During the Covid-19 pandemic in India, central and state governments have been increasing economic freedoms.
Given the limited fiscal space and the relatively small coverage of the formal credit system, the approach has been to push activities that can be done by individuals and businesses to sustain themselves.
This has meant removing restrictions on what people can do. A number of things that were deemed to be illegal have been allowed, thus increasing the scope of activity and growth in the economy.
Some of these relaxations have immediate benefits. Others do not, but augur well for the Indian economy in the long run.
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3 advantages Europe & US have over India
The government’s economic response to the pandemic in India has been different to countries in Europe and America due to three main factors. One, those countries did not have structural issues such as loss-making public sector enterprises and banks, restrictions on farming and agricultural trade, etc. There was, thus, no benefit to growth that could be reaped by liberalisation.
Second, countries such as Germany have had a fiscal surplus. They thus had the fiscal space to spend. Others have the ability to borrow in international markets to support larger deficits. This allowed them to give a Covid fiscal stimulus up to 10 percent of GDP.
Third, the formal economy, including banking and credit systems, have an economy-wide reach. Liquidity measures taken by central banks could reach not just big businesses, but medium and small enterprises all over the country. This meant liquidity measures were far more effective than they would be in a country like India, where only about 5 per cent of banking sector credit goes to small businesses.
Steps central govt has taken
One of the first liberalisation steps was the legal framework for telemedicine on 25 March. The guidelines allowed doctors to consult patients and issue prescriptions over video conferencing.
The regulations were a boon to reducing crowding at clinics and hospitals, hotspots for transmission of the virus. However, the guidelines have the potential to change how medical services are provided across the country. After decades of trying to place doctors in rural and remote areas, the regulations will allow patients to take advantage of the telecommunications network. Telemedicine will not replace the need for better access to physical health infrastructure, but will reduce the need to travel to a medical centre in all cases.
The agricultural sector saw ordinances to remove restrictions in the Essential Commodities Act, free farmers from the clutches of market committees, and allow contract farming.
The government also acted on the failures of the Punjab and Maharashtra Cooperative (PMC) Bank and Yes Bank. The RBI was empowered to fast-track resolutions and exercise greater control over cooperative banks.
Industry and finance also saw increased freedom. Coal mining saw a boost with the governments opening up 41 mines through auctions. Previously, when the government would allocate or auction coal mines, it would come with conditions on the allocation of the coal. Miners had to sell centrally planned and pre-decided volumes to power-plants, cement industries and other factories at pre-fixed rates. The new sets of auctions will be free from such central planning. Miners will be able to sell coal at market prices to any customer.
In FDI, the government gave greater freedom to weapons manufacturers to invest in India, by increasing the FDI cap in defence production to 74 per cent.
The financial market regulator (SEBI) also joined the efforts. In addition to temporarily extending deadlines, SEBI also made it easier to raise capital quickly. Before the pandemic, a company could not use the ‘fast-track’ mode to raise capital if it had pending legal proceedings before SEBI. A rule change on 12 April removed this requirement, which allowed Reliance Industries to raise more than Rs 50,000 crore. In a country where legal proceedings can take decades to resolve, this was a welcome change.
The government committed to disinvestment and increasing the role of the private sector. While actual sales have not happened, steps like appointing an advisor for the IPO of LIC, starting private trains, planning to merge regional rural banks, and the decision to disinvest 23 public sector undertakings are steps in the right direction.
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States have also chipped in
Unlike the 1991 reforms, this round of liberalisation has seen active participation from the state governments. State governments have made legal changes to free farmers, exempt industries from labour laws, and allow greater freedoms in land sales.
Madhya Pradesh and Uttar Pradesh started with amending their agricultural marketing laws, allowing farmers to sell some produce outside the regulated market system. Soon, other states joined.
Similarly, states have exempted industries from compliance with various labour laws to allow for a more flexible labour market. In land reforms, Karnataka has taken the lead. It has freed the excessive restrictions on farmers that prevented them from selling their land at remunerative prices.
Looking forward, the economy will gain from greater cooperation between the centre and states. At present, some states see the central reforms on agricultural markets as a violation of the principles of federalism. Similarly, the central government is concerned that the suspension of labour laws by the states may violate India’s international obligations. These differences will need to be resolved to provide greater stability to the investment climate.
Ila Patnaik is an economist and a professor at the National Institute of Public Finance and Policy.
Shubho Roy is a researcher at the University of Chicago.
Views are personal.
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Prof.Ila Patnaik always has positive outlook for India, without being unrealistically optimistic like the political mouth pieces. The problem is, difficulties are here and now, and the solutions can yield results only after a year or more.
India has gone for Macro level reforms during Covid19. Timing is interesting. Are these reforms good to take care of the immediate shuttering and slow down of the economy. N0. Why Govt waited for 29 years to go in for such massive reforms. Would we have got these reforms if Covid was not there. NO. In India Govt’s believe in incremental reforms only and go for massive reforms when country has its back to wall. Nobody protests also. Measuring India’s response with developed economies is a fallacy. We do not measure up to them in any of the metrics , though we aspire to be one of them.
‘Measuring India’s response with developed economies is a fallacy. We do not measure up to them in any of the metrics , though we aspire to be one of them.’
I have noticed that many Hindus have aspirations beyond their capabilities. They are casteist and communalist but imagine they can be a superpower and equal to the heavy weights.
We should be bolder. We should enshrine economic freedom in our constitution. Mere fundamental right to trade with so many caveats will not do. A comprehensive framework of economic rights including right to property has to be enshrined under Fundamental rights. This will send a big signal to investors and the world will actually believe India’s commitment to freedoms both political and economical. It will also end our hypocrisy of hailing state controls while secretly preferring services from private players.
right to property has to be enshrined under Fundamental rights. ….
It was there in the original constitution, Mrs Indira abolished it
This is over-optimistic spin by Hindutva Hindus who always tell us each and every failure of Modi is in fact a success. Only dumb Hindu bhakts will believe. Of course, there is no shortage of such Hindus in India and abroad.
The Ambanis have been enriched even in these times with all manner of benefits. Mukesh can be trumpeted as the fifth richest person in the world. The impoverished majority had to walk 500 kms. and die on the way. No one is responsible for this callous lack of planning. Ambani may be the fifth richest in the world but India may be amongst the poorest per capita.
The removal of all regulations is a recipe to strengthen the hands of unscrupulous banias and caste Hindus, and is opening the way for bonded labour. The system could not take care of the ‘migrant labour’ precisely because 92% of the Indian economy is in the unorganised + informal sector. All the ‘increased economic freedoms’ that the authors are trumpeting as virtue will amount to just weakening further the people who work in this 92% of the economy .
Such Hindus even project it like India’s ‘increased economic freedoms’ has stolen a march on Europe !
This despicable story is like the ones you read by similar Hindus who tell us India gained the upper hand against China in fact at the LAC, because it has prompted India to buy the latest arms, and we have to wait to see the benefits.
Good initiatives by the government. Need to ensure rigorous implementation now especially on de-govermentalisation of tax payer run companies and banks. Need for greater tax reforms especially simplifying the GST and freeing power pricing from controls.