Economy
Why India has increased economic freedoms in response to Covid, unlike Europe & US
Central govt has removed numerous restrictions in various sectors of the Indian economy, and unlike the 1991 liberalisation, states have also chipped in.
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.
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.
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.
Courtesy : The Print
Writen by – Ila Patnaik who 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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