Will Prime Minister Narendra Modi use this crisis not only to provide relief but to initiate radical economic reform? He displayed his oratorical skills in speaking to the nation on Tuesday on a massive package of 20 trillion rupees (10% of GDP) to combat Covid-19, revive the economy, and start economic reforms. His aim was to inspire rather than inform, as he did not give details. This was left to Finance Minister Nirmala Sitaraman to introduce over installments that started on Wednesday.
Modi said India has the grit, determination, and talent to become great through atmanirbharta (self-sufficiency or self- reliance). India will help save the world by supplying medicines and equipment through global supply chains, which, puzzlingly, he mixed up with local supply chains. It has repeatedly emphasized self-sufficiency and localisation, although it implies that this is associated with global prosperity.
Sorry, the contradictions between self-sufficiency and globalization cannot be orated away. Sitharaman started providing package details. Something called Lockdown 4 will appear after May 18. Modi warned, rightly, that the health crisis will last for a long time. Danger: We can switch from one lock after the other till Lockdown. 20 or more, with more oratory but no return to normalcy.
Global prosperity in the last century was created through the massive expansion of global trade and investment. "Productivity is not everything, but in the long run It is almost everything,". Competitive markets create a relentless search to improve productivity that spurs economic growth and prosperity. This means specialising and prosperity. It means specialising in, and exporting, what you can do best while importing the rest.
Alternatively, if you aim to achieve self-sufficiency regardless of competitiveness, your productivity will fall behind others who are heading towards globalisation: the story of Jawaharlal Nehru vs Lee Kuan Yew. Swadeshi Jagran Manch (SJM) might not understand this, but Modi does.
The opening does not mean de-industrialization, as critics feared when India opened in 1991. Modi is proud that India is helping everyone supply medicines. However, remember, when Nehru created the Indian Public Sector of Medicines and Medicines Limited (IDPL) to make India self-sufficient in pharmacy, it failed miserably. In contrast, today's booming pharma industry is firmly embedded into global chains, 70% of its ingredients are imported from China, and half of its production is exported.
Sitharaman's first stimulus package of 1.8% of GDP announced on March 24 included several measures that were already in the budget. So the additional stimulus was half. Others and I urge Modi to ignore fears of a credit downgrade by rating agencies and to seek a major relief package. It exceeded expectations by allocating 10% of GDP for needy individuals and enterprises.
His speech was aimed at attracting investments being diverted out of China. A lover of translations, he promised radical changes in labour, land, liquidity, and laws to revive the economy and "make in India". This sounds good, but let's wait for more details.
His package included massive RBI measures already announced, so exaggerates the size size of any new stimulus. Some analysts estimate that Indian GDP will be -5% or worse in 2020-21. The consequent revenue will take the combined income Centre-state deficit between the combined Centre-state deficit to 11-12% of GDP. In such a grim situation, the new package is unlikely to reach an additional 10% of GDP financially.
Economist Karthik Muralidharan argued that a public health splurge of Rs 75,000 crore annually in testing, tracking, and isolating 1-3% of the infected cases was the right way, not the locks costing Rs. 2 crores per week. Implementation will be difficult. However, Modi needs to follow this wise advice to focus on the affected few, not on lockdowns hurting a billion people.
Many senior BJP ministers have suspended all labor laws except for a few for 3-4 years to attract investment. This is an effort worth making for politically difficult reforms under the cover of the Covid-19 crisis. But while India needs reforms for labor flexibility, it also needs ILO-compliant laws that protect worker health and grievance mechanisms. The employment and dismissal approach must be accompanied by unemployment insurance and recycling.
Suspending labor laws for 3-4 years will not attract sceptical foreign investors. They will seek a permanent change of laws. Other political parties must win gradually, or else they will reflect reforms when they come to power. All parties followed the reform path after 1991. Will they do it again?
India needs land reforms for rapid acquisition, to make possession simple and popular so that the lease can be used to boost small non-economic packages on large, viable farms. The current outrage must be stopped to extort large sums of money to convert farmland into non-farm land by declaring that large areas are free of permits. Legal reforms are absolutely essential. But let's see what Modi thinks.
If Modi takes advantage of the Covid-19 Crisis to make reasonable and late reforms, we will be happy to forgive all the hype about the scale of stimulus and the perceived double talk about self-sufficiency while actually globalising.
Source: TheEconomicTimes,The hindu
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