Providing his perspective on the recent policy paper by Subramanian and Felman, Nirvikar Singh contends that more emphasis is needed on financial reforms and innovation, addressing India’s export slowdown, and enhancing digital connectivity. In his view, greater transparency and openness to criticism will lead to better policymaking.
As one would expect, Arvind Subramanian and Josh Felman have provided a clear and compelling account of where the Indian economy stands, and how it might move forward in a positive manner, especially after the challenges and disruptions of the Covid-19 pandemic. Their analysis is readable and objective, noting achievements as well as areas for improvement. My reflections here will try not to repeat any of their central points, but instead offer some additional perspectives, and possibly some different emphases.
Financial reforms and innovation
As the authors emphasise, dealing with problems in the balance sheets of non-financial corporations and of the financial sector (banks and non-banks) is a matter of the highest urgency. Achieving the levels of investment that India needs to start growing faster requires concentrated attention to restructurings and, if necessary, liquidations. A persistent overhang of bad debt will kill economic growth for a long time, because it will discourage new investment. Even before the pandemic, the application of the new bankruptcy law (Insolvency and Bankruptcy Code) was too slow and displayed some conceptual difficulties. Recognising and assigning losses is always difficult, so much more expertise and focus may be needed on this front, if the bankruptcy process is going to work speedily and effectively.
What is absent from the authors’ suggestions is a needed complementary focus on household finance, particularly savings. The 2017 report of the committee headed by Tarun Ramadorai made excellent suggestions on pensions, insurance, mortgages, and more. It provided recommendations for improving the organisation and functioning of consumer-oriented financial intermediaries, and for innovations in consumer savings products. Household savings in India are disproportionately in gold and real estate, and one would like to see focussed policy attention on this front to change that situation, in parallel with cleaning up the financial sector’s balance sheets.
Indeed, continuing with the theme of finance, there needs to be serious attention to modernising financial intermediation overall. Small and medium firms, in particular, do not have access to adequate working capital, and they often get financially squeezed by their large corporate customers, who delay payments. There has been an attempt to create an online platform for firm finance (TReDS; Trade Receivables Discounting System), but it has been slow to take off, and there is room for much more innovation in this area, including privately run finance platforms. These can be not just for small and medium firms, but for firms of any size, except perhaps the largest corporates. One can add here the need for a functioning corporate bond market for larger firms, something which is long overdue in India. All of these issues require very detailed attention to implementation, since we know that financial innovations can also go badly wrong, but there is clearly room for increasing the efficiency of financial intermediation across the board. Put in another way, India’s policymakers must improve financial inclusion in these much broader senses, not just by providing bank accounts for the poor and disadvantaged.
Looking outward: Addressing export slowdown and enhancing digital connectivity
Turning to another area that needs a great deal of policy attention, in their table of “Major Policy Actions”, with respect to international trade, the authors note an “Inward turn, upending three-decade long consensus to open up the economy. Many tariff increases.” But there is no other mention of this issue in their discussion. In my opinion, this “inward turn” is a dangerous direction for Indian economic policy. The authors just hint at the problem. Tinkering with, and raising tariffs is a damaging policy approach, attenuating competition and creating uncertainty. It would be much better to stick with low, relatively uniform, and consistent tariffs, and deal with any dumping or other issues through international organisations such as the WTO (World Trade Organization). Furthermore, the policy focus in international trade ought to be on identifying and dealing with the reasons for India’s export slowdown. This issue, too, does not get attention from the authors. It may be that there are macroeconomic factors at work, related to capital flows and the exchange rate, that run into other kinds of goals and constraints. But independent of those, much more can be done to provide non-financial support to India’s exporters (knowledge and access to markets), and to create effective coastal export zones. India also needs a strategy for integrating more of its firms into regional production networks, especially in the absence of strong participation in regional trade agreements.
The authors note the importance of, and recent improvements that have taken place in, digital connectivity, but much more needs to be done on this front, not just with respect to wireless infrastructure, but even more so in wired broadband. A digital infrastructure with much greater capacity will be necessary for India to be globally competitive as well as for purely domestic growth. There are large profits to be made in this arena, and it is no accident that one of the problematic instances of tax policy that the authors highlight (the case of Vodafone) occurred in this sector. Allocation of spectrum, as well as a host of other issues with respect to creating a 21st century digital infrastructure and doing it in a manner that promotes competition rather than monopoly, will be a major challenge for policymakers in the immediate future. The pandemic has highlighted the possibilities for India, as well as the extent of unrealised potential, in its participation in the new digital economy. The rapid increase in the number of smartphones is often highlighted, but that development will not be adequate for, say, long-distance education, or for many other areas where digitisation can be important for the Indian economy.
In another area of economic policy, the authors mention the liberalisation of foreign direct investment (FDI), and this is overall a welcome development. But FDI is particularly valuable when it is combined with knowledge, both disembodied, and embodied in individuals. Being open to FDI should mean being open to ideas, even in areas of the economy such as higher education, and creative ideas that go beyond specific technologies or business skills.
The “software” of policymaking
The authors refer to the “software” of policymaking and how it needs to be improved. India desperately needs inputs from as many sources as possible, at home and abroad, and it needs institutions and mechanisms for discussing these inputs, testing them and refining them into workable policies. Transparency and openness to criticism will lead to better policymaking. The authors refer to the need to improve the rule of law, including specific areas such as contract enforcement. Reforming the courts and legal system is an enormous undertaking, and is likely to be slow. But there is scope for more rapid administrative reforms that increase organisational flexibility and bring greater expertise into government, without being too disruptive of the current structures of the administrative elites. This has happened in varying degrees throughout independent India’s existence. But at present the set of sources of inputs into economic policymaking seems to be shrinking. Reversing that apparent trend will help in every aspect of that policymaking, and in the outcomes for the economy.
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