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Indian Economic Reforms for a strong and balanced Economic


Governance Regaining Growth with Employment
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Overview

Building on fragile economic growth and regaining public trust requires greater
oversight, increased innovation and comprehensive structural reform. More remains to
be done to strengthen regulation in order to deal with the risks of contagion and
government and other fail institutions. As forecasts of India GDP performance continue
to be revised downwards, new policy initiatives and a reduction in global trade
restrictions are essential perhaps the most important policy to improve the Indian
economic outlook would be an approach to medium-term deficit reduction that would
provide a path to sustainable national debt levels.

The two most pressing, and related, challenges for public action in India are;

Institutional reform to enhance the capability of public sector institutions to ensure
the effective delivery of core services,
Sustaining rapid growth and making the process of economic growth more inclusive
across sectors, across regions, and bringing the benefits of higher incomes and
living standards to more people.

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Mukesh Kumar Mishra, Secretary General of Krityanand UNESCO Club Jamshedpur
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Service delivery and expanding the inclusiveness of economic growth is needed for
empowerment and opportunity. The central employment challenge is to create
productive jobs and livelihoods for the millions of people who enter the labor force.
There is an urgent need for more data collection and statistical analyses, which should
figure prominently in the post 2015 debate on the MDGs.

Inclusive development calls for a macroeconomic policy approach that goes beyond the
narrower goal of macroeconomic stability. This approach needs for expanding the
number of instruments and coordinating macroeconomic policies with other policies to
stimulate the development of productive capacities. It should target financing public
investment in physical and human capital by accelerating public investment in
infrastructure and rising spending on development. To do so will require strengthening
government capacity.

Though India faces a deep cyclical problem today, the sustainable solution in our view
does not involve the classic counter-cyclical response of monetary and fiscal easing.
Rather, the sustainable solution would be to regain macro stability, improve productivity
growth, and to lay down the foundations which will return the economy towards a higher
growth path. This paper begins with a consideration of the Framework for Strong,
Sustainable, and Balanced Growth.

Reforms after the Elections
In my view, addressing these issues quickly in the post-election period would help to
restore macro stability and revive productivity growth;
Initiate policy changes to manage wage growth in line with productivity
Cut the fiscal deficit
Policy to Improve the business environment
Reform urbanization policy
Address structural rigidities in the economy to unleash the growth
potential particularly in energy and mining sector;
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Challenge in current scenario

Weak Productivity Dynamic at the Root of Indias Macro Challenges
The root cause of Indias macro challenges over the past few years has been weak
productivity growth. Productivity growth trends as measured by either incremental
capital output ratios or contribution of total factor productivity to headline GDP growth
have been steadily weakening since 2011. Rather surprisingly, Indias levels have risen
to a level that is comparable to Chinas, which has had to deal with the challenges of
over-investment in recent years.

The deterioration in productivity growth is the direct result of a series of poor
policy choices:

These include maintaining a high fiscal deficit, pushing for high rural wage growth, and
general policy uncertainty against a backdrop of weak external demand. The result has
been an unfavorable business environment. These policies have been largely guided by
a preference for income redistribution over income growth as a means to lift societys
economic and social welfare. However, this policy direction has generated the side
effects of weaker economic growth and slower employment, which has hampered the
urban economy.

Unproductive dynamic has also caused elevated levels of inflation: This has
eroded the purchasing power of households and is likely to have increased income
inequality. To that point, the rural population, which has been the focus of the
redistribution efforts, is no longer reaping the benefits of higher nominal rural wage
growth. Higher rates of rural inflation have meant that real rural wage growth has now
decelerated to 3.4% from a peak of 12.3%. Hence, the redistribution policies seem to
have left the country with a sub-optimal outcome in the goal of maximizing economic
welfare.

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The Sustainable Solution Reforms to Boost Productivity
Though India faces a deep cyclical problem today, the sustainable solution in our view
does not involve the classic counter-cyclical response of monetary and fiscal easing.
Rather, the sustainable solution would be to regain macro stability, improve productivity
growth, and to lay down the foundations which will return the economy towards a higher
growth path.

Some Other Economic Challenge is
Goods and Services Tax, Central Bank Policy, Privatization and Subsidies, Labor,
Defence, Insurance & Banking, Power and Gas.


Indian Economy: Features

We have now had 23 years of economic reforms spanning six governments. What have
these reforms achieved? We have ascended a higher growth path; poverty has been
reduced; the external sector is more than comfortable; industrial growth has been
restored; and all this has been achieved with financial stability in the country. As a
consequence of all these momentous changes there is a new respect for India in the
world and, even more important, Indians in all walks of life have found a new level of
self confidence. But we still have miles to go. We need to move to the next level of
sustained growth so that per capita income growth can exceed over 8% per annum on a
sustained basis and thereby see at least a doubling every decade.

