Bold reforms now could set India on a high growth trajectory

Keeping in mind the dictum that every challenge is also an opportunity, the time is right for the Narendra Modi government to launch second-generation reforms to unshackle the economy and put it back on the high growth trajectory.

A black swan event is a rarity. Having two such occurrences in a single quarter is almost unprecedented. But that's exactly what India faced in the first quarter of the current financial year. The first quarter of 2020-21 has just ended and speculation is rife about the extent of contraction in the Indian economy. The estimates range from a 10-15 per cent shrinkage forecast by rating agency ICRA to 25 per cent projected by Axis Bank, India's third-largest private sector commercial bank, to a devastating 40 per cent drop in GDP predicted by India's largest commercial bank in the public sector, State Bank of India (SBI).

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The Chief Economic Advisor to the Ministry of Finance, K.V. Subramanian, has also said he expects the economy to contract in the first quarter, though he refused to talk about the extent of decline. Regardless of the magnitude, it will be fair to say India - and much of the rest of the world - is staring at an economic crisis of unprecedented proportions.

Facing two crises simultaneously

The lockdown to contain the Covid-19 pandemic is entirely responsible for the falling GDP figure in Q1. It will also impact the economic growth figures in the remaining three quarters of the year. Close on its heels came another black swan event - the unprovoked Chinese military assault in Ladakh that killed 20 Indian soldiers (and an unspecified number of Chinese troops) and the consequent nationwide backlash against rising Chinese inroads into India.

Several Indian industries - from automobiles to mobile phones to pharmaceuticals, among dozens of others - are critically dependent on Chinese inputs. So, the rising anti-China sentiment in the country and difficulties in sourcing Chinese inputs as a result of Covid-related supply chain disruptions have come as a double whammy for Indian businesses.

Never let a crisis go waste

But every crisis is also an opportunity. As late British Prime Minister Winston Churchill said: “Never let a good crisis go waste.”

These twin crises offer India a unique chance to build its own industries up to internationally acceptable standards and integrate itself into the global value chain.

Economists and analysts have for years prescribed the second-generation reforms India needs to attract US, European, Japanese and South Korean multinationals looking for alternatives to China.

India's rigid markets for land, labour and capital are a big hindrance to attracting foreign investment and generating faster economic growth. Then, politically expedient but economically damaging policies have led to very high energy and logistics costs in India compared to China and South East Asia. And unreformed bureaucratic procedures, especially at the lower, industry-facing levels of government, scare away all but the most determined investors.

There is only a small window of opportunity to push through the necessary reforms to make India competitive vis-à-vis its peers in South East Asia. Once these companies decide on their new investment destinations, it will close. Therefore, the time to act is now.

Modi has the political capital to push reforms

The reforms trajectory is well known. But there are strongly entrenched political interests that oppose any easing of norms as these directly inhibit their ability to seek rent. More than any other government, the Modi 2.0 administration has the requisite political capital to push through the contentious reforms mentioned above to put India back on a high growth path.

He has already demonstrated this by announcing far-reaching reforms in the agriculture sector. He has also freed the coal, atomic energy and space sectors from public sector monopolies and allowed private domestic and foreign companies to invest in them.

The government can now use the twin crises it is facing to launch the next generation of reforms that will make Indian companies competitive and help reduce their dependence on Chinese inputs.

It won't be easy. “Indian companies and consumers may face higher costs in the short term, but with government support, Indian manufacturing can quickly achieve economies of scale. The government wanted to open up the economy and be more competitive, but we forget for how many decades China protected their economy before they became competitive," L&T Chairman A.M. Naik recently told a major Indian newspaper.