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Three Years Of Modi Govt: Reform The Subsidy System

The NPA problem should be recognised as not merely a banking problem, but a national problem

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Many schemes have been implemented with results to show. The rhetoric about India has been very positive, with the Prime Minister as chief salesman, enticing industrialists the world over to invest in India.  The results are FDI at a record high ($65 billion in 2016-17) and new sectors such as electronics and transport attracting interest for the first time. In the same way, infrastructure — especially road construction — has been driven forward aggressively.  The recent Udan round can connect India as never before.  And all this has been accompanied by fiscal prudence and a deficit in control.

Some key reforms have been initiated. The Goods and Services Tax (GST) can add to our annual GDP growth rate even in the diluted form (too many rates, exemptions, jurisdictions) in which it begins.  The Insolvency Act is now beginning to be used.  The right noises are now being made on bank NPAs.  The big disappointment is the ‘Ease of Doing Business’ initiative.  Much has been done, with states competing with each other to improve performance.  But, if you ask the average firm if it is easier to do business today than one or two years ago, the answer would be ‘No’.  This is disappointing, and it means we are far from the Prime Minister’s 2014 vision of seeing India in the top 50 EODB rankings by this year.  It needs a lot of detail work, by the Centre, state, and regulator, to deliver on this vital metric.  Our firms do not need concessions to compete with the best in the world; we need an easy business environment.

Some major areas, essential for the long-term transformation of the Indian economy, require this action-oriented government’s attention in its remaining two years.

Reforming the subsidy system and applying user charges is a long pending opportunity.  The success experiments with Direct Benefits Transfers using Aadhaar should encourage a much more widespread use of DBT — for fertiliser subsidy, for electricity subsidy (in place of the existing cross-subsidy system), and for food subsidy.  This year’s Economic Survey floats a Universal Basic Income as an omnibus replacement for all subsidy programmes; it needs serious discussion and experimentation.  The potential benefits in coverage for the poor and efficiency would be transformative. 
The higher education sector has been left largely untouched in 25 years of reform. The critical problem is quality.  Every government since 1991 has tried to regulate quality into the system — and failed. The key is to use a combination of competition and autonomy to improve quality — with the state playing a very limited role.  In brief, the state should publicly assess institutions, and it should provide loan guarantees so all students have access regardless of economic need. It should stop regulating what fees can be charged, who can be admitted, what courses can be offered, and what curricula to follow. 

The public science system is another neglected area.  The higher education sector invests 0.04 per cent of GDP in research, against a world average of 0.4 per cent.  This is not for want of public resources for science: the Central government spends around Rs 85,000 crore annually on research, but almost all of this goes to autonomous state R&D laboratories, with little result to see.  Their budgets should be frozen at the current nominal level, and the entire increase (Rs 8,000 crore each year) allocated to higher education institutions. Let institutions compete for these funds.  The net effect would be a transformed public research system and a transformed higher education system, producing the talent the country needs.

These three years have seen much activity, and much delivery on the ground.  By ensuring that launched schemes deliver actual change on the ground in every case, and by opening up these new areas in the next two years, this government can lay the foundation for India’s growth over the next 25 years. 

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Naushad Forbes

The author is Director, Forbes Marshall

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