Miscellany

I4I Panel Discussion: The way forward for the Indian economy

  • Blog Post Date 29 January, 2019
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Ashok Kotwal

Editor-in-Chief, Ideas for India; University of British Columbia

ashok.kotwal@ubc.ca

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K.P. Krishnan

Ministry of Skill Development and Entrepreneurship

kpkrishnan@nic.in

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T. N. Ninan

Business Standard

tn.ninan@bsmail.in

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Ila Patnaik

National Institute of Public Finance and Policy

ilapatnaik@gmail.com

In December 2018, I4I organised a panel discussion on ‘The Way Forward for the Indian Economy’ with K.P. Krishnan (Ministry of Skill Development and Entrepreneurship), T.N. Ninan (Business Standard), and Ila Patnaik (NIPFP). Ashok Kotwal (Editor-in-Chief, I4I) – the moderator of the discussion – set the context and laid out the key issues for deliberation in a blog post prior to the event.

The panellists presented their views on issues including banking sector stress and infrastructure financing; possibility of India following an export-led growth path; the country’s business environment, including factor markets and law and order; skilling of the labour force; rural distress; India and the 4th Industrial Revolution; and the quality of our institutions.

Banking sector stress and infrastructure financing

There is currently a great deal of concern regarding the stressed balance sheets of banks. One of the main reasons for this situation is the financing of infrastructure projects through PPPs (public private partnerships).

Ila Patnaik contended that a key issue with infrastructure projects being financed by banks was the huge maturity mismatch – banks take short deposits, while infrastructure projects are typically 10-30 years long. Besides, business was overestimated in the time of boom, and there were delays as the developers had to obtain clearances etc. on their own. Hence, a lot of these projects got into trouble and became NPAs (non-performing assets). Several attempts were made to restructure these loans – including RBI (Reserve Bank of India) schemes like CDR (Corporate Debt Restructuring), SDR (Special Debt Restructuring), S4A (Sustainable Structuring of Stressed Assets) – based on the thinking that the economy will pick up and these projects will start yielding revenues. However, that did not happen and the NPAs became very big.

The question now is not just whether we can recapitalise NPAs but how such a situation may be prevented in the future. One of the solutions is to finance long-term projects with long-term savings. However, very little of such saving – in the form of pensions and insurance – takes place domestically, and we need to think about how it may be incentivised. The other option is financial intermediaries or a bond market, which undertake long-term investment using long-term funds.

KP Krishnan added that reform of the EPFO (Employees’ Provident Fund Organisation) system and the government bond market is crucial in this context. Hence, the deeper problem in the bank balance sheet issue is a whole set of financial sector reform issues that need to be addressed. Also, there are sectoral issues to be considered, for instance, in the municipal sector.

T.N. Ninan argued that too much is being expected from the private party in a PPP. The main motivation of the private party is to recover their money at the project stage. Hence, the project stage risks should be borne by the government as sovereign and it is only the execution risk or the actual construction work that should go to the private sector. Completed projects can then be bid out to toll operators in order to establish a revenue stream.

Export-led growth path?

Given the growing ascent of nationalism in developed countries and distrust of the process of globalisation, is it possible for India to follow the East Asian model of export-led growth?

According to Mr Ninan, India cannot have export-led growth beyond a point, and the primary constraint is domestic and structural – not the protectionism abroad. Firstly, transition to export-led growth assumes high efficiency of the production system and we are not there yet. Secondly, we have the unusual situation of a surplus in services trade and deficit in manufacturing trade. The success of services export makes the rupee stronger than it would otherwise be, and this affects the competitiveness of manufacturing exports.

Speaking of primary constraints on export-led growth, Dr Krishnan added that there is a host of factor market reforms that need to be undertaken. For instance, there is a lot that can be done to take the sting out of the Land Acquisition Act. The private sector’s interest in government land acquisition is mainly because there is no other way to get a secure land title; it is not really for the low cost of acquisition.

Besides manufacturing and software services exports, there are other emerging areas for services exports. For instance, India now has a formal agreement with Japan for export of skilled manpower for 124 job roles and a whole ecosystem has come up in India to train people as per Japanese regulated standards. The numbers are currently small but there is huge potential in this area.

Business environment

Every government has found it very difficult to reform both labour and land markets. Is this because of the federal structure as per which a lot of these things are left up to the states? What are the particular difficulties that we face vis-à-vis other countries?

In Dr Krishnan’s view, the fact that both the Union and state governments have joint jurisdiction over land is not really a showstopper. Not enough is being done currently to fully understand the complexities of the land issue in the specific context of India. It is certainly possible to address the issues without serious constitutional or large-scale legal changes.

According to Prof. Patnaik, something that we do not focus on much is law and order, especially, the aspect of contract enforcement and the time is takes for the courts to settle a case. Other countries have tried to address this issue through bilateral investment treaties. However, in the case of India, one is still required to depend on the Indian judiciary system and there is a reluctance to admit that it is not working well. The kind of foreign investment factories that we would like to see set up in India are likely to be part of global value chains, and we are not in a position to offer a good business environment for them. This may be one reason that companies that are leaving China due to US tariffs or anticipation of further tariff wars are moving to Vietnam and Bangladesh and not so much to India.

Skilling of the labour force

Another major constraint on India having export-led growth is our less skilled labour force. Given the poor state of the public education system, how does one skill a labour force that starts out with a weak foundation in terms of primary and secondary education?

