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Need for Economic Reforms (8th December 2020)

Need for Economic Reforms (8th December 2020)

1. Context:

1.1. The government’s economic reforms agenda in response to the coronavirus pandemic has the potential to raise India’s medium-term growth rate.

2. Background:

2.1. Ratings agencies expect the Centre to announce more reforms measures over the next few years, and hope state governments will follow suit.

2.2. Fitch Ratings recently said several initiatives, such as the

  • Agricultural reforms to offer farmers more flexibility to sell their produce,
  • Labour reforms to improve access to social security, passed by Parliament amid the covid crisis may lift prospects of medium-term growth.

2.3. Meanwhile, amid the farmers’ protest, the chief economic advisor on Tuesday said that the country’s new farm reforms are designed to benefit the majority of the agricultural sector.

2.4. The Finance Minister Nirmala Sitharaman too assured the industry that momentum of economic reforms will continue to make India a hotspot of global investment. India has turned the crisis created by the COVID-19 pandemic into an opportunity to push the economic reforms, which remained pending for decades.

GUEST:

1) Dr. Arvind Virmani, Former Chief Economic Advisor

2) Gurcharan Das, Bestselling Author & Economist

 

3. IMPORTANCE OF ECONOMIC REFORMS:

3.1 Increase Income and Growth rate: It is the only way to lift the Income of Indian and reform has proven that country after country has been able to raise its growth rate.

3.2 Importance of reforms- Increases productivity and competitiveness- which in turn increase per capita income- helps in more welfare of people which is ultimate objective.

3.3 Public Vs. Private Sector:  Govt monopoly is withhold only in 2-3 sectors, otherwise all sectors are open now for Private sector. PSUs are a burden on public exchequer and people don’t understand that how much public money is wasted on PSUs.

3.4 Rich v. poor in Reforms: People say that reforms make the rich richer and the poor poorer. But its exactly opposite.

3.5 Pro Market reforms-means reforms and it results in lower the costs of products. It raises the quality of products. Helps everybody. We have seen that in reforms of cable TV, Civil Aviation, Telecom sector.

3.6 Farm Reforms-These 3 bills/Acts announced really represents AZADI for farmers. Its most important steps taken by any Govt after Green Revolution-1960, and will lead to 2nd Green Revolution.

3.7 Productivity: Main thing it will achieve is Higher Productivity.  Our Agri productivity is low, one reason is small land holding.

3.8 China v. India in Productivity: China has half the arable land than India but productivity is three times higher. These reforms will help make Nations more Productive.

  • Method: is to create competition which Increases productivity and competitiveness.

3.9 Agri Reforms: This is real Azadi. It will lead to 2nd Green Revolution. Today the farmers are at mercy on APMC Mandis/ Arahtiyas.

3.10 Exploitation by Arahtiyas/wholesaler: They fix a very low price and don’t declare it till night. Poor farmers had to go to home in Night so he had to make distress sale. Now farmers have freedom. He can buy or sell in any mandi.

3.11 Dividends to Farmers: Consumers pay 40rs for a kg of potato but farmers get paid only 10rs. Rest 30 Rs goes to Arahtiyas, wholesaler, retailer, lediwala. If you allow farmer to direct sell, farmers can earn up to 25-30rs. Because we reduce middlemen’s profit.

3.12 Reforms in Essential commodity Act- It used to put limit on stocking, to keep price in checks. As considered as essential commodity. Hence cold storage dint come up as they survive on storage. Now no. of cold storages is coming.

3.13 More Avenues for Farmers: Now farmers can directly sell to cold storage, Food processor, So there are many avenues.

3.14 MSP- Farmers saying that MSP should be guaranteed by law. This MSP system is 2nd rate system. We may one day remove all subsidies and use Direct Benefit Transfer for all subsidies. In case of MSP-Govt. is forced to buy which people don’t want. Mountain of grains come up in FCI and eaten by rats. Why don’t they produce Pulses, oilseeds. Etc. We import these crops hence we should convey our farmers to produce such crops.

4 CHALLENGES IN REFORMS:

4.1 Reforms difficult in Democracy: Farm protest taking place now shows that reforms are difficult in democracy as Politics is T-20, Short term gain but Economics is long term gain like Test match. So this is why reformer find it difficult to execute the reforms.

4.2 Populist leader v. reformer in Politics: Like a Populist leader promises 1Rs Rice, he will win, but a reformer leader will say that he will bring more investment, mechanisation, reforms, supply chain but he will lose.

4.3 Protest not on National level: The Protest coming from a small section of farming community, only 6 % of community get benefit of MSP. Rich farmers are mostly in Punjab. They are supported financially by Arahtiyas. These agents earn 1500-3000 crore across country. They are financing this protest. So, a small group showing that it’s a national issue which is not.

