- October 18, 2020
- Posted by: Kabir
Written by: Vivek Rathi, CFA
The worst nightmare of India came true in March 2020, when the country had to undergo one of the severest lockdown in known history. Even before the pandemic set in, Indian economy was slowing and the country was staring at severe slow down. The GDP in the last quarter for FY 2019-20 was already at 3.1%. But with covid19 hitting the world, the complete economic activity came to halt and the GDP collapsed by 23.9% in Q1 FY 2020-21.
This catastrophe set the stage for what one can call next generation reforms. The low hanging fruits were already plucked over last six years and now it was time for permanent foundational changes. This daunting drop in economic activity had pushed administration to the wall, revenues dried up and the only option left was extensive structural changes. Though, the transformation started last year in the form of reduction in corporate taxes, but it was moving at snail’s pace. However, the pandemic ravaged crises accelerated the process. There was need for major tectonic changes, the “next generation reforms”. These changes are expected to turn the tide in favor of India and can be grouped into three major categories, reforms in farm sector, the modification of archaic labor laws and the privatization of public sector enterprises.
The passage of farm liberalization bills set the tone last month. The Farmers Produce Trade and Commerce Bill, Farmers Agreement on Price Assurance and Farm Services Bill and the Essential Commodities Act together are expected to significantly improve productivity in the farm sector. The changes in regulation will not only allow market oriented price discovery but will remove barriers to free trade as the farmers can directly contact sellers and sell anywhere. Currently, farmers are allowed to sell only in APMC regulated mandis and can’t go beyond state boundaries. Though, there are concerns regarding the center doing away with minimum support price but these laws are expected to create a free market where supply and demand would drive the price. This will not only benefit the farmers but will help in improving efficiency in the long run. Nevertheless, there are legitimate concerns on some of the provision of law which may encourage hoarding by private players leading to increase in food inflation. This has to be monitored closely as we move forward.
The second one being the labor reforms, by and large 44 labor laws were subsumed in to four broad categories. These changes will help in improving ease of doing business and incentivizing new industries. These laws also address the concerns on wages and social security of employees. One of the changes in industrial laws aim at allowing full freedom to factories of up to 300 employees to hire and fire workers without seeking any statutory permission. The MSME sector is expected to be the biggest beneficiary of these changes. It is second largest employment generating sector in India. According to a report, as of June 2019, it already employs around 120 million people.
The privatization of public sector units is the third major change. According to reports in media, the process of selling BPCL & Air India (though delayed) is already in advanced stages. In fact, the Finance minister has already announced its plan to privatize most of the PSU except few strategic ones. Once this is implemented, then we can expect a vibrant industry which would encourage healthy competition. This will improve productivity and may considerably boost capacity as well. Additionally, it will help in sorting out NPA issues plaguing the public sector banks.
The first step of getting legislative changes is completed but the implementation of these reforms will not be easy. As of now, there are few states questioning the legality of agriculture related amendments. Moreover, these bills may be challenged in courts as well. Also, there are questions in few quarters on labor laws too. Going by history, one can expect significant backlash while privatizing PSU’s. Recently, Uttar Pradesh government had to pull back its plan to privatize state DISCOM because of protest from employees. There will surely be resistance from labor unions, may be some legal hurdles, but the government have to be firm in implementing these measures so that desired benefits are achieved. Overall, this looks like an inflection point in India’s history, current crisis may go down as one of significant importance which radically transformed India’s growth trajectory or the one big wasted opportunity.
The aforementioned changes are expected to provide huge impetus to economy in the long run. If implemented to perfection, one can expect significant improvement in efficiency across industries and momentous changes in life of farmers. This is a long term view but a closer look at it seems intriguing. Did we witness adequate informative debate on these bills? Was there ample discussion among masses? Actually, we are yet to see healthy discourse on these regulations. Although, few interviews of professionals and the opinions of experts are being published but the intellectually stimulating arguments such changes warrant are missing.
Sadly, we seem to have already passed through the deliberation phase on these profound changes. This is not a good sign, as we may miss critical points if such changes are not scrutinized extensively. A healthy dialogue will help in communicating the intended benefits and consequences of such far-reaching changes to the people of the country.
To conclude, government is all set on its course of reforms, but are we heading in right direction? Is there ample discussion around? Do impacted communities really know pros and cons of such shifts? Only time will tell how these changes pan out. But it is pretty clear, the opportunity does not seem to be lost, government is making crucial changes but these are going unnoticed or may be lost in the current turmoil (with Pandemic, elections, other issues getting continues attention, ignoring the important fundamental changes).
About the Author
Vivek works as a Product owner in FX space with one of the global investment bank. Has 12+ years of industry experience. He is a Computer Science Engineering graduate, holds MBA from Institute of Management Technology and is a CFA Charter holder
Disclaimer: “Any views or opinions represented in this blog are personal and belong solely to the author and do not represent views of CFA Society India or those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated.”