The reform agenda: on track?

Clear winners
The first category contains a number of
obvious candidates. The most prominent is perhaps the Direct Benefits Transfer
(DBT) programme. This effectively comprises two initiatives: Aadhar-based
authentication and the Jan Dhan banking
exercise. By directly transferring cash to validated beneficiaries DBT has helped
reduce fake recipients, parallel markets and fund diversions in Government
welfare programmes. This has, according to the government, enabled notable
savings of Rs 360 billion in FY16 and Rs 570 billion in FY17. From 34 schemes
in 2015 the DBT’s canvas now stretches across 140 and it is estimated that a total
of 528 schemes can eventually be brought within its fold. It is possible to
save more than 1.5% of GDP annually through the use of DBT in central
Government schemes alone. A similar figure can be added for savings under state
Government programmes.
A second area of progress is infrastructure
where the Government has correctly tightened its administrative machinery and
ramped up the speed of implementation. It perhaps realised early on that
private investors were hesitant to commit new investments while banks were in
no position to lend. It went about reviving stalled projects and assuming a
larger share of expenditure on its own books. For instance, in the case of
roads and highways, it doubled its capital expenditure from Rs 275 billion to
Rs 541 billion, resolved 62 of 72 stalled projects and increased the rate of
tender awards from 2,000-4,000 kms to 10,000 kms a year, all within two years. In
the case of the Railways, spending was nearly tripled from Rs 460 billion to Rs
1.2 trillion and project approval durations cut from 2 years to 6 months. In
the power sector, almost all states have been brought on board the Ujjwal Discom Assurance Yojana (UDAY)
scheme for the revival of distribution utilities. The results are encouraging –
technical and commercial losses are down from 26% to 22% and under-recoveries
of utilities from Rs 0.6/unit to Rs 0.49/unit, in less than two years.
In the domain of legislation too, the
Government has some achievements to its credit. The more significant ones
includes the Real Estate Regulation and Development Act that brings the realty
sector into the fold of independent regulation; the Enforcement of Security
Interest and Recovery of Debts Act which amends four separate financial laws to
make them more effective; a new Mines and Minerals Development (MMDR) Act to
enable easier transfer of mining leases; the new Insolvency and Bankruptcy Code
to reform India’s archaic bankruptcy system; and finally, a host of GST-related
laws.
In broader areas of policy, the Government
can claim credit for having pushed the envelope on federalism by significantly
enhancing the fiscal latitude for state Governments. Their share in central tax
resources has been increased from 32% to 42% albeit with a consequent reduction
in federal support for state schemes. But states now have a larger amount to
spend at their discretion in place of standardised central templates. In a
similar vein, the replacement of the Planning Commission by the Niti Aayog
represents a structural shift towards involving states in the formulation of national
policies. Finally, there are successes in the domain of foreign policy, many of
which have been led personally by the Prime Minister.
Work to be done
In areas where one might find fault,
perhaps the most prominent pertains to the tax administration. While
policy-level reforms have been enacted to increase tax collections and clamp
down on evasion, commensurate efforts to reform the administration itself
possibly fall short of expectations. For instance, the treasury continues to
maintain a poor record on disputes and appeals with anecdotal evidence suggesting that it loses a
vast majority of them as they are ultimately deemed flimsy. Unless
accountability is enforced and data on appeals and refunds made public, matters
are unilkely to improve. The tax department’s efficiency levels are also
uninspiring. Its disposal rate of pending assessments has fallen from 80% in
the early 2000s to 68% in 2014-15. The backlog is increasing by 10 million cases
a year causing delays and scope for harassment. Another need is for more scientific
and localised methodologies to arrive at tax collection targets as unreasonable
ones drive arbitrary demands. At a more fundamental level, there is need to widen
the tax base beyond the current paradigm. As we have argued in an earlier
paper, almost 38% of India’s GDP is not subject to direct tax. Such a high percentage,
which excludes agriculture and the poorest 20% of the population, leads to an
unreasonable allocation of the tax burden across income classes.
Analysts have bickered that the inability
to reform the land acquisition regime is one of the failings of this
Government. Whilst this it true, to the extent that it has been unable reform
the law on acquisitions, the fact remains that the battle is really at the
state level. Without the cooperation of the states, a central law has limited
value since most aspects of land fall beyond its purview. A more valid
criticism would pertain to labour reforms or lack thereof. The Government has
made minor amendments to labour laws and commenced a process to collapse the
multitude of current laws into 4 or 5 simple codes. However, it has generally avoided
difficult subjects such as those relating to retrenchment, trade unionism, contract
labour, etc. These discourage the hiring of permanent workers by industrial
enterprises and raise the cost of doing business. Effectively they undermine
the long term welfare of the very population they were meant to serve. A few
states have gone ahead with reforms at their level, since labour is a
concurrent subject, and it is possible that as more and more states join the
bandwagon the Government may provide a push at the federal level.
The jury is still out
The final category comprises areas where
efforts have been made but results may not yet be visible. The most obvious of
these is the GST, which came into force on July 1 but can hardly be assessed at
this time. The challenges stem from the multiplicity of tax rates and the sheer
newness of the tax. However, the efforts by the administration to smoothen the
transition and provide leeway wherever possible are equally significant and should
help compensate. A more pertinent issue relates to the recovery in industrial investment,
which is as yet a hesitant one. Proposed investments dropped from Rs 5.6
trillion in 2012 to Rs 3.1 trillion in 2015. To arrest this trend, the
Government simplified the process of environmental and forest approvals,
fast-tracked infrastructure projects, eased labour laws for small companies and
increased FDI limits in many sectors. So far, these have had modest results with
planned investments increasing to Rs 4.1 trillion in 2016. However, this should
pick up in 2017 and 2018. One indication of this stems from the trend in actual
investments (‘implemented’ as opposed to ‘proposed’) as this ultimately defines
the attractiveness of a country. This shows a slight uptick – from Rs 820
billion in 2012 to Rs 1.0 trillion in 2016 – and should lead to an improvement
in investor sentiment. Indeed, DIPP data shows that proposed investments had
already reached Rs 2.1 trillion in the first four months of 2017.
Finally, the all-important issue of banking
NPAs remains an inconclusive one. Whilst some aspects of the problem lie in the
domain of the central bank others, specifically legislative and financial ones,
are the Government’s responsibility. On the former, as noted above, the
Government has taken steps by way of enacting the Insolvency Code and amending
other laws to enable faster debt recovery. On the latter, it has done
relatively less. A Rs 700 billion recapitalisation plan over five years, will
clearly not be enough in view of the fact that bad loans stand at around Rs 12
trillion if all dubious assets are counted. Unless banks are allowed to raise
funds from the market, diluting the Government’s equity in the process, it is
difficult to see a permanent solution. So far, the Government has not committed
itself on this issue either way.
In the final count, any economic analysis
that seeks to evaluate a Government mid-way through its term suffers from the obvious
shortcoming that not enough time has elapsed to appraise large scale or
structural initiatives. This can be further complicated by a difficulty in
separating what should be attributed to the current administration versus the
previous one. However, by most benchmarks, the current Government has a number
of achievements to its credit and if it remains focused on its economic agenda
for the rest of its term, it should surely be able to add another feather or
two in its cap. Economic growth now at over 7%, from a wobbly 5.5% a few years
ago, would constitute decent performance. On this issue at least there can be
no debate.
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