Opinion: Economy On 'Autopilot' But India Needs 5 Big Reforms

Recently, the Chief Economic Advisor (CEA) drew attention with his assertion that the Indian economy is currently on "autopilot". Looking at private consumption, we see the growth rate, post-pandemic, has returned to the projected trend. As if the pandemic never happened. An astute observation that is, nevertheless, being distorted by some who portray it as a sign that the government will not continue with the reform agenda and will simply rely on this 'auto-pilot'.

This perception is a far cry from the truth. Think of it this way - as Newton's First Law states, an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force. Our economy, akin to such an object, is maintaining its course - a testament to the momentum imparted by the series of impactful reforms enacted by the government over the past few years. Today, high-tech exports, such as IT services, mobile phones, drugs and pharmaceuticals, are driving significant growth in India.

Not a sign of inertia or apathy, the autopilot state is emblematic of the robustness of the Indian economy and the efficacy of past reforms. The government has no plans to rest on its laurels, as has been demonstrated by numerous policy changes and reforms discussed previously in this space. The autopilot analogy simply alludes to a scenario where the economy, having been given a powerful impetus by effective policies, continues its trajectory, overcoming the turbulence caused by the pandemic.

For India to secure a sustainable growth rate of 7.0 per cent and transcend the threshold of a developed nation, it is imperative that we advance with our next wave of reforms. These reforms are not just necessary, but their implementation is an absolute exigency. This column will focus on five such imperative reforms - reforms that have been delayed for far too long but are fundamental for India's evolution as a developed nation. 

1. Land Reforms

Land reform in India is ongoing but incomplete. It varies across states due to land being a state matter. Digitising land records can boost India's economy and make business easier. This involves creating a complete land record system, standardising a national registry, formalising maps, resolving property disputes, and repurposing unused farmland. The government aims to complete this by March 2024 through the Digital India Land Records Modernization Programme and the Bhu-Aadhaar initiative, providing clear land ownership, faster transactions, and fewer disputes.

The government's SVAMITVA scheme provides land titles in rural areas and property cards in villages. However, execution varies by state, making the task unfinished.

The Land Title Act can resolve property disputes and affirm ownership. The NITI Aayog published a draft Model Land Titling Act in 2020 that states can consider. States should enact it. Existing tenancy laws need modernisation to strengthen tenant and small farmer rights. Land fragmentation hampers efficient farming, needing policies favoring land consolidation.

2. Labour

Data highlights that regions with stringent labour regulations often bear the burden of slow growth in labour intensive industries. Bangladesh's labour reforms stand testament to how mitigation of rigidities propels growth and job creation. Particularly in sectors like textiles, flexibility is key.

India's textile and apparel sector, hindered by skewed distribution towards small firms, hasn't thrived optimally. Research blames it on restrictive labour regulations preventing firms from amassing large workforces.

Until recently, the complexity of India's labour laws stifled growth. An estimated 40 laws administered by the Labour Ministry, 50-55 at the Union level, presented inconsistencies, convoluting litigation and complicating case law. They created rigidity in the organised sector while inadequately protecting the unorganised. The system needed rationalisation and harmonisation.

Several states, including Andhra Pradesh, Telangana, Delhi, Gujarat, Haryana, Himachal, Karnataka, Madhya Pradesh, Maharashtra, Punjab, Odisha, Rajasthan, Tamil Nadu, Uttar Pradesh and Uttarakhand, have enacted labour reforms. Classified as regions with flexible labour laws in the Economic Survey 2018-19, these states have adapted to a more effective system.

Flexibility is not solely a function of statutory amendments; it can be achieved through orders and regulations. While empirical analysis points to positive effects on employment and new establishments, labour flexibility alone is not a panacea. It needs to be supplemented with broader reforms such as those in infrastructure, law enforcement, and education.

On the national front, the Union government has consolidated 29 statutes into four Codes on wages, safety, industrial relations, and social security, after rigorous debates and the recommendations of the Second National Labour Commission and other reports. These legislative changes, approved after exhaustive discussions, hold potential for improvement, as stated by Prime Minister Narendra Modi at the National Labour Conference.

The responsibility now falls on states to enact these new codes and ensure that the improved labour laws bring about a positive change. Labour reforms and a broader vision of development are crucial stepping stones towards robust economic growth.

3. Legal Reforms

India's drive for strong legal and judicial changes covers a broad range, touching on both 'ease of living' and 'ease of doing business'. The need for such changes primarily stems from the growing backlog of cases and the slow pace of legal proceedings, which affect business operations and the confidence of investors. Particularly when the government is a major party in numerous cases, this inefficiency puts a hefty load on the system, causing significant delays.

