Author: M. Govinda Rao, NIPFP
Of the many slogans coined by Prime Minister Narendra Modi’s government, ‘Make in India’ is the most important. It promises to make India an important investment destination. But, like most other slogans, it is important be clear about what has to be achieved — and how — before assessing whether or not the flowery words may come true.
India’s first prime minister, Jawaharlal Nehru, also strived to ‘make in India’ by erecting high protective barriers to trade. The policy completely ignored the interests of the consumers who had to put up with inferior products and higher costs. India departed from that unsustainable strategy in 1991. The new slogan should have a different connotation not merely in terms of its tapestry but also real content.
Today, making India an important investment destination requires a systematic approach involving both policies and institutions. The existing systems and processes must undergo significant changes to remove structural rigidities, improve the quality of institutions and infrastructure, and create a favourable climate for fostering technological progress. The distributional coalitions deeply entrenched in the Indian political system will not easily allow such changes. Union policymakers will thus need a clear understanding of what needs to be done and must cooperate with state-level governments to design strategies for this long journey.
The most important intervention for the Indian government is to change the character and quality of the country’s institutions. Indian labour laws, for example, have constrained labour-intensive industrialisation and led to the declining fortunes of labour-intensive industries like textile and leather. But as labour becomes more expensive in China, India can reclaim some lost ground. The union (central) government initiative to give a greater role to state governments is the best way forward.
A critical component of institutional restructuring is administrative reform. The Second Administrative Reforms Commission has made some useful recommendations on governance and economy which, limits the powers of the bureaucracy. Yet given the enormous influence of the Indian bureaucracy, the status quo is likely to continue. Virtually every regulatory system has been captured by retired bureaucrats. As a result, competence has not always been the major criterion for government appointments. Ensuring accountability, reward performance and making competence-based appointments should be the key aims of bureaucratic reforms.
The union government has to take the lead to reform all levels of India’s government. The licence raj (licence rule), in particular, continues to pose impediments in various ways. Every initiative from the union, state and local levels of government requires numerous bureaucratic clearances, be it starting a business or constructing a house.
India also has a significant infrastructure deficit. Investment in a multitude of infrastructure projects — equivalent to an estimated 8 per cent of GDP — has stalled for one reason or another. These cobwebs need to be cleared. The land acquisition issue is stuck in the political logjam. In the power sector, the major problem is the disconnection between the policies relating to power generation and distribution. On several occasions, the government has bailed out power distribution companies, but political interference and ineffective regulation have continued to paralyse the sector.
To address the infrastructure deficit, the government needs to step up public investment in infrastructure. The central’s government investment budget is worryingly small, but the government has done well to accelerate capital expenditures in the first quarter. Better revenue collection from indirect taxes may also enhance investment spending. But the government must improve the model concession agreements on public–private partnerships. Private investors desire for low interest rates means that the fiscal deficit should be contained to avoid crowding out in capital markets. With this in mind, increasing public infrastructure investment means increasing the tax-to-GDP ratio.
But tax reform is a lengthy process, not a big bang reform. In May 2015, the government passed the Goods and Services Tax reform, which will introduce a consumption tax of 27 per cent in 2016. While the tax reform promises much, compromises and distortions make it unclear how much it will deliver.
Finally, the government should address price controls, which continue to constrain allocative efficiency and productivity. Even after 24 years of liberalisation, the prices of many goods and services are determined through administered fiat rather than the forces of supply and demand. These controls have distorted resource allocations at the macro and micro levels and have proliferated subsidies. The administered interest rate on provident funds places a floor on interest rates — they cannot go lower. And the associated overvaluing of the exchange rate hurts the export sector.
India cannot continue to distort sugar cane prices while also increasing import duties on sugar to protect the sugar lobby and upping the proportion ethanol blended in petrol. Subsidising irrigated water results in the farmers adopting water-intensive crops even when they are not appropriate and subsidising electricity results in depletion of underground water that would otherwise be used for irrigation. Subsidising urea results in the distorted consumption of fertilisers and soil salinity. The examples can be multiplied.
