Second generation reforms need of the hour

Rohit Joshi and Siddharth Tak/ZRG

On Friday, Standard & Poor’s (S&P) affirmed India’s BBB- rating with a negative outlook. It, however, said that the outlook may be revised to stable if the government carries through with its plans to unleash public and private investments (for example, by enacting the land acquisition bill), implement a nationwide government sales tax, and further trim fuel and fertilizer subsidies.

The S&P wish list is a reiteration of the vocal call made here for quite some time now to usher in comprehensive reforms that go beyond merely making the environment more attractive for foreign investors. The FDI policy push too has yet not yielded the desired results. FDI flows in the fiscal 12-13 on gross basis have declined by 20.6 percent to 36.9 billion dollars on yearly basis. The government proposes to review the FDI limits in various sectors and has therefore set up a committee under Economic Affairs Secretary, Arvind Mayaram for the purpose.

After reviewing the reforms announced by the government in the last eight months it can be easily inferred that their inclination has been towards FDI reforms. Government has allowed 51 percent FDI in multi brand retail subject to state approval. It also approved 49 percent FDI in scheduled and non-scheduled air transport services.

Furthermore, government has raised FDI ceiling to 74 percent from 49 percent in broadcast carriage services. It also gave nod to 49 percent FDI in power exchanges. Moreover, Cabinet cleared proposal related to 49 percent FDI in insurance along with 26 percent in the pension funds but these particular bills require Parliament clearance.

But this fails to impress those who have demanded legislation driven reforms in the country. Arvind Mohan, Professor of Economics at University of Lucknow opined, “Unfortunately till date, we haven’t done enough to move towards the second generation reforms in India. We are merely focused on FDI. We have structural issues in our economy which need to be first removed.”

However, DK Pant, director, Fitch Ratings, argued in favour of FDI focus as a way forward to end the macroeconomic woes in the country. “To restore confidence of the investors, government is opting for reforms which don’t require legislative approvals. We are a capital starved economy so we have to increase investment in order to give stability to our economic growth. Current account deficit (CAD) is increasing hence sustained capital flows are required to fund it. Capital flows in the form of portfolio investment (FII flows) are not desirable to finance CAD hence FDI is required,” he observed.

Apart from FDI push, the government hiked diesel prices and capped the limit of LPG cylinders. It also increased rail and urea prices in the country apart from setting up the Cabinet Committee on Investment (CCI) to boost overall investment climate in the country. Moreover, the Banking and Companies Bill too were passed in the winter session.

However, there has been need felt to do more on the ground. Experts have identified “second generation” reforms as including: Land Acquisition Bill, Mines and Minerals Bill, Goods and Services Tax (GST), Direct Taxes Code (DTC).

Sounding not so optimistic about the progress achieved so far on passing these Bills, Pant at Fitch affirmed, “Meaningful reform like clearance of Land acquisition bill has to be passed by Parliament and they (UPA) does not have the support of other parties. Therefore, it would be difficult for the government to approve such reforms.”

Reiterating the importance of these bills, Mohan at University of Lucknow asserted, “The Land Acquisition Bill is critical for the development of industrial, agricultural, and infrastructure.”