Reforms must run their course for economy to regain its full strength
For an economy struggling to claw out of its deepest slump in 25 years, it’s a pleasant sight to spot a flurry of reformist intent, if not downright action. Fuel prices have been decontrolled; disinvestment is on track with the promise of more floating stock on our stock exchanges; a new coal allocation policy is being firmed up; land purchase rules are in the process of being simplified and the Centre is in the last stage of discussions with states for a unified goods and services tax (GST).
If indeed an opportunity is presenting itself, the government is exploiting it prudently. Until now, India had changed its fuel prices with an eye more on elections than on the crude oil price trends. The latest fall in crude oil prices offered an opportunity to set the clock right. Market-determined diesel prices, free of administrative control, which the government announced during the weekend, would cut subsidies and help reduce taxes on petroleum products. This will help offset the shocks when global crude oil prices shoot up.
Having freed diesel prices from State control, one of the most difficult reforms, the government should now show the same degree of urgency in other areas that are crying for attention. For instance, a coal auction policy to give mining licences to private companies through competitive bidding to replace the earlier controversial policy of allotting coal blocks based on the recommendations of a bureaucrats’ panel is long overdue. Likewise, reforms in land purchase rules require the government’s priority attention. Highly restrictive conditions, as specified in the land acquisition legislation that the UPA government pushed through last year, is proving to be a major barrier for industry to buy land. Many large proposals are stymied by ambiguous titles of ownership, environmental issues, poor compensation and social concerns. The government should also not lose an opportunity in the coming Winter Session of Parliament to raise the FDI limit in the domestic insurance sector to 49% from 26%. Life insurance penetration, defined as the ratio of premium underwritten in a given year to GDP, is about 3.17% of GDP in India, lower than more than the 10% in Japan and about 6% in Australia. On tax reforms, there are signs that a plan to roll out the GST has entered its last leg.
There are many other key reforms, such as overhauling the public distribution system, introducing a contemporary income tax code, which need an immediate political push. Economic reforms are, in many ways, like a dose of antibiotics. Half measures tend to linger. It is time to run the full course of reforms for the economy to regain full fitness.