Role of state, local governments vital
To reform or not to reform is not the question. Nor is it about what is the right time for reforms, for there is none. While justifying a recent flurry of economic reforms, the government spokesmen stated that the Centre had done what it took to put the economy back on track and would continue to do so even more vigorously in future. Our risk-averse Prime Minister went a step further and said, "If we have to go down, we will go down fighting". Thus, the question has been turned on its head and reframed in terms of "Reform or perish'. Let history bear witness for an answer.
In the meantime, the political class, the media and the business leaders have reacted typically. While the government made it a case of biting the bullet and the Opposition has taken to the streets, the electronic media has extensively covered partisan vitriol on talk shows, while business leaders want more reforms. However, no one has cared to initiate a healthy public discourse on the merits or otherwise of these reforms for various stakeholders. Policy formulation continues to be governed by sloganeering rather than being rooted in solid research. Education and advocacy prior to policy formulation is altogether missing.
It is, therefore, essential to know as to what these reforms are and what hope do they hold for the economy. After postponing the implementation of the General Avoidance Agreement Rules (GAAR), promising to revisit retrospectivity of tax laws and appointing an expert committee to draw up a fiscal consolidation path, the government increased diesel prices by Rs 5 per litre, imposed a cap on subsidised LPG cylinders and allowed foreign direct investment (FDI) in multi-brand retail trade, aviation, power exchanges and broadcasting.
For the government, it is a panacea for kickstarting a slowing economy; for the largest opposition party, it is only a tactic to divert people's attention from the myriad scams the government is mired in; for the Left, it is yet another act of appeasing Americans. One wishes our leaders could listen to Bill Clinton speak at the Democratic National Convention the other day, when he said, "We believe in working with everybody", and went on to say, "We have to prepare our people for the New Economy. The Old Economy is not coming back."
In this background, the case for reforms already undertaken and yet to be undertaken can hardly be overstated. However, reforms by themselves will not suffice to achieve the desired outcomes, unless accompanied by several other measures for good governance at all three tiers of the government - federal, state and local. Thus, reforms are a necessary condition to break out of the economic downturn, but may not be a sufficient one.
Among the reforms, the case for FDI in multi-brand retail broadly rests on cutting short the long and inefficient supply chains and integrating the field with the fork. The resultant efficiency gains will be a win-win situation for producers/suppliers and consumers, apart from attracting huge backend investment in infrastructure, creating a large number of jobs and promoting best practices in the retail business. Critics argue that it will result in sacrificing a large number of livelihoods in 'karyana' stores and causing exploitation of farmers and small traders, whose bargaining power is no match for the deep pockets of multi-national companies or corporations (MNCs).
For an Indian perspective on the subject, the following facts must be considered:
"95% of retail trade is in the unorganised sector, where more than a billion consumers are charged a first-rate price for a third-rate product.
"Typically, if a consumer pays Re 1 for a product, the producer gets just 25 paise, while the rest is eaten up by the middlemen.
"15% grains and 25% to 30% fruits and vegetables perish year after year due to poor post-harvest technologies.
"Just 5% of fruits and vegetables are processed.
"India's fruits and vegetables, milk products, meat and poultry are not acceptable in the world markets because they do not conform to requisite phytosanitary (animal/plant health) norms.
These facts make a compelling case for allowing FDI in multi-brand retail, especially when big Indian corporations are already operating in this segment. Opposition to this is mainly because of ideological fundamentalism, votebank politics and plain opposition for the sake of opposition. Undoubtedly, the government should suitably calibrate its policy to facilitate co-option of 'karyana' stores into the supply chain and safeguard interests of farmers.
However, it will take much more than a mere facilitation of FDI in multi-brand trade to fully realise the desired outcomes in terms of growth, employment, breaking out of subsistence agriculture and fair price to producers and consumers. This is why active and positive involvement of state and local governments is so vital to fully realise the benefits of FDI.
If one were to draw up a list of to-do things, it could be as follows:
"Roll out the goods and service tax (GST) expeditiously.
"Remove restrictions on the farm-gate procurement and free movement of agri-produce by scrapping the Agricultural Produce Market Committee Act and Essential Commodities Act.
"Clean up the property market, rent and tenancy laws.
"Put in place a legal framework for contract farming.
"Suitably organise small and marginal farmers to fully benefit from FDI in retail.
"Facilitate investment in backend infrastructure, agri-produce processing and post-harvest technologies with liberal tax breaks.
"Find an easy way out of the maze of government approvals at various levels.
In the absence of these backup measures, FDI in retail will only result in a few big and swanky malls coming up in some big cities of the country and will completely pass by its larger objective. The Punjab government should grab this opportunity with both hands to emerge as a gateway to the globalisation of Indian agriculture. It would indeed be tragic if Punjab were to miss the retail revolution too, having already missed the automobile, information technology (IT) and biotechnology revolutions.
The writer, a former chief secretary, Punjab, can be contacted at email@example.com