Session 02_a

The Current Economic and Policy

Environment

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 India: A Comparative Picture
(for the year 2022)
Parameters India China USA World
GDP(current $ Tn) 3.42 17.96 25.44 101.33
GDP per capita (current $) 2410.9 12720.2 76329.6 12743.9
Gross Savings (% GDP) 30.0 46.0 18.0 30.0
GCF (% GDP) 31.0 43.0 21.0 27.0
Inflation (CPI) % 6.7 2.0 8.0 8.0
Poverty ratio (%), 2021 (2017PPP) 11.9 0.1 0.2 9.0
Tax revenue (% of GDP), 2021 12.0 8.0 12.3 14.4
Labor force (in Mn) 523.84 781.83 169.23 3427.84
Fertility rate, 2021 2.0 1.2 1.7 2.3
Life expectancy at birth (male/female) 66/69 75/81 74/79 69/74
Agri share (% value added) 16.7 7.3 1.0 4.3
Industry share 25.7 39.9 17.9 28.0
EDB Index (1=most friendly) 2019 62 32 6 -
Strength of legal rights index (0=weak 9 3 11 6
12=strong) 2019
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Source: https://data.worldbank.org/indicator, accessed on 22 February, 2024
Major Institutional Reforms, 1991 -
• Fiscal Reform
Fiscal Responsibility and Budget Management Act, 2003
Cooperative fiscal federalism (GST Council), w.e.f July 2017.
Insolvency and Bankruptcy Code (IBC), 2016.
NITI Aayog replaced the Planning Commision
• Monetary Policy Reform
The New Monetary Policy Framework, 2016
Inflation targeting, Aug. 2016
Demonetisation, Nov. 2016.
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Key Issues
• Ensuring macroeconomic stability

• Fixing the stressed sectors

• Making growth inclusive and sustainable

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Dealing with Key Issues: Views and Proposals

1. Ensuring macroeconomic stability

Economic stability entails:

Low and stable inflation
Sustainable fiscal deficit to promote pvt investment
Sustainable current a/c deficit

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Fiscal consolidation to create space for more investment

• Adherence to FRBM stipulations.

• Incentivise states to get them aligned with the Centre’s fiscal goals.
a) Use the model of the GST Council as a successful example of
cooperative fiscal federalism
b) Use Finance Commission awards to reward good behavior.
c) Remove Central guarantees for the market borrowings of the
states.
• Adopt better accounting.

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Reduce risks from the external sector

• Undertake a systematic programme to hedge global crude prices.

• Adopt a set of steps to de-risk the external sector by:
a) Attracting more FDI
b) Disincentivising ‘hot money’.
c) Encouraging hedging of foreign currency borrowing by firms
d) Developing domestic substitute financial assets linked to gold
prices.

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Dealing with Key Issues: Views and Proposals (Cont…)

2. Fixing the stressed sectors

Agriculture and the rural economy

Infrastructure
Power
Exports
Financial sector

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Agriculture and the Rural Economy
• Increase investment in research and extension service.
• Ensure better price to farmers by improving their access to domestic
and international markets.
• Facilitate scale of farming through suitable aggregator model.
• Move to a fixed cash subsidy per acre (e.g., Rythu Bandhu) from the
current price support scheme.
• Improve and expand PM Fasal Bima Yojana (PMFBY)

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Infrastructure
• Improve land acquisition process.
• Create e-registry for land and govt guaranteed titling.
• Create inter-state council to share best practices in land records.
• Revitalise PPP model.
• Create SEZs for exports as well as for domestic production.

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Power
• Free energy prices to promote more E&P.
• Expand participation in auctioning of coal blocks .
• More competition in allocation of natural gas blocks and exploitation
of natural gas resources.
• Improve access and reliability of the power grid so that the use of
inefficient diesel generators is reduced.
• Reform distribution by creating competition for state monopolies.
• Integrate renewables into power production.

