By Subrata Majumder
At a recent economic summit organized by World Economic Forum, the investors bemoaned the absence of any big ticket reform under Modi government. They lamented that against all high hopes generated by the Modi model of development before election, the government failed to announce any major reform which could stoke investment. In the summit, the echo from the investors was clear. They were waiting for clear-cut reforms which can draw the road map of development. They were looking for definite steps which can inspire them to jump in the playing arena.
There was, however, some improvement in investment during the first five months of Modi government. But, the increase in investment was not the effect of Modi reform. These investments were pre-determined and were based on the indications that the economy was bouncing back. The windfall of Modi’s reform will actually pour only after the ground realities of the reforms are ceded to the investors.
The first opportunity came to Modi government to push reform was the Union Budget for 2014-15. But, the budget disappointed the investors. The concept for rebooting the manufacturing sector as the base for growth was seen a distant vision in the budget. The BJP manifesto, which said that “We should not remain a market for the global industry. Rather, we should become a Global Manufacturing Hub “, lost its sheen in the Budget.
The second opportunity endowed to Mr Modi was the celebration of Independence Day from the rampart of Red Fort. There too Mr Modi failed to impress the investors. No major announcement was made for the reform and belied the hopes of investors.
The third opportunity given to Mr Modi was his announcement of Make in India programme. The investors were abuzz with expectation of big ticket reforms. But, here too the investors were disappointed.
At the economic summit, there was a palpable feeling that the investors were looking for tangible changes in economic reforms. The overwhelming desire of the investors was that they would like to see real changes at the ground level before they invest. So far whatever the reforms Mr Modi unveiled, they were at low ebb to trigger any big investment.
In 991, Dr. Manmohan Singh, the then Finance Minster under Narasimha Rao Prime-ministership, announced bold measures of economic reforms to lead the country into an open economy within two months of coming to the government. This was despite the fact that Narasimha Rao government was in minority in Lok Sabha. Abrogation of licensing system in industrial manufacturing and import trade, opening the opportunities for private and foreign investors, pruning the list of exclusively reserved for public sectors, gave stimulus to gear-up the investment.
A continuous process of reforms is a necessity to pitch sustainable growth. In this perspective, a lesson from China is imperative. Given the downturn in foreign investment on account of global crisis, China resorted to major reforms in its FDI policy in 2012. The reforms comprised two components. They were fiscal incentives and structural changes sync with the ground realities to revive the FDI attraction. First, to balance the lopsided FDI flow in between Central and Western China and the Eastern China, China provided concessional tax treatment of 15 percent against the normal tax of 25 percent. Second, with the upcoming of new industries essential for growth, China inducted environment friendly, high technology and value-added industries in its list of “encouraged” industries.
Therefore, any major reform to trigger big investment requires fiscal incentives and structural changes in the policy. Modi’s reforms in FDI policy and launching of Make In India programme are far from these two characteristics. Raising FDI cap in defence, insurance, permitting private sector and FDI in railway infrastructure and rationalization in construction cannot be construed big tickets reforms in the perspective of global attraction of investment. No fiscal incentive was unleashed and no major structural changes were resorted to attract big investment.
In the structural reform front, no measure was adopted to sort out the two crucial hurdles for investment: land acquisition and labour reforms. The Land Acquisition Act 2013 was more stringent than before. Mandatory obligations of 80 per cent of farmers’ consent and paying four times more than normal value of rural land and two times more than urban land have almost gridlocked the land purchase by big investors for their projects. A number of big investment projects in power and infrastructure remain stuck due to land acquisition problem. The CEO of Siemens lamented that Make in India programme was potent for small industries only.
Modi’s labour reforms embraced more of social aspects of workers than labour management to trigger manufacturing growth. The two important labour problems which stymied the manufacturing growth are hire and fire system and exit policy. Both remained untouched in Modi’s labour reform. The stringent labour laws and the empowerment of the bureaucrats acted disincentives to the investors to set up big factories. Doing away with the factory inspector raj is no panacea for the big investors.
Paranoid by the fiasco of Insurance Bill in the last session of Parliament, Modi government seemed to have been more cautious in pushing major reforms which require legislative amendments through Parliament. Modi government pitched reforms in such areas which do not require Parliamentary approval. Any reform in labour laws to negate the stringent regulation for hire and fire requires legislative amendment and Parliament approval. Reform in Industrial Dispute Act 1947 is most warranted as this regulates hire and fire of workers and the winding or closure of units.
Buckled by minority in Rajya Sabha, which can block major economic reforms, Modi government should launch the reforms at the State level in the beginning. Rajasthan showed the way. It’s cabinet has already approved three labour laws to ease the hire and fire system and drafted a new land acquisition bill, which are in the process to be laid in the assembly. At present, BJP has 5 states with absolute majority and two States with local party alliances. Close on the heels of Rajasthan, BJP should introduce investment friendly land and labour reforms in their respective states. The reforms will have ripples in the neighbouring states when the investments start flowing in these states. (IPA Service)