Today, the government is the largest litigant. The underlying problem often lies with the mindset of government officials who hesitate to employ alternate dispute resolution (ADR) methods, which could streamline the process significantly. These officials worry that if they bypass court proceedings in favour of ADR, they may invite future scrutiny or inquiries, casting a shadow on their decisions. This fear, while understandable, often contributes to an inefficient system with a huge backlog of cases, much of which could be resolved more swiftly and effectively through ADR. Fostering a culture of trust and providing assurance to these officials could motivate them to consider ADR. As a result, not only would this ease the litigation burden on the judicial system, but it would also expedite dispute resolution, a crucial aspect in enhancing the ease of doing business and ease of living.

The concept of 'ease of living' is deeply tied to the 'ease of doing business'. PM Modi has stressed the importance of 'ease of justice', which is just as crucial as ease of living and doing business. It ensures that disadvantaged sections of society have access to justice and that legal disputes are resolved promptly. Thus, modernizing the judicial system, incorporating digital solutions, and guaranteeing timely justice are essential for improving 'ease of living'.

Moreover, the government has taken considerable steps to cut down bureaucracy and corruption by removing outdated regulations, resulting in a more business-friendly environment. However, to fully leverage its economic potential, India needs to make more extensive reforms in crucial areas like land acquisition, enforcement of contracts, and protection of intellectual property rights.

In short, these reforms aim to establish a fair, efficient, and transparent legal system that boosts economic growth, smoothens business operations, and ensures justice for all citizens. This will contribute significantly towards enhancing the ease of living and doing business in India.

4. Direct tax reforms

India's tax-GDP ratio is lower compared to other major economies. Reforming the tax structure becomes crucial for fiscal consolidation, minimizing economic distortions, and creating market stability. It would also help generate sufficient revenue for development.

With the presence of exemptions in both the new and old tax regimes, the current tax system is very complicated, and that complexity can stop our economy from growing and businesses from thriving. Before our economy was liberalized, we had big problems with our taxes, like high tax rates, difficulty collecting taxes, too many exemptions, and unfair corporate tax practices. We need to simplify our tax laws, which will help people and businesses follow these laws. We need to simply remove all exemptions. This would also help in reducing direct tax litigation.

Next, we must focus on widening the tax base and cutting tax rates. A tax base is the total amount of assets or income that can be taxed. When the tax base is wider, the government can keep the same amount of revenue even if it lowers tax rates. This helps to avoid economic problems that can stop growth.

5. Administrative Reforms

Anchored in the cobwebs of its colonial past, India's administrative system, as it stands today, grapples with the challenges of an era long past [8]. Echoing Plato's philosophy, where governance should be like an orchestra harmonising the variegated interests of citizens, the current Indian administrative system often stumbles. Instead of harmonising, it dithers in accommodating the nuanced needs and ever-growing aspirations of Indians.

To reinvent itself, India must embrace administrative reforms. More than a makeover, these reforms should represent a quantum leap towards efficiency, transparency, and above all, accountability.

Since independence, India has formed several commissions and committees to drive administrative reforms. The pioneering panel was the Gopal Swami Ayyangar Committee in 1949, proposing improved personnel practices and ministry groupings. The Gorwala committee followed in 1951, focusing on administrative system development and planning. In 1953, the Paul H. Appleby committee advocated an O&M division to enhance administrative methods and procedures. The first Administrative Reforms Commission (ARC) was established in 1966, contributing significantly to public administration reforms, including the establishment of the Lokpal and Lokayukta. Headed initially by Morarji Desai and then by K. Hanumanthaiah, the first ARC produced 20 reports and 537 recommendations on a wide range of topics. A second ARC was formed in 2005, which aimed to renovate public administration and offered 1500 recommendations across 15 reports. The second ARC focused on financial management, personnel administration, e-governance, regulatory structures, and crisis management.

Despite this, nothing substantial has happened. Indeed, the goal is daunting but not unachievable. It demands the creation of a system that resonates with the rhythm of its people, a system that is an enabler rather than an obstacle. The transformation of India's administrative system should not be perceived merely as a structural alteration but as a profound revolution.

India stands on the cusp of significant transformations that can propel it into the league of developed nations. This journey demands bold and well-rounded reforms across various sectors. These changes, while demanding, can drive sustainable growth and help India realize its potential.

Bibek Debroy is the Chairman, Economic Advisory Council to the Prime Minister (EAC-PM) & Aditya Sinha is Additional Private Secretary (Policy & Research), EAC-PM.

Disclaimer: These are the personal opinions of the author.