End archaic labour laws, allow firms to buy land, cut subsidies to poor: "Economist" to Modi

By Rajiv Shah 

Influential right-wing British journal, “The Economist”, which had earlier opposed Narendra Modi as India’s Prime Minister calling him divisive, in its new commentary has "offered" certain neo-liberal recipes to the new government in India to take over under Modi for "repairing" the world’s third largest economy. Titled “Kick-starting India: India’s new government must get the economy working again. Here’s how”, the journal (May 17) has said that “investors are excited” with Modi in power, wanting him to take some tough measures. The steps me must take include abolition of “archaic labour laws”, and take steps to ensure that “contracts to let firms buy land” are strictly obeyed.

Insisting that “India’s new rulers must be more strategic and ruthless”, "The Economist” wants end to the regime of subsidies that the Government of India provides in the name of helping the poor. This, it says, is necessary to break the “a destabilising cycle of stagflation”, underlining, “High public borrowing has fuelled inflation, which stands at 9%. The new government must cut wasteful spending on subsidies of food and fuel.”

At the same time, the journal wants the new government to widen the tax net. It says, “The main reason why India has not run a budget surplus since independence in 1947 is that its tax base is puny. So the government must bring more of the economy into the tax net in order to repair the public finances.”

The reason for being “ruthless”, according to "The Economist” is, “A decade ago India’s economy was winning new-found respect as a riot of energy and enterprise, but its performance in recent years has been dismal. Now foreign bosses roll their eyes when you mention India, as they did in the 1980s. Growth has fallen to 5%, half the level at the peak of the 2004-08 boom. Inflation and public borrowing are too high. The rupee slumped in 2013. Private firms are fed up with red tape and graft and have cut investment from a peak of 17% of GDP to 9%.”

It points out, “On some measures the country is going backwards in time. Households have been shifting savings away from banks into the ancient refuge of gold. In a country that should be industrialising, the contribution to GDP from industry has been declining while manufacturing jobs have stagnated.” It adds, “The last government dithered and was preoccupied with bolstering India’s welfare state”, something that must be done away with.

The “Economist” also wants the Modi government to “tackle India’s rotten banks”, saying, “Bad debts have soared as the economy has slowed and infrastructure projects have got snared by red tape. Banks have chosen to ‘extend and pretend’ loans to zombie firms. The cost of cleaning up banks’ balance sheets could be as high as 4% of GDP—slightly larger, in relative terms, than Wall Street’s bail out.”

“But until the banks are fit enough to finance a new cycle of investment, no recovery will happen. Deeper financial reform is vital, too. Banks are forced to buy government bonds, giving politicians a blank cheque to borrow. Limiting that would help end the habit of reckless public deficits”, "The Economist” underlines.

Pointing towards following East Asian economies in creating “decent jobs”, "The Economist” wants that the new government do it the way these countries have “prospered by employing unskilled farmworkers in factories”, adding, “India should be doing that right now. Over 10m people a year will enter the workforce for the next decade. Labour costs are rising in China, leading firms to shift production elsewhere. Japanese companies are scrambling to diversify away from China as military tensions crackle. The rupee has fallen by a third against the yuan since 2010, making India’s workers more competitive”, the journal elucidates.

“The Economist” says, “So far India has blown it. For firms wanting to invest, access to the ingredients of production—energy, labour and land—is uncertain and expensive. The taxation of foreign companies is a lottery. As a result, firms such as Li & Fung, which sources textiles and toys for America’s supermarkets, say that factories are shifting to Bangladesh, South-East Asia and Africa, not India.”

“India can go in one of two directions. It can watch its position in the world decline as its infrastructure lags further behind and its army of underemployed people grows. Or it can stabilise its finances and build a productive private sector that creates the jobs its young people need and turns it into a serious global power. The choice is the new government’s”, the journal concludes.