategy for India”*, authored, among others, by Raghuram Rajan, former Governor, Reserve Bank of India:
Careful but quick policy reforms are needed for the sectors/areas that are stressed. These include agriculture, infrastructure (including power), exports and banking. There are common themes in any revival. Typically, we need to redeploy government effort in each of these sectors, focusing it on areas where it is truly needed to play an enabling role, while freeing the sector of excessive bureaucracy and intervention, which results in inadequate access to markets, distorted prices, and poor incentives. While the recent focus on improving India’s ranking on the World Bank’s Doing Business measures is commendable, we should guard against the temptation to focus on the specifics of the World Bank measures, while neglecting the broader impediments to producing in India. We now consider each of these sectors in more detail.
Agriculture & the rural economy
We need deep rooted transformation of agriculture, treating it not as a sector that has to be propped up through repeated sops, but as an engine of India’s job creation and growth. For that, it is imperative that we thoroughly reform agricultural and land policies. In particular, a key source of agrarian distress in recent years has been that the terms-of-trade confronting farmers has turned progressively more adverse, partly as a result of policies to combat food inflation. While low inflation is desirable in itself, the impact on farmers also needs to be taken into account. A policy priority should be to reduce distortions in farm product prices as well as input prices. Another important enabler is technology, both in educating and informing farmers, as well as in opening access to markets. Some specific proposals include
- Increase investment in research – covering new seeds including genetically modified (GM) ones, latest farming and irrigation techniques and disseminate new techniques widely, including through digital means. Invest in infrastructure such as irrigation, roads, and improved transport and storage logistics. Eschew loan waivers that divert resources from needed investment.
- Ensure that farmers receive more of what is paid by the consumer by o Improving farmer access to domestic and international markets by reducing fees, restrictions on competition and building the necessary infrastructure. o Foregoing frequent closing or opening of access to international markets
- Facilitate farming at scale for relevant crops o through the creation of farmer/producer cooperatives, o by enabling easier long-term leasing of land, for which land titling is an important prerequisite.
- Move to a fixed cash subsidy per acre cultivated based on digitizing and identifying plots (as demonstrated successfully by the Rythu Bandhu Scheme of the Govt. of Telangana)
o Replace price support schemes that are costly (because of corruption and inefficiencies in procurement and storage), ineffective (because procurement is not widespread, especially when and where most needed), and distortionary (because the wrong crops are incentivized).
- Improve and expand the current Pradhan Mantri Fasal Bima Yojana (PMFBY), especially as the climate gets more volatile. o Here quick assessment of crop damage using new technologies such as satellite images and drones, as well as quick payout into bank accounts, will enhance adoption.
- For landless laborers, the best short-term policy option is likely to be to strengthen the National Rural Employment Guarantee Scheme. Evidence suggests places with well-implemented NREGS schemes have significantly higher market wages – without hurting employment. Thus, increasing allocations to, and ensuring better implementation of, NREGS may be the best immediate policy option to protect the landless rural poor o Efficiency of NREGS spending can be increased by working with line departments to improve asset quality and create better quality rural infrastructure.
Accelerating the pace of the infrastructure build-out will help in a number of ways; it will create jobs in construction and new economic activity around the resulting roads, ports, airports, railways, and housing; it will promote inclusion as it connects interior rural areas to markets; it will make our exports (and import-competing manufacturing) more competitive as it reduces input costs such as land (as cheaper areas are connected) and power, as well as improves logistics and reduces transportation costs; it will open up India to both domestic and foreign tourism, which can be a tremendous source of semi- skilled jobs. This will require
- Untangling stalled projects through continued efforts to improve the land acquisition process, addressing environmental clearance issues, improving raw material availability and establishing various sector regulators.
- Improving access to land for development, through computerized land mapping, government- guaranteed titling, the creation of land banks, use of auctions for land acquisition, etc. Some states have been much more successful in these than others. The model of the GST Council can be used for sharing best practices between center and state, as well as for formulating national actions such as land titling reform.
- Freeing up public resources for investment through public finance reforms (asset recycling, asset swaps, expenditure reform).
- Revitalizing public-private-partnerships with appropriate and enforceable risk allocation.
- Creating Special Economic Zones, not necessarily with a sole focus on exports, but also for domestic production. Improved infrastructure and access to land and environmental clearances in such zones can accelerate investment. These can also be “laboratories” for some experimentation with alternative regulations before there is a decision to scale them up. It is important, however, that the SEZ do not degenerate again into opportunities for land-grabbing and rent-seeking.
Despite having some of the largest reserves of coal, as well as having substantial unutilized power generation capacity, India is both short of coal as well as short of power. These are policy self-goals, arising from both the dominant presence of government in coal mining and power distribution as well as populist impulses in pricing. Nevertheless, our low base allows us to choose a path that is both more energy efficient as well as less polluting as we reform the system for the twenty first century. For this we need:
- Free energy pricing to generate more exploration, especially for cleaner gas, while using carbon taxes (or tradeable carbon use permits) to align private incentives and social costs.
- Expand participation in auctions of mining rights for coal
- Allow more competition in allocation of natural gas blocks and exploitation of natural gas resources.
- Improve access and reliability of the power grid so that the use of inefficient diesel generators is reduced.
- Reform distribution by creating competition for state monopolies.
- Integrate renewables into power production, recognizing there will be a need for additional balancing power and storage.
India’s non-oil, non-gold current account has deteriorated by almost 3% of GDP in the last three years, suggesting an urgent need to improve the underlying competitiveness of the tradable sector. Boosting exports should be the lynchpin of that strategy. The existing constraints in the export sector appear to be reflective of more general problems in manufacturing: low scale of production, low productivity, bureaucratic impediments, high cost of inputs like land and power. We have suggested ways to address these earlier. In addition,
- Trade agreements, simpler documentation procedures at ports, and low and stable tariffs are needed so that we can be part of global supply chains. High tariffs and other impediments to cross- border trade not only hamper domestic exporters but will also discourage foreign manufacturers from seeing India as a viable part of their supply chains.
Given the non-performing asset (NPA) build up in the banking system, it is imperative we make the banking system more robust and well capitalized, expand its capacity to extend credit, and improve incentives to lend to the most productive sectors. While the recent travails of the NBFCs are a matter of concern, some of their problems stem from an overly rapid expansion of their balance sheets as they grew to substitute for banks. Stability in the banking system will help spread stability to other parts of the financial system as, of course, will the reverse. The main challenges for the banking sector are to improve governance, transparency, and incentives in the banking system. Key measures should include
- Cleaning up bank balance sheets by reviving projects that can be revived after restructuring debt.
- Improving governance and management at the public-sector banks and then recapitalizing them.
- De-risking banking by encouraging risk transfers to non-banks and the market; and reducing the number and weight of government mandates for PSBs, and banks more generally.
The non-bank financial sector needs a strong banking system as well as deep equity and bond markets, supported by liquid secondary markets and a robust regulatory and legal infrastructure. Key priorities include:
- Developing a liquid and deep corporate bond market through policies to encourage institutional investor participation.
- Enhancing liquidity in the government debt market and making it more attractive to institutional and retail investors
- Developing missing (or nascent) markets like fixed income derivatives to hedge the credit and interest rate risk of fixed income securities.
*Authored by Abhijit Banerjee, Pranjul Bhandari, Sajjid Chinoy, Maitreesh Ghatak, Gita Gopinath, Amartya Lahiri, Neelkanth Mishra, Prachi Mishra, Karthik Muralidharan, Rohini Pande, Eswar Prasad, Raghuram Rajan, and E Somanathan.
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