Wanted – Reforms on “Kaizen” Mode!

In the last few days, newspapers and online portals have been filled with nostalgic Op-Ed pieces on how the 1991 reforms happened as we celebrate 30 years of the reforms. These pieces by some of them who were part of “reforms team” then and other commentators often talk about the circumstances in which the reforms were unleashed, how the then Prime Minister Narasimha Rao weathered the political storm in taking some bold steps and how the then Finance minister Manmohan Singh and his team went about implementing them finally.

Yes, the “1991 reforms” was a significant event in our post Independent political history and in terms of impact on the ground, probably the most significant. Though it was not realised then, the reforms package helped to change gears of the country which was stuttering at a modest pace of growth all along, while the rest of the world was galloping.  It also helped lift millions of Indians out of poverty in the next 20 years.  So, it is apt that we give due recognition to the process and the people behind it and celebrate with much enthusiasm.

As a country, we are in a phase where we need the next reforms momentum. One that will define our growth trajectory for the next 30 years. In that sense, we need to now move on from living in past glory of what the 1991 reforms delivered and initiate the next cycle of reforms. So, what could they be? A reform is defined as a change brought in an existing system to make it better. Therefore there are reforms that result in incremental changes, thereby incremental benefits and there are reforms that are big which result in monumental changes and thereby impact. 1991 reforms can be grouped in the latter category.

 In the last 20 years, since the Vajpayee regime till now, it’s not that there have not been reforms of the big impact category in our country. But they have been few and far between. In the issue of reforms, I would like to see the glass as half empty. What we need is the next bust of reforms one shot that will change the course of our country forever and for the better. And if at all there is an opportune ‘muhurat’ for the same, it is this. Because when we come out of Covid hopefully very soon, we need to not just recoup the lost two years but get back to an irreversible high growth trajectory.  And for that, we need a whole set of big bang reforms that need to be unleashed ASAP. And I will group them in the following critical areas:

  1. Ease Of Doing Business: While we continue to say that we have improved our ranking on the Ease Of Doing Business front from before, those of us on the ground very well know that India continues to be a complex country to do business in and with. And the issue of “Central” subjects and “State” subjects adds complexity to the whole thing.  To put this in perspective, we have 1536 Acts, 69233 Compliances and 6618 filings to comply with for our businesses in our present regulatory environment.  There have been bits and pieces effort in states to remove/amend rules and regulations in the last few years. But these are just incremental changes and do not move the dial. What we need is a complete review of the existing rules and regulations across all states that include Central laws and state laws and a wholesale repeal of all the frivolous ones.
  1. Labour: This is connected to the “Ease Of Doing Business” but has scope beyond that as well in terms of ensuring competitiveness and achieving productivity as well. A paper I read on Labour Reforms mentioned that labour laws in India constitute 30% in terms of acts and 47% in terms of compliances in our regulatory framework! In terms of numbers, it is 463 labour Acts, 32542 labour Compliances and 3048 labour filings! Not that the existing regulatory environment has benefited the labour so far. The current labour laws cover only 9% of India’s employee base! So, there is an express need for simplified labour laws that will help the industry to grow while remaining competitive, will be fair to the employees while empowering them while bringing a majority of the labour force in its ambit.
  1. Infrastructure: It is undisputable that the general infrastructure in India has grown leaps and bounds in the last 20 years. There are two ways of looking at this. If we compare with where we were in the past, then of course, things are certainly better. If we look outwards and compare with our peers, then we will realise that we have still a long way to go in basic infrastructure. It is also a fact that with respect to infrastructure we are always in a perennial “catch up” and “Work in Progress” mode. And I will explain this with an example. In 2005, in the Nagoya city of Japan, a new airport was thrown open just to coincide with the World Expo that happened in that city. When I visited Nagoya in that year, I was appalled to find the new airport almost empty though, it was witnessing almost 4-5 times the normal traffic on account of the Expo. Compared to the old airport, the new one was huge and I was told then that this airport was now built forecasting for next 30 years of traffic growth so that they don’t have to meddle with this for a long time. Now, this is the approach required for infrastructure projects. However in India, we build projects based on today’s situation and by the time the project is completed, it is already bursting at its seams. The new Bengaluru Airport is an example of this. Inaugurated in 2008, it had to launch its expansion by 2011 within just three years! Most of our highway projects are planned like this. That’s why I say that the grudge towards the bullet train project in India based on today’s situation is ill informed. By now, we should have kicked off at least eight bullet train projects, not one.  Unlike in the past, financing for infrastructure projects is no longer a concern. There are global multi-lateral agencies backed by developed countries willing and waiting to fund viable infrastructure projects in a country like in India which offers potential and returns.  In the area of Infrastructure, we need drastic reforms in our planning method and execution. And that brings me to the next critical area.
  1. Land: Most of our infrastructure projects get stuck or go through inordinate delays due to the issue of land availability aka land acquisition. This is an indeed complex issue but we need to study best practices in other developing nations and come up with a new method that is fair to all and makes the process easy and less time consuming. The present Land Acquisition bill in its form needs urgent reform.