As India looks towards further liberalization, it must first prepare its economic institutions
by re-orienting them from managing the economy to regulating the economy. Without an
enhancement of regulatory capacity, increased liberalization will simply perpetuate
corruption and further inequality. By improving regulatory capacity, the state can better
focus on the socio-economic aspects of governance that will be so important for Indias
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future. In order to better direct and manage institutional change in India, we must first
look to history to understand how Indias economic infrastructure was built.


Key Reforms that we need to do

Indias economy has had to face dual challenges over the past few years
slowing growth GDP growth has been steadily decelerating from above 9% before
the credit crisis to sub 5% now, well below Indias potential growth. and elevated
inflation: Inflation (CPI), on the other hand, has been running high by historical
standards. It has persisted above the central banks comfort zone of 5.05.5% since
March-2008.

This stagflation-type environment has persisted Thats despite the support of
strong positive structural factors such as favorable demographics and high potential for
catch-up growth, suggesting that the challenges are largely cyclical in nature. and to
escape it, India needs further action on economic reforms: The last government had
already started to work to implement some key reforms in the last few months, but we
believe the new government that will need to get to work quickly on the pending
reforms.

Key policy reforms: the new government will need to implement these to move out of
the current stagflation type environment and accelerate GDP growth in a sustainable
manner towards 7-8%; and;


1) Initiate policy changes to manage wage growth in line with productivity:

If we were to list only one policy reform that India needs to implement to move out of the
current stagflation-type environment, it would be fixing labor policy. We believe that
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persistent high nominal wage growth even as GDP growth and job creation have
collapsed can only be explained by the intervention of policy makers in the labor market.
Strong rural wage growth, due in part to the national rural employment guarantee
scheme, has led to an increase in food production costs and food inflation. In turn, the
persistence of food inflation is a key factor behind elevated inflation expectations.
Ensuring an effective implementation of the rural employment scheme would ensure
future wage gains more in line with productivity, which should limit the inflationary
impact. Modi government will need to implement measures to ensure that the national
rural employment policy is implemented with a focus on efficiency.

2) Cut the fiscal deficit:
Indias fiscal deficit has remained high over the past five years, mainly due to a slippage
in revenue to GDP trends. In the first stage there is a need to reduce expenditure - to
the tune of about 1% of GDP. In the second stage, as growth recovers and tax
revenues to GDP improves, expenditure growth will need to be maintained at a lower
level to ensure that the national fiscal deficit is brought down from current level of close
to 8% of GDP to about 5% of GDP. Consolidating the fiscal deficit would help to
improve public saving, thereby helping to increase the overall level of saving in the
economy and lower the current account deficit in a sustainable manner. More
importantly, there is a need to improve the mix of government spending towards more
capital expenditure, which tends to be more productive and produces more positive
spillover effects in the economy.

3) Policy to improve the business environment:

Policy uncertainty, corruption-related investigations, and regulatory hurdles have led to
deterioration in the business environment and held back the investment cycle. The last
government had taken steps such as liberalizing FDI limits, yet the overall business
environment still remains challenging. Thus, policy makers should address this
comprehensively, on the following policy;
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Providing a consistent policy framework in key infrastructure and industrial sectors
Streamlining the approval process for investment projects,
Facilitating the rehabilitation of corporate balance sheets,
Providing funds for recapitalizing SOE banks to unclog their balance sheets
Promoting reforms to encourage more workers to move into organized forms of labor
market activity.

4) Reform urbanization policy:
The focus on redistribution and development of rural areas has resulted in dis
incentivizing urbanization. The ideal policy for an emerging economy like India with such
strong growth in working age population is to promote urbanization so as to lift overall
productivity growth. The urban economy is typically more efficient, and brings with it
higher-value-added job opportunities. Instead, in the last five years, the governments
policy to promote higher rural wages has directly worked against the urbanization effort.
To encourage urbanization, policy makers will need to focus on creating physical
infrastructure in cities and ensuring better delivery of public services to citizens. A
comprehensive nationwide plan needs to be implemented to accelerate urbanization
and Smart Cities concepts


The government needs to focus on creating infrastructure for sustainable growth of the
cities with proper civic amenities such that cities are able to absorb the rural migration.
The government would need to focus to create a systematic plan for development of:

physical infrastructure creation in cities;
delivery of services through empowering the local level government bodies;

5) Reform structural rigidities in the economy to unleash growth potential
particularly in the energy and mining sectors:

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India is a net importer of energy requirements, and is the fourth-largest energy
consumer in the world. Meeting energy needs to sustain a higher growth trend of 7-8%
will become increasingly challenging. Though India is not as well endowed with energy
resources, the presence of structural bottlenecks is creating shortages and
necessitating imports in areas even where resources are present. Thus there is an
urgent need to use all available domestic resources to the maximum potential to reduce
import dependence. Several supply bottlenecks including the approval process for
environment and land acquisition, and lack of rail connection have hampered the
energy and mining sectors and have weighed on Indias growth