Tuesday, September 18, 2012

Are these new reforms worth cheering so much?

Prime Minister Manmohan Singh has taken everyone by surprise. Suddenly, he seems to have shifted from his perpetual 'silent mode' to 'animal spirits mode'. In a bid to end the policy logjam, a few policy initiatives were announced back to back over the last few days. First, a cut in diesel subsidies was announced. Next day, the door was opened up for foreign investment in multi-brand retail and aviation. The Finance Minister has proposed a National Investment Board to speed up clearances on large infrastructure projects.

The news media is abuzz with reports cheering the so-called 'bold' reforms. Even the stock markets have given a thumbs-up to the initiatives. The BSE-Sensex is at its one-year high already. With so much hoopla over the announcements, it is important to consider how big an impact they could have on the economy. And in doing so, to figure if the ongoing celebration is really worth it.

Let us start with the most basic question. Will the recent policy reforms revive investments in the economy? To a certain extent, investments will certainly get a boost. But these are certainly not the reforms that could be game-changers for India.

For instance, data from the Centre for Monitoring Indian Economy (CMIE) suggests that projects worth Rs 1.8 trillion were shelved during April-August 2012. This was in addition to projects worth Rs 4.5 trillion shelved in the fiscal year 2011-12. The reason for shelving of more than half of these projects was because of the inability of the promoters to acquire land. This is clear hint where the real big reforms ought to be happening.

Secondly, it will take a while before new investment proposals could match the boom years of 2004 to 2008. The main reason for the investment boom during this period was on account of cheap access to natural resources including land, coal, iron ore and bauxite. A similar scenario doesn't exist anymore.

In the opinion of Mr Mahesh Vyas (MD & CEO of CMIE), the Prime Minister's recent attempts to revive the investment climate in the country could take the proportion of investments in GDP to about 37% from the current 35.5% level.

If the impact of the new reforms is not going to be very significant, what is the reason for the sudden excitement? The answer is that the government has failed to initiate any meaningful policy reform in last several years. As such, the expectations have been abysmally low. It is only in contrast with the very poor expectations that the recent initiatives seem bold. The real game-changers for India would be progressive reforms related to land ownership and acquisition as well as labour laws. We would like to see if the Prime Minister takes up these issues with equal enthusiasm.  

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