Is the Govt. smartly using the pandemic as an opportunity to unleash difficult reforms?

For many, what happened last week in parliament should lit up this famous quote of Vladimir Lenin in their minds. “There are decades where nothing happens; and there are weeks, where decades happen”. Labor reforms were stuck for decades, but passed in a jiffy in a week. Same was the case with farm bills. All of a sudden, we have this new found energy in the current administration for structural reforms. What has changed and will this sustain?

First a bit of backdrop. It was middle of summer in 2019. Govt. had just then been voted back to power. With the track record of key reforms such as IBC, GST, DBT, MPC and RERA in the first term, the expectations were sky high as the second term began. As fate would have it, what followed were series of mis-steps, not reform measures everyone was hoping for. Some of these mis-steps were so regressive (super-rich tax comes to the mind first), it triggered all round pessimism across which eventually brought down the GDP growth for FY20 (even without factoring the pandemic impact of March). With a decisive mandate in polls that was not seen for decades, this was a big let-down from an administration which laid a solid foundation in the first term by unleashing some fundamental changes (listed above). Of course, the Govt. spent the next several months in reversing those manic mis-steps. 

The intent of this note is not to figure out what prompted this Govt. to change track (may be pandemic offered the much needed opportunity/excuse to unleash otherwise difficult reforms), but to look at how material the implications of these reforms will be on the structural growth.

First, the list of recent reforms:

• Changes in Labour Laws

• Clearance of Farm Bills

• Privatization of discoms thro’ state incentives (Orissa has taken the lead by starting the bidding process)

• Commercial Coal Mining

• Port Authorities Bill (Outsourcing of Major port operations)

• PLI Schemes (performance linked) to boost local manufacturing

• Privatization of select railway routes

• Co-op Banks brought under RBI ambit

• Administrative (Civil Servants) reforms (Cabinet Clearance for Mission Karmayogi)

• Acceleration of PSU Divestments

These are next generation reforms which will have far reaching implications for the long-term structural growth for India. Some of these like labor and farm bills are well debated and dissected in the media. But, others like Port Authority Bill and Privatization of discoms etc., have gone largely unnoticed without the usual media frenzy that follows such bold reforms. Ironically, less the media attention, more potent the reforms seem to be. Take for example the Ports Authority Bill. The bill aims to enable and empower the major ports in the country to function with greater autonomy and decision-making power. One of the key provisions in the bill is with regard to outsourcing the port operations to private operators by enabling the ports to lease the infrastructure on landlord-tenant model. This will go a long-way in revamping and enhancing port infrastructure and port logistics across the country. Similarly, discom privatization has the potential to clean-up and revive the power sector in a big way.

More importantly, these reforms come at a very crucial juncture when global companies are looking at diversifying their global supply chains thro’ China+1 strategy. Looks like the intent is clear on boosting local manufacturing. This comes out in how Govt. realized that mere slogan like Make-in-India lacked the magic and was willing to improvise that thro’ concessional corporate tax regime (15% for new investments) and PLI based programs tailored to specific sectors where India is globally competitive. 

These difficult reforms in conjunction with the foundation works that were laid in the first term (IBC and GST in particular), have the potential to lift the medium term (2 to 3 years) structural growth rate to above 7%-8% level if executed well. This must come as good news to die-hard India optimists who were slowly drifting into a sense of disillusionment because of series of regressive steps, esp. in year 2019.