4.4 When reforms are protested?  

  • Some of these reforms not attracted much attention but Agri reform drew much attention. Reason behind this is that Modi Govt did it in bulk i.e. 3 bills in one go. It should have been done in parts.
  • Vested interests will oppose reforms but if reforms are isolated, done in parts, it becomes easy to reform.
  • Some of laws/reforms may do not impact huge public hence no much protest.

4.5 Role of Opposition Party: The trouble is that opposition party say exactly opposite of when they remain in Govt. Every opposition party opposes these reforms but at some point of time, they all advocated for these reforms.

4.6 Why farmers are protesting? Farmers are like Prisoners. Birds in the cage loses the ability to fly. The farmers regulated for years, forgot the importance of reforms. Govt. need to tell them.

Other reforms needed:

1. Direct tax code- Which has been pending for more than a year. Really hope that govt introduce it to simplify the tax.

2. GST- Simplifying and rationalising GST tax.

  • These two reforms very crucial for MSME sectors.

3. Direct cash transfer system: Not just substitute of farm subsidies, but all subsidies are highly distorted. Fertiliser subsidies increase fertiliser use, lead to soil, water pollution etc.

  • More reform needed to do: Reforms in Electricity distribution, twin balance system reforms
  • Skill reform, apprenticeship act reform which will be important for Atmanirbhar Bharat to succeed. It will help in manufacturing sector a lot.
  • Reforms Done so far: Education, Agriculture, labour code, GST Simplification, Electricity amendment act.
  • New reforms have to be done with prior announcements and with awareness of people and to be done over a period of times.

5. WAY FORWARD:

Fiscal deficit and Economic Development:

  • The question to whether we should be concerned about breaching the Fiscal deficit norm is least important question for this current year, for Pandemic year, for lockdown year.
  • Key thing is where is the money needed, how much money is needed, we need to infuse it, transfer it. It doesn’t matter if its 10 crore or 100 crore or 1000 crore.
  • Lockdown not only impacted private players but also impacted Govt projects. So, we need to look upon government projects as well.

5.1 There are still many reforms to do be done after this excellent Labour reform, Agri reforms and Education Reforms/NEP 2020. All these reforms will add up to make India a High growth Country.

5.2 Niti aayog’s recommendation: NITI has suggested that all states and private market should make equal tax say 1 or 2%.

5.3 You have to make people understand that reforms are good for everybody, today People can not distinguish b/w Por Market and Pro Business.

5.4 Reform by stealth: It is not just the MODI Govt. but this is the fault right from 1991. All Govt, be it Vajpayee, Man Mohan Singh, P. Chidabaram, HD. Gauda, they dint go out and sold the reforms. That’s why India has to reform by stealth. That INDIA has to reform in Night i.e., CHUPKE CHUPKE CHORI CHORI. But that is not the way to do.

 

Important Points made by Guests:

Gurcharan Das, Bestselling Author & Economist

Q. How important economic reforms are, especially in the midst of Pandemic?

Ans:

It is the only way to lift the Income of Indian and reform has proven that country after country has been able to raise its growth rate.

There are still many reforms to do be done after this excellent Labour reform, Agri reforms and Education Reforms/NEP 2020. All these reforms will add up to make India a High growth Country.

Farm Reforms-These 3 bills/Acts announced really represents AZADI for farmers. Its most important steps taken by any Govt after Green Revolution-1960, and will lead to 2nd Green Revolution.

Productivity: Main thing it will achieve is Higher Productivity. Our Agri productivity is low, one reason is small land holding.

China v. India in Productivity: China has half the arable land than India but productivity is three times higher. These reforms will help make Nations more Productive.

Reforms difficult in Democracy: Farm protest taking place now shows that reforms are difficult in democracy as Politics is T-20, Short term gain but Economics is long term gain like Test match. So this is why reformer find it difficult to execute the reforms.

Populist leader v. reformer in Politics: Like a Populist leader promises 1Rs Rice, he will win, but a reformer leader will say that he will bring more investment, mechanisation, reforms, supply chain but he will lose.

Protest not on National level: The Protest coming from a small section of farming community, only 6 % of community get benefit of MSP. Rich farmers are mostly in Punjab. They are supported financially by Arahtiyas. These agents earn 1500-3000 crore across country. They are financing this protest. So, a small group showing that it’s a national issue which is not.

Dr. Arvind Virmani, Former Chief Economic Advisor

Q. Can populism (Politics) and reforms (Economics) can go hand in hand?

Ans:

Importance of reforms- Increases productivity and competitiveness- which in turn increase per capita income- helps in more welfare of people which is ultimate objective.

Method: is to create competition which Increases productivity and competitiveness.