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Exports
• Focused strategy for promotion of exports.
• Picking winners for fiscal incentives towards promoting exports.
• Strategy for making India a part of global supply chain.
• Stable tariff regime
• Promote RTAs
• Simplifying trade documentation procedure.

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Financial Sector
Commercial Banks
• Cleaning up balance sheets by reviving projects
• Recapitalise public sector banks.
• De-risking banking
• Reducing the number and weight of govt mandates for PSU banks
NBFCs
• Developing a liquid and deep corporate bond market.
• Enhancing liquidity in govt debt market
• Developing fixed income derivatives to hedge credit and interest rate
risk.
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Dealing with Key Issues: Views and Proposals (Conti…)

3. Making growth inclusive and sustainable

Education (National Education Policy, 2020)

Dealing with the skills shortage (Skill India Programme)
Women’s labor force participation (Beti Bachao Beti Padhao
(BBBP) Scheme)
Health care (Aayushman Bharat)
Environment (carbon neutrality by 2070)
Social protection (NFSA, 2013; KISAN; MNREGA, …)

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Education
• National Education Policy, 2020.
• A national mission to achieve universal functional literacy and
numeracy by class three.
• Repeal the RTE Act’s input-based approach to education quality, and
instead focus on regulation of pvt schools based on transparency and
disclosure.
• Implement the School Education Quality Index (SEQI) to help shift
the policy focus to outcomes, encourage state-led innovation to
improve outcomes, and facilitate sharing of best practices across
states.
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Skill development and upgradation
• Move contract labour into multi-year fixed term contracts.
• Firms to expand their training programmes rather than relying on
stand-alone training firms.
• Govt could set up paid internships which generates on-the-job skilling.

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Women’s labour force participation
• Gender disparity wrt LFPR with < 40% of the women
• Promote greater representation of women in all professions.
• Ensure public safety.
• Behavioural change interventions targeted at both women and their
families.
• Women-friendly policies in the private sector. If need be govt subsidy
to certain women-specific benefits.

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Healthcare
• Expand public health outreach efforts to pvt sector providers.
• Carry out public health campaigns to raise health awareness.
• Build a second district hospital in every district HQ.

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Environment
• Enact a new environmental protection law and appoint a fully
independent regulator.
• Adopt suitable policies to improve energy pricing.
• Change city design that seeks to increase public transport, micro
electrical vehicles and cycling.
• Introduce congestion pricing in city traffic by onboard GPD tracking.

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Social protection
• Retain a few schemes which are targeted at the most important forms
of risk that people face.
• Adopt a choice-based approach instead of cash vs kind option.
• Indexation of social security schemes to inflation.

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Reference
• BGRS: Introduction - “Why strong, equitable and sustainable growth
is vital for India”, p. 1-30.

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 India: The Current Policy Environment
The Wall Street Journal | Page A017 Friday, 5 March 2021
Nearly seven years after he was first elected, India’s Prime Minister Narendra Modi finally appears ready to place the
private sector at the heart of his development model. This belated embrace of business is welcome. But the path Mr. Modi
has chosen—state-guided capitalism of the East Asian variety—is strewn with pitfalls.

If it works, the proposed mix of tariffs, production-related incentives and deregulation will make India a manufacturing
hub bursting with new factories supplying global markets. But the country may instead end up as an isolated backwater
where well-connected firms shielded from competition enjoy de facto monopolies, while consumers and small businesses
pay more for shoddy goods.

Necessity has driven Mr. Modi to embark upon this ambitious reordering of the economy. In his first term, he focused less
on economic reform and more on expansive welfare schemes—including bank accounts for the poor, subsidized cooking
gas, and government-funded toilet construction. But faced with collapsing growth and increasing skepticism about India’s
trajectory, the government has pivoted toward the most explicitly pro-business agenda since at least the early 2000s, and
possibly since independence in 1947.

