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Naina Lal Kidwai: Do What it Takes to Improve Standard of Living

For this, restart the investment cycle, liberalise factor markets, mitigate food inflation, and increase public spending on health care and education

Published: May 22, 2014 06:40:01 AM IST
Updated: May 21, 2014 10:53:05 AM IST
Naina Lal Kidwai: Do What it Takes to Improve Standard of Living
Naina Lal Kidwai, Former President, Ficci. She is also Chairman, India and Director, HSBC Asia Pacific. An alma mater of the Harvard Business School, she is a leading voice in the Indian business community. Also sits on the global board of directors of Nestle

General elections in India usually attract a lot of attention. This year is no different. The key message given by all major political parties was that of enhancing growth and generating jobs. The emphasis on improving the state of the economy and bringing confidence back is acknowledged in their manifestos. I think this is absolutely essential.

Admittedly, the last two years have been difficult for the economy. Growth has been in the sub-5 percent range. The current account deficit (CAD) had moved out of the comfort zone before it was brought back within the range considered normal by the Reserve Bank of India. The fisc (fiscal deficit) has remained under strain even if the latest numbers indicate that we did not cross the red line set by the finance minister. Inflation, particularly food inflation, is becoming endemic. Early indications for the current year show that growth will again be around the 5 percent mark. Our vulnerabilities on the external side continue with limited coordination expected among monetary authorities of different countries. The mounting subsidy burden would constrain the government balance sheet. And with a repeat of the El Nino phenomenon, we could see monsoon and agriculture production being impacted, with a cascading effect on food prices.

While the policy contours of the new government to tackle these issues will become clear in due course, there are a few areas that should be focussed on.

First, restart the investment cycle. Without adding to the productive capacity of the economy, we cannot push up growth in a sustained manner. To achieve that, it will have to work on both intangible and tangible issues. There must be clear articulation that investors will be provided a predictable environment while ensuring sanctity of contract, stability in the tax regime and applicability of legislations prospectively.

Second, liberalise factor markets. We have liberalised the product markets but have not followed suit in case of factor markets. Whether it is land, labour or capital—the market for each of these is plagued with rigidities. For the healthy growth of our enterprises, we need to rid them of the difficulties encountered while acquiring land, hiring labour or raising capital. We need to review the new Land Acquisition Act, consider applying more flexible labour laws to new entrants in the workforce and ensure capital is available at competitive costs to MSMEs (micro small and medium enterprises).

Third, make fiscal prudence the cornerstone of government functioning. The first budget will be looked at with a lot of interest. It must signal bringing efficiency in expenditure management through rationalisation of subsidies. The Aadhar-based direct cash transfer model has proved effective in certain states and should be continued. Also, we need greater effort towards raising resources through the disinvestment of PSUs, including those in the services sector, as well as monetisation of land as advocated by the Kelkar committee. Any new programme or extension of existing programmes should be backed by matching resources. All revenues and expenses must be correctly identified and reflected in the budget numbers.

Fourth, evolve a plan for mitigating food inflation. This is a supply side problem that calls for a quantum jump in food productivity, straightening kinks in agri-supply and distribution, and reducing wastages. Given the growing demand for protein and mineral rich food items, we need to have a second green revolution that focuses on fruits and vegetables, meat, fish, eggs and dairy products. We also need an effective cold chain and warehousing infrastructure. The desired changes in the APMC Act have not been effected by all states and the new government should make this happen.

Naina Lal Kidwai: Do What it Takes to Improve Standard of Living
Image: Jayanta Dey / Reuters
Along with increased production of food grains, there should be an effective warehousing system

Fifth, prepare a strategy for maintaining a healthy balance of payments account. This should entail a targeted reduction in CAD. Keeping it within manageable limits is essential to prevent a sharp depreciation of the rupee. This could fuel imported inflation and add to pressure on the fisc through higher oil and fertiliser subsidies. For maintaining CAD at sustainable levels, the trade deficit needs to be reduced significantly from the present levels of 9 to 10 percent (2012-13). This would require economising imports of oil, coal, gold, electronics, etc, by raising domestic production and augmenting exports through greater diversification of products and markets.

Sixth, plan for re-energising the banking sector. Estimates show that around Rs 5 to 6 lakh crore are required for recapitalising public sector banks to meet the investment needs of the economy while meeting the Basel-III requirements. The rise in stressed assets in the banking industry is also a matter of grave concern. Reducing government shareholding in PSUs could help address the issue of capital requirement of banks. As for NPAs, there is a need to activate the ARCs (asset reconstruction companies) by addressing concerns on both sides (banks vis-à-vis ARCs). Also, expediting clearances of stalled but viable projects and dealing effectively with wilful defaulters would help bring down NPAs in the system.   

While these points constitute the economic agenda for the government, there is an equally expansive social agenda that needs to be looked at. Areas like health, education, gender equality, water security and the role of women in society are a few essential constituents of such an agenda.

The current public spend on health care and education together is below 5 percent of GDP. This should go up to at least 9 to 10 percent over the next five years. At the same time, adequate checks and balances need to be put in place to ensure every rupee spent delivers more. Only a healthy and educated workforce can contribute meaningfully towards nation building. Likewise, greater gender equality can enhance economic productivity and improve development outcomes.

In the case of water, I would say that the problems with regard to water management, usage and distribution cannot be tackled until we do away with the practice of water management across various ministries and departments. A comprehensive water management policy will have to bridge the water divide and take a unitary view of water management and pricing of this scarce resource.

I hope the new government can take this up as well as develop a framework to incentivise water conservation and recharge while penalising wastage in use of water.

In closing, I would like to reiterate that the ultimate objective of all policies and programmes should be to provide meaningful jobs and improve the standard of living for all Indians. Creating an enabling environment through better governance and clear and stable policies hold the key to bringing confidence back and driving growth of the economy.

(This story appears in the 30 May, 2014 issue of Forbes India. To visit our Archives, click here.)

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  • Vikas Mohan

    Divestments of PSU's is no guarantee that the outcome will perform better in private hands. It's misnomer that is often lumped together with other demands for economic reform. PSU's, if on one side consume subsidies (or have been doing so in the earlier socialist era) - also, happen to be a steady source of income and tax revenue for the State. Agreed, PSU's have swallowed a lot of resource over the decades, but now, when the time has come to harvest, why to sell off the family silver?

    on May 27, 2014