Public Vs. Private Sector:  Govt monopoly is withhold only in 2-3 sectors, otherwise all sectors are open now for Private sector. PSUs are a burden on public exchequer and people don’t understand that how much public money is wasted on PSUs.

Reforms Done so far: Education, Agriculture, labour code, GST Simplification, Electricity amendment act.

When reforms are protested?

Some of these reforms not attracted much attention but Agri reform drew much attention. Reason behind this is that Modi Govt did it in bulk i.e. 3 bills in one go. It should have been done in parts.

Vested interests will oppose reforms but if reforms are isolated, done in parts, it becomes easy to reform.

Some of laws/reforms may do not impact huge public hence no much protest.

Gurcharan Das, Bestselling Author & Economist:

Reform by stealth: It is not just the MODI Govt. but this is the fault right from 1991. All Govt, be it Vajpayee, Man Mohan Singh, P. Chidabaram, HD. Gauda, they dint go out and sold the reforms. That’s why India has to reform by stealth. That INDIA has to reform in Night i.e., CHUPKE CHUPKE CHORI CHORI. But that is not the way to do.

You have to make people understand that reforms are good for everybody, today People can not distinguish b/w Por Market and Pro Business.

Pro Market reforms-means reforms and it results in lower the costs of products. It raises the quality of products. Helps everybody. We have seen that in reforms of cable TV, Civil Aviation, Telecom sector.

Rich v. poor in Reforms: People say that reforms make the rich richer and the poor poorer. But its exactly opposite.

Role of Opposition Party: The trouble is that opposition party say exactly opposite of when they remain in Govt. Every opposition party opposes these reforms but at some point of time, they all advocated for these reforms.

Agri Reforms: This is real Azadi. It will lead to 2ND Green Revolution. Today the farmers are at mercy on APMC Mandis/ Arahtiyas.

Exploitation by Arahtiyas/wholesaler: They fix a very low price and don’t declare it till night. Poor farmers had to go to home in Night so he had to make distress sale. Now farmers have freedom. He can buy or sell in any mandi.

Niti Aayog’s recommendation: NITI has suggested that all states and private market should make equal tax say 1 or 2%.

Dividends to Farmers: Consumers pay 40rs for a kg of potato but farmers get paid only 10rs. Rest 30 Rs goes to Arahtiyas, wholesaler, retailer, lediwala. If you allow farmer to direct sell, farmers can earn up to 25-30rs. Because we reduce middlemen’s profit.

Reforms in Essential commodity Act- It used to put limit on stocking, to keep price in checks. As considered as essential commodity. Hence cold storage dint come up as they survive on storage. Now no. of cold storages is coming.

Avenues for Farmers: Now farmers can directly sell to cold storage, Food processor, So there are many avenues.

Why farmers are protesting? Farmers are like Prisoners. Birds in the cage loses the ability to fly. The farmers regulated for years, forgot the importance of reforms. Govt. need to tell them.

MSP- Farmers saying that MSP should be guaranteed by law. This MSP system is 2nd rate system. We may one day remove all subsidies and use Direct Benefit Transfer for all subsidies. In case of MSP-Govt. is forced to buy which people don’t want. Mountain of grains come up in FCI and eaten by rats. Why don’t they produce Pulses, oilseeds. Etc. We import these crops hence we should convey our farmers to produce such crops.

Dr. Arvind Virmani, Former Chief Economic Advisor

Q.  What more reforms are needed? Govt. is now keen on giving the right impetus to the economy. More funding can be spend as told by Finance minister as well. Should there be a concern of high fiscal deficit?

Ans:

Budget is 6 weeks away and there are 3 important reforms which can be introduced in the budget.

  1. Direct tax code- Which has been pending for more than a year. Really hope that govt introduce it to simplify the tax.
  2. GST- Simplifying and rationalising GST tax.

These two reforms very crucial for MSME sectors.

  1. Direct cash transfer system: Not just a substitute of farm subsidies, but all subsidies are highly distorted. Fertiliser subsidies increase fertiliser use, lead to soil, water pollution etc.
  • More reform needed to do: Reforms in Electricity distribution, twin balance system reforms
  • Skill reform, apprenticeship act reform which will be important for AtmaNirbhar Bharat to succeed. It will help in the manufacturing sector a lot.

These reforms have to be done with prior announcements and with awareness of people and to be done over a period of times.

Regarding Fiscal deficit:

Least important for this current year, for Pandemic year, for lockdown year. Key thing is where is the money needed, how much money is needed, need to infuse, transfer it. It doesn’t matter if its 10 crore or 100 crore or 1000 crore.

Lockdown not only impacted private players but also impacted Govt projects. So we need to look upon government projects as well.

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