Here are the elements of Modinomics 2.0: The prime minister is increasingly using his massive megaphone to praise
private businessmen as wealth creators who deserve the nation’s respect. The government has budgeted roughly two
trillion rupees ($27.50 billion) over the next five years to boost manufacturing by providing “production-linked
incentives” for domestic and foreign firms in 13 sectors, including those producing cellphones, pharmaceuticals,
automobiles and auto components, and solar batteries. In recent years, Apple, Samsung and Foxconn have set
up manufacturing facilities in India. The government hopes that Cisco and Tesla, among others, will follow.
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The government has also pledged to privatize a raft of state-owned firms, including Air India and two unnamed public-
sector banks. Late last month, addressing bureaucrats charged with administering the privatization, Mr. Modi dusted off one
of his old slogans: “The government has no business to be in business.” In Parliament, he ridiculed the idea of bureaucrats
running everything from fertilizer plants to airlines. In her budget speech last month, Finance Minister Nirmala Sitharaman
pledged to pare the public sector to a “bare minimum” in four “strategic sectors.” She also broke a taboo by repeatedly using
the word privatization. Indian politicians have long preferred the euphemism “disinvestment.” Although modest in scope,
the proposed bank privatizations directly repudiate one of socialist India’s most damaging legacies—Indira Gandhi’s 1969
bank nationalization.

At the same time, the Modi government has moved to allow the private sector to play a larger role in agriculture by
competing with state-controlled marketing yards, begun to ease onerous labor laws, raised foreign-investment limits in
insurance, and spoken of setting up a so-called bad bank to tackle nonperforming assets and of streamlining notoriously
slow land-dispute settlement mechanisms.

All this takes place against the backdrop of four years of sustained tariff increases that have partly reversed three decades of
trade liberalization. In 2019 India walked out of negotiations to join the Regional Comprehensive Economic Partnership, a
free-trade grouping of Asia-Pacific economies. It has also scrapped or renegotiated several bilateral investment treaties
entered into over the past quarter century.

How does all this add up? Optimists believe Mr. Modi is poised to deliver the industrialization India has long sought. In an
op-ed, the Bangalore- based businessman and commentator Manish Sabharwal summed up the government’s ambition as
“raising the productivity of India’s regions, firms and individuals by making them more formalised, urbanised,
industrialised, financialised, and skilled.”
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As the logic goes, firms seeking to diversify supply chains away from China will choose India for its large domestic market
and deep pool of skilled manpower. The stick of tariffs and the carrot of production-linked incentives will spur this shift.
Mr. Modi’s popularity gives him the political capital to make sweeping changes that other politicians wouldn’t dare
contemplate. Recent agriculture reforms are a case in point. These arguments can’t be dismissed out of hand. Yet a dollop
of skepticism—entirely absent among Modi-boosters—is warranted.

For starters, promising reforms isn’t the same as delivering them. Protests by farmers from Punjab and Haryana have
already thrown agriculture reforms into question. The government has tried to offload Air India since 2017 without success.
India’s quixotic courts—often manned by economically illiterate judges with sweeping powers—add another wrinkle to the
process. As with any government bid to pick winners and losers, there’s always the danger of benefiting well-connected
cronies rather than competitive export champions, and of betting on the wrong industries.

Nor is it clear that the international environment is welcoming. In a phone interview, Vivek Dehejia, a trade economist at
Ottawa’s Carleton University, points out that India couldn’t reach trade agreements with the U.S. and the European Union
even before trade became an explosive domestic issue in the West. Fraught relations with China and India’s rejection of
RCEP affect India’s access to Asia’s largest markets as well. In many cases, India’s domestic market is too small to count.
It needs to create a more stable regulatory environment, end “tax terrorism” by officials, and upgrade infrastructure to
become competitive as an export hub.
“You can try and race an Ambassador car on a Formula One racetrack,” Mr. Dehejia says. “But you’re going to have to get
incredibly lucky to make it work.”
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