Dr Krishnan remarked that a large part of the skilling agenda is actually about handling the results of the failure of the education agenda. Skilling programmes need to focus on not just basic literacy and numeracy skills but also matters of hygiene and attitudes towards work – things that should have been completely handled in school. The difficulty is that the skills agenda is being driven by the same State machinery that got education spectacularly wrong.

The Ministry of Skill Development is now working with the Education Department to reinforce what can be done in schools, with both the central and state boards. However, it is a difficult agenda.

Mr Ninan recounted his experience of visiting a skilling centre outside Gwalior a few years ago, where construction and other trades were being taught. The centre was trying to train young people to be welders or fitters but it was very tough as the trainees could not do the math to decide where to cut a sheet of metal in order to fit it into a particular space. The school-level arithmetic that was being taught to them at the centre was so beyond their capacity that they were dropping out of the course. Hence, skilling is a downstream issue and basic education is at fault.

Dr Patnaik added that besides literacy and numeracy there are so many things that one should learn in school such as how to address somebody when speaking, or personal grooming, and these are the skills that are very useful in the kind of industry where India is growing – hospitality, tourism, etc.

Mr Ninan contended that for skilling to really take off the jobs issue has to be addressed. Most people do not want to pay for a skilling course or even spend the time that can otherwise be used to earn money, if there is no job at the end of it. If there are jobs, companies would themselves do the skilling through the apprenticeship model.

In the context of construction, the structure of the industry is such that availability of skilled workmen is a problem and yet there is no incentive to provide skilling. Real estate developers cannot afford to employ permanent electricians, masons, etc. as there is no certainty regarding projects and labour laws make it difficult to fire employees. When they have a project they go to labour contractors and hire people for the duration of the project, and labour contractors do not usually care much about how good the workmen are.

Rural distress

Almost two-thirds of India lives in rural areas and a little under half makes its living in agriculture. Several parts of rural India have been in distress and a big reason is that we are not able to move labour out of agriculture by creating other jobs. Given that is so, what can be done to increase incomes in agriculture?

Mr Ninan contended that a key issue in Indian agriculture today is that non-grain tonnage has become greater than grain tonnage; the government support system of procurement and assured minimum prices for farmers that works for grain cannot work for perishable crops as they cannot be stored. Hence, price fluctuations are harder to manage: there is serious distress when prices crash, and consumer resistance when prices hit the roof.

Another issue is that we now have net surpluses in agriculture but we do not have sufficient productivity and hence, competitiveness for the export market. As a result of more supply and less demand, prices crash and farmers are unhappy. There is hence, a need to re-examine our entire agricultural thrust in terms of efficiency, water use, subsidies, and perhaps cash benefits to farmers, and to create good jobs outside of agriculture so as to take some people away from land.

Dr Patnaik emphasised the importance of providing more certainty to farmers in terms of trade policy. It is hard for farmers to get into export markets in any case, and then duties and price caps for exports keep on changing and these policies do not keep pace with changing market conditions.

Mr Ninan added that we are a large country with large land area and a lot of production. Even if we manage to enhance productivity and export, there is still a market problem: the global markets cannot absorb our surpluses.

India and the 4th industrial revolution

All around the world there is a fear that with artificial intelligence and machine learning, robots will displace humans in jobs in manufacturing and even services. Given India’s success in the high-skilled IT, software, and business services sectors, is it possible that there is reason for optimism and that India may initiate the 4th industrial revolution?

According to Mr Ninan, this is not possible with tiny firms. India has corporate pigmies at the global level and the giants of other countries, such as Samsung or Oppo, are eating up every single market there is. To get into the modern game, we need to encourage scale in the corporate sector, and huge capital is required.

There are still many low-hanging fruits for India to pick in terms of raising the low productivity levels. We are the fastest-growing large economy and although there is a lot that is still possible to do, there are also many things that are happening. However, to be at the frontiers of where the world is going, we would need to wait a while.

Institutions

In the much talked about book ‘Why nations fail’ by Daron Acemoglu and James Robinson, the main storyline is that successful nations are those that are able to build inclusive institutions, rather than exclusive institutions that are run by the elite only for themselves. Given the state of India’s institutions, what do you think the verdict of Acemoglu and Robsinson would be? Are the institutions getting better or are they eroding?

The panellists agreed that this is a story of good and bad. Mr Ninan remarked many countries would be happy to have some of our institutions – even if we are conscious of the shortcomings – and that there are great strengths in our institutions. In his view, the Election Commission has improved a lot over the days; there is decay in the Parliament and the State Assembly is barely functioning; higher-level courts are more or less okay but there are major issues at the lower levels; the police are, by and large, a disaster story; the media is mixed – newspapers have gotten better and television stations have gotten worse; universities are in a bad state but some new ones have come up and a transformation is taking place in the IITs in terms of more focus on research.

Dr Patnaik opined that this is work-in-progress and there still many things that we are struggling to set up. She noted that the fact that the general public is now interested in issues such as the independence of the Central Bank is a very positive sign. The fact that we have smooth, non-violent transition of power when someone loses an election is very rare in the world and something to celebrate.

Dr Krishnan added that there have been some spectacular successes and we need to build on them. He gave the example of the 10 years between 1992 and 2002 – almost entirely a period of coalition governments – when India passed 10 major amendments to laws related to the securities market, including the SEBI (Securities and Exchange Board of India) Act.

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