Tuesday, February 27, 2024

Time for a reset

Increased suspicion of China presents India with a unique opportunity to expand its global market share. But it must remove burdensome regulatory hurdles for businesses and incentivise R&D. By Sanjiv Bhatia

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The Covid-19 crisis may be the most defining global event of the last 100 years. The virus has claimed over 1,60,000 lives, destroyed the livelihood of millions of people and crushed the dreams of entrepreneurs and businesses worldwide. Many are predicting that things may never be the same again. It may be time to reset our personal lives, our businesses and government.

On the personal front, each of us will set our priorities—increased time with family, spirituality, meditation, solitude, higher savings, less conspicuous consumption, etc. But collectively, as a species, it is time to start respecting nature. Pollution and waste have become a part of our lives. It is not a coincidence that we wear masks when there is either a pandemic virus or when we breathe toxic air. Nature wants us to stop polluting.

Manufacturing will have to be re-engineered to stop the destruction of our air and water systems. All major cities in India have reported large drops in air pollution after the lockdowns. Beautiful images of the Himalayan mountain range, now visible as a result of reduced air pollution, are a powerful reminder that there needs to be a reset on the use of fossil fuels. And this could present a huge opportunity for India.

India has the potential to be a major global player in waste management, environmental and water treatment products. Technical expertise is abundant, but most companies never acquire the scale required to compete internationally. A reset in the government’s tendering process can change that dramatically. Public utilities, the largest consumers of waste and water treatment products, still use the lowest bidder criterion to award projects. If instead, the contracts were awarded to innovative and efficient technologies, Indian companies would be able to build the scale and track record required to compete for global projects. China, which leads the world in environmental products, provides attractive incentives to emerging and innovative companies, which then eventually acquire the experience and scale to become world leaders in their industry.

It is also time to think about electric engines and move away rapidly from the thermal production of electricity. India’s future economic growth could come from retooling its large automobile industry and creating a massive recycling industry that destroys old fossil fuel cars to produce a new breed of non-polluting electric vehicles. The government should understand what industry wants and provide the necessary incentives and the supporting infrastructure.

It would also spawn an entire industry of ancillary services from recharging stations, metal recycling units, battery production, electronic components and new information technologies to drive and support these modern non-polluting electric vehicles.

Covid-19 will also force the world to explore ways to move away from China’s dominance of global supply chains. India now has an opportunity to position itself as an alternative. It is becoming clear that the world has become over-reliant on China even as Chinese ideology and authoritarian governance pose a direct threat to the value systems of democratic countries. The secrecy with which the Chinese government allowed the Covid-19 virus to become a global pandemic is forcing a rethink among its trade partners. Recent statements by Japan and South Korea expressing interest in pulling companies out of China is evidence of what could soon become a global trend. Already, Germany has given a £130-billion invoice for what Beijing “owes” it for Covid-19 related damages.

India’s track record of democracy and human rights could present an attractive alternative for thousands of industrial products and services. But to take advantage of this opportunity, India would need to reset its regulatory regime. A consequence of India’s big government is the unnecessary regulations that have burdened its companies from becoming world leaders. Only a handful of companies (seven) are currently in the global Fortune 500 list. And that is not because India lacks entrepreneurial competence, but because India’s red tape and bureaucracy, with its array of obsolete and bizarre rules and regulations, hold businesses back. 

For India to take China’s place in the global supply chain, the government will have to unshackle Indian industry from burdensome tax rules, labour laws that prevent companies from expanding, complex regulations that throttle India’s export industry and capital control regulations on foreign exchange.

The government should immediately appoint a committee of industry leaders tasked with the mandate of eliminating 90 percent of regulations in all major sectors. Only regulations that protect the rights of others (citizens, businesses and government), prevent practices that create market imperfections like monopolies and price cartels, and prevent criminal activities should be kept. Regulations that don’t meet these objectives should be eliminated. 

