- The Indian economy recovery has been better than that of most countries.
- In the recent past growth suffered because of an excessive focus on structural reforms while neglecting the smoothening of shocks. Current policy has responded to the latter.
- Given this ups and downs, the talk of the necessity of reforms is again in the air.
So what reforms are required?
- The IMF-WB holy trinity of structural land, labour and other market-opening reforms harms many domestic citizens and, beyond a point, runs into severe resistance that imposes large political costs.
- Liberalisation has reached a point of diminishing returns.
- Organic reform will take place as states compete.
- Improving the supply-side has many other aspects. In choosing from the reform menu, the Centre must be guided by feasibility and pragmatism and ensure that benefits accrue to a majority.
What should be done?
- The focus should be on leveraging the special circumstances that currently favour India.
- These include the impetus Covid-19 has given to digital aspects, where India has a comparative advantage, the possibility of supply chain diversification away from China, moving to a net zero economy and harnessing green initiatives as a source of investment and innovation.
- Attention should be given to developing skills and capabilities, improving employability, augmenting infrastructure, reducing logistics and other business costs through better Centre-state coordination, and enhancing the quality of governance and counter-cyclical regulation with good incentives.
- Much can be done to improve data use and privacy, functioning of courts and police.
- Instead of wasting political capital on reforms that encounter large resistance and shock the system, reforms should enhance favourable trends.
Role of Public Sector Banks
- Improvements in PSB governance and risk-based lending profiles have resulted in falling NPA ratios and strong capital adequacy even under the pandemic shocks.
- Diversity in institutions and approaches makes for a more stable financial sector.
- PSBs have garnered Rs 1.7 trillion in their Jan Dhan accounts, while private banks have hardly any.
- PSBs can leverage their advantages in low-cost deposits through many co-lending opportunities and partnerships.
- This is not the time to disrupt the recovery in credit growth by Privatizing PSBs.
- PSBs should be allowed to compete and raise resources on their own.
- Only those who cannot do so, or have other serious weaknesses, should be allowed to exit through the privatisation or merger route.
- There are recommendations that the rupee should be completely market-determined since this would benefit exporters.
- But pass-through of exchange rate depreciation is much faster in Indian imports, which are dominated by dollar-denominated commodities such as crude oil.
- Indian exporters largely have little market power and are forced to share the benefits of depreciation.
- Many studies show they do not gain from volatility.
- As imported inflation rises, monetary tightening follows and hurts the real sector. Any gain to exporters from overshooting is temporary.
- Market panics and large deviations from competitive real exchange rates hurt the economy and most participants.
- Lower volatility in the real exchange rate helps both gainers and losers when there are changes in the rupee value.
- Thus the intervention by the central bank that prevents overshooting has facilitated the working of markets and their discovery of equilibrium values.
Thus moving beyond liberalisation, focus must be on leveraging India’s special circumstances and areas where India has a comparative advantage.
Source: Indian Express