‘Make in India’ will require coordinated reform and bi-partisan support at both the central and state level. This cannot be achieved through a confrontational strategy. Opposition parties have nothing to lose by opposing reform. But the ruling party has the responsibility to adopt a conciliatory approach to build consensus. Without effort from both sides, ‘Make in India’ reforms will not go far.
Govinda Rao is an emeritus professor at the National Institute of Public Finance and Policy, New Dehli, a non-resident senior fellow at the National Council of Applied Economic Research and an advisor of the Takshashila Institution.
ASEAN weathering the COVID-19 typhoon
Author: Sandra Seno-Alday, Sydney University
The roughly 20 typhoons that hit Southeast Asia each year pale in comparison to the impact on the region of COVID-19 — a storm of a very different sort striking not just Southeast Asia but the world.
Just how badly is the COVID-19 typhoon thrashing the region? And what might the post-crisis recovery and reconstruction look like? To answer these questions, it is necessary to investigate the strengths and vulnerabilities of Southeast Asia’s pre-COVID-19 economic infrastructure.
Understanding the structure of the region’s economic house requires going back to 1967, when Southeast Asian countries decided to pledge friendship to one another under the ASEAN framework. While other integrated regions such as NAFTA and the European Union have aggressively broken down trade barriers and significantly boosted intra-regional trade, ASEAN regional economic integration has chugged along slower.
Southeast Asian countries have not viewed trade between each other as a top priority. The trade agreements in the region have been forged around suggestions for ASEAN countries to lower tariffs on intra-regional trade to within a certain range and across limited industries. This has lowered but not eliminated barriers to intra-regional trade. Consequently, a relatively significant share of Southeast Asian trade is with countries outside the region. This active extra-regional engagement has resulted in ASEAN countries’ successful integration into global value chain networks.
A historically outward-facing region, in 2010 around 75 per cent of Southeast Asian commodity imports and exports came from countries outside of ASEAN. This share of extra-regional trade nudged closer to 80 per cent in 2018. This indicates that ASEAN’s global value chain network embeddedness has deepened over time.
Around 40 per cent of ASEAN’s extra-regional trade is with the rest of Asia. From 2010 to 2018 Southeast Asian countries forged major trade relationships with four Asian countries: China, Japan, South Korea and India. Outside Asia, the United States is the region’s major trading partner. ASEAN’s trade focus on Asia’s largest markets is not surprising. Countries tend to establish trade relationships with large, geographically close, and culturally similar markets.
Fostering deep relationships with a few large markets, however, is a double-edged sword. While it has allowed ASEAN to benefit from integration in global value chains, it has also resulted in increased vulnerability to the shocks affecting its network connections.
ASEAN’s participation in global value chains has allowed it to transition from a net regional importer in 1990 to a net regional exporter in 2018. But the region’s deep embeddedness in a small and tightly-coupled network cluster of extra-regional global value chain partners has exposed it to disruption to any and all of its external partners. By contrast, ASEAN’s intra-regional trade network structure is much more loosely-coupled: a consequence of persistent intra-regional trade barriers and thus lower intra-regional trade intensity.
In the pre-COVID-19 period, ASEAN built for itself an economic house held up by just five extra-regional markets, while doing less to expand and diversify its intra-regional trade network. The data shows that ASEAN trade became increasingly concentrated in these few external markets between 2010 and 2018.
This dependence on a handful of markets does not bode well for risk and crisis management. All of the region’s major trading partners have been significantly affected by COVID-19 and this in turn is blowing the ASEAN economic house down.
What are the ways forward? The immediate task at hand is to get a better picture of the region’s position in global value chain networks and to get on top of managing its network risk exposure. Already there are red flags around the region’s food security arising from its position in food value chains. It is critical to look for ways to introduce flexibility into existing supply chains for greater agility in responding to crises.
It is also an opportune time for ASEAN to harness the technology transfer gains of global value chain participation and invest in innovation-driven diversification of products and markets. The region’s embeddedness in global value chain networks certainly places it in a strong position to readily access large export markets not just in Asia but also Europe and the Americas.
Over the longer term, ASEAN is faced with the question of whether it should seriously look…
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