If India wants to maximise its potential as an industrial and technological powerhouse, the existing regulatory structure must be completely reset in favour of increased economic freedom and with a minimal role for the government in matters of finance and commerce.

It is also time to reset India’s trade sector and set a goal of doubling the country’s total global trade in five years. Countries that produce goods and services that others want are wealthier than those that don’t. India contributes only 2.2 percent to global trade, which is small for a country its size. India must start producing goods the world wants. Exports have declined from a high of 26 percent of GDP in 2012 to less than 19 percent in 2019. As a result, the trade deficit reached a record high of $176 billion in the last financial year.

Increased suspicion of China and its unfair trade practices presents a unique opportunity for India to expand its global market share. Resetting India’s export sector will require an immediate exemption on GST for all export businesses. Exporters get a refund on the GST they pay on inputs, but these refunds take anywhere from six to nine months. A complete exemption on GST would free up enormous amounts of working capital and make the country’s exports competitive.

India also needs a comprehensive analysis of its existing and potential export markets and aggressively move to sign free trade agreements with key trading partners.

Finally, the government should prioritise the export sector with liberal credit terms, higher tax deductions for R&D, market penetration and brand promotion strategies. The RBI can help exports by easing capital controls on foreign exchange to attract foreign companies that want to set up value-added manufacturing in India. This will allow India to be a significant player in the global supply chain.

India also needs a reset in its approach to public health. Covid-19 has exposed decades of low public investment in healthcare. India’s total public expenditure on health (centre plus state) has averaged 1.1 percent of GDP over the last ten years compared to the global average of 3.7 percent.

Investment in healthcare will need to double in five years to around 2.5 percent of GDP. Universal health insurance, neighbourhood clinics for preventive medicine, higher investment in medical education and support for a robust pharmaceutical industry are areas of immediate attention.

And as part of public health, the government must provide clean drinking water for all Indians. In the two-month period in which over 540 people have died across the country from Covid-19, over 2,52,000 children have died from water-borne diseases. And sadly, while Covid-19 has paralysed the entire nation, preventable and unnecessary deaths of a quarter of a million children has gone entirely unnoticed because it mostly affects the poor. This is the tragedy and hypocrisy of India’s governance.

Finally, in the post Covid-19 era, India must reset its welfare policies. The economic loss to millions of people has yet to be calculated, but it will be enormous. We can all agree that citizens must be guaranteed some basic level of subsistence. Governments over decades have prided themselves on coming up with “schemes”, but all these suffer from the same inefficiencies: exclusion of the poor, leakages in the system, misallocation of resources across districts and benefits to non-poor.

Estimates by the finance ministry show that in just the PDS and MGNREGA programmes, as much as 40 percent and 65 percent of the funds, respectively did not reach the people who most needed them. There are currently about 950 government schemes which cost about 5.2 percent of the GDP. Even if the average misallocation is 30 percent, the amount of leakage equals almost Rs 2.1 lakh crore.

It is time to reset India’s welfare and subsidy system to give people the right to choose how they should allocate their welfare money and be responsible for the execution and consequences of those choices. It is time for the government to enact a Universal Basic Income (UBI) scheme which guarantees every low-income person a minimum subsistence income deposited directly in their accounts. UBI should replace all existing welfare and subsidy schemes and the money saved by eliminating waste and leakages from the system can be used to train people for jobs in the new economy and to provide high-quality education and improve health benefits.

Covid-19 has given us all time to reflect and reset. From crisis come opportunities, and it is time for the country to reset itself to take advantage of these. It is time to reset India onto a path of greater economic freedom, smaller government and wealth creation that benefits all.

A completely new approach is required, in which the government acts as an umpire rather than a player. It would require leadership from the top. Prime Minister Narendra Modi once famously spoke about minimum government and maximum governance. This is his chance to end regulatory overkill, reduce the size and reach of the government and give Indian businesses the economic freedom they need to become world leaders.

—The writer is a financial economist and founder, contractwithindia.com

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