There are other areas too where reforms are the need of the hour and I will continue with those in Part – 2 of my blog next week.  But my focus remain on areas related to economic growth. To part conclude this piece, I would like to say that “Reforms” are a continuous process. And so continuous improvement of what we do is required. Going back to the Japanese way, they call it the “Kaizen” approach in management.  In India, we need Reforms on “Kaizen mode”!

To be continued.

 

CAE of CAB/CAA!!

In the last one week, what was known as CAB (Citizenship Amendment Bill) got passed in both the houses of the parliament and became CAA (Citizenship Amendment Act) when the President put his stamp on it. However, as we have been seeing in the last few days, the CAE (Cause and Effect) of this has been different in different parts of the country and among different sections of the society.

In Delhi and in states like West Bengal, Kerala and even parts of Uttar Pradesh, the opposition to the Act stems from the point that the act is discriminating against Muslims. This was what was being echoed by the opposition in parliament and by and large by liberals in the media. The narrative here is that the Act goes against the “Idea of India” as enshrined in the constitution which is “Secular” in not singling out a religion on any ground.  On this pretext, as expected there is a large resentment among Muslims and of course among political parties who depend upon their votes and among liberals. So we see huge street protests in Delhi, Kolkata and in Kerala. As I write this, the protests have gone violent and turning into a mob fury!

In some states like Tamil Nadu for example, the disapproval to the Act is because, it has only included persecuted minorities from three countries namely Pakistan, Bangladesh and Afghanistan while leaving out Tamils from Sri Lanka who are minorities there. The opposition on this count is less intense and is mostly restricted to TV debates, newspaper columns and not much on the streets.

The third category is how the Act has been seen in the North Eastern states like Assam and Tripura. Here, the reaction has been more virulent with fire spreading on the streets with little signs of slowing down. And the cause for the same is completely different from what it is in say, West Bengal. The fundamental issue is that people here see this Act as going against the spirit of Assam accord by opening up the states to foreign illegal refugees of all religions. The opposition here is more about protecting regional identity and space and less about Nationalistic considerations.

And then there are other parts of the country where the reaction is muted and thereby letting one to deduce that the people are neutral on the Act.

In Engineering and Quality Management, “Cause and Effect Analysis” is an oft repeated technique to look at all possible causes for a particular effect. This technique was pioneered by Kaoru Ishikawa, a Japanese professor who later came to be renowned as a Quality Guru. The corner stone of this technique is to brainstorm with as many relevant people as possible and list up all possible causes (Man/Material/Method…) that could lead to a Quality problem.

In the case of CAB/CAA, at the outset it could be argued that probably the Act was required to correct a historical festering issue. However, from the kind of reactions which have emerged, it is clear that the government has not thought through the ramifications of the Act in different parts of the country. Hence I would conjecture that the government has not done a proper “Cause and Effect” analysis on the issue by involving a cross section of domain experts to list up what could be the reactions to the Bill.  It is extremely surprising that on a crucial move like this, perhaps in the interest of confidentiality, the government did not discuss the bill and its implications enough before bringing it to the parliament.

The kind of homework and alacrity the government had shown when it went about annulling of Article 370 is clearly missing this time. Otherwise, Assam and parts of North East where BJP has its own governments would not be burning today. Today, the home minister is busy assuaging one and all that the government will address all genuine concerns of the North East states.  And I believe that a roll back is in the offing soon as the government goes about dousing the fire.

Loyalists to the government argue that CAB was clearly part of the BJP manifesto and hence now that it has got the mandate, it is only going about ticking off items one by one from the manifesto. While one cannot pick too many holes in this argument, one cannot avoid asking if this was really a top priority at this point in time.

Ever since May 30th 2019 when this government took over the reins for the 2nd time, two ministries have hogged the headlines, for different reasons. First, the home ministry under a very aggressive minister – Amit Shah, has been busy with issues around Kashmir. Annulling of Article 370 and 35A, splitting of the state of Jammu and Kashmir and then handling the fall out of these moves have kept the home ministry under constant attention. Second, the finance ministry under Nirmala Sitharaman has been on the receiving end of the media, opposition and the industry due to the tanking economy. Quarter after Quarter the GDP has been touching new lows, not to mention of other economic indices as well, except perhaps the Sensex!

To be fair, the finance minister who is considered a green horn in the ministry has been earnest. Though she comes across as haughty, truth be told, she has been busy meeting a cross section of opinion leaders in trying to understand what needs to be done to fix the economy. It is perhaps her bad luck that she was thrown in to the circus ring when the Indian economy was on a decline. Some steps have been taken but they have not yielded any visible results.

Having seen the versions of many economists who have been critical of the economy, one thing is clear. The experts are split down the middle as to whether the problems in the Indian economy are structural, cyclical or a bit of both. So, it would be good for the finance minister to first do a detailed Cause and Effect analysis of the Economy on top priority, understand the causes first and then go about fixing them.  If these are not addressed before the next budget time frame, once again the fabled “India Story” will miss the bus as it did many times in the past!

That is why, it is time the government also goes about ticking off the manifesto points on issues related to the economy on SOS basis instead of just focusing on home affairs. Here, I feel that the finance minister needs political heft which can be provided only by the Prime Minister. And it is time he does that. What was that? “Modi hai to mumkin hai”, right???

Pic courtesy: Indiatimes

Howdy Economy?

“Howdy” is in the air in India these days! With Prime Minister Narendra Modi set to address the global Indian audience from the NRI platform at Houston, which has been branded as “Howdy Modi”, this American slang has got into the Indian vocabulary!  But, in India, ever since the 1st Quarter poor GDP results were out, the commentariat has been asking just one question “Howdy Economy?” Because, Indian economy is believed to be in ICU where the Chief Doctor was not giving much attention!

In India, the time tested tradition has been to undertake reforms when there is a crisis. Economist and Author Shankkar Aiyyar explains this beautifully in his book – “Accidental India” with back stories behind every single historic economic initiative of post independent India. The bottom line being, we take such drastic steps only when push comes to shove!

It looks like the latest decision of the government to slash corporate taxes drastically in one go from 30% to 22% is one such initiative which will have a lasting positive impact on the economy but which was taken when the answer to Howdy Economy question was very, very feeble. Naysayers notwithstanding, simplifying the tax structure, eliminating the myriad exemptions and having a reasonable low rate is a welcome move. It will make the industry competitive, make it more profitable, attract both foreign and domestic investments thereby have a trickle-down effect on the economy.

I saw some commentary that, this is more of a long term treatment and not an answer to the short term woes. Indeed yes. There is no silver bullet that can get the economy growing at 8% and more. It needs a combination of measures that are short term and long term. My belief is that, irrespective of the condition of the economy, a simple and low corporate tax structure was anyway required to grow the economy from the 8% levels we were couple of years ago, to 10%. With the economy struggling at 5% levels, the crisis like situation galvanised the government into action. Finally, the progressive reduction in corporate tax from 30% to 25% which was promised by the then Finance Minister Arun Jaitley in the 2015 budget has been executed by his protégé Nirmala Sitharaman. She has done it in one stroke and has gone a step further reducing the rate to 22%.

While the reduction in corporate taxes is a supply side reform, steps are required in the demand side as well. With the transition to the GST regime, the government has less flexibility to announce stimulus like in the past where excise duty or Sales tax cuts used to be announced to boost demand and consumption. In the present GST regime, the GST council has to take a call on the same and make those adjustments. Some of the announcements on GST rate reduction on hotel tariffs are in this direction.

With the reduction of corporate taxes, there is a loud clamour for reduction on the personal taxes front. Experts keep saying that this will put more money in the pockets of the salaried class which will make them spend more. I am not too sure of this. In the past, whenever there has been some personal income tax slab changes and effective rate reduction, we hardly came to know of the savings or reduction. And I don’t think anyone then consciously went to spend the money saved! Of course, it is more of a mood lifter and gives a feel good effect to the salaried class. Beyond that, I am not sure if a personal income tax rate reduction will boost the consumption in the short run which is what experts claim!  Nevertheless, as I have opined in the past, simplification and reduction of tax rates is essential.  This will also remove the peeve that there is now too much gap between the corporate and personal income tax rates!

One positive signal from the last few weeks is that the Government is listening.  In today’s world, any government of the day can choose to ignore the mainstream media. However, it cannot afford to ignore popular opinion which manifests in social media. As someone said, in India, we have as many economists as we have cricket experts! But the good part is, thanks to social media, apart from the secluded voice of the commentariat, there is an opening for “People like us” to give our opinions.

Ever since the tax cut announcements, there has been much discussion and debate as to whether it is right, whether it is sufficient, whether it is too little – too late, if it is pandering to corporates and so on. And if things can turn around quickly? With the festive season coming up in India, it is all about signalling and lifting the spirits and mood. When there is bad news which usually reaches us through the media, even if we are not directly connected to it, we all start talking about it, isn’t it? I refer to this as the economy suffering from “Headlines syndrome”! So similarly, when there is positive cheer emanating from even a single but important decision like this, it has a ripple effect. So, I hope this corporate tax cut move leads to such positive ripple effect in the coming days! And the answer to “Howdy Economy?” becomes loud and cheerful in the coming days!

Postscript:  In my earlier posts, I had said,

As a purely short term stimulus, any capacity building in manufacturing industry by way of new factories, expansion of plants,.. should be provided with tax relief”

And

With respect to taxation, “In simple terms, the mantra should be lower tax rates with no or very few genuine exemptions

Glad both these found resonance with the government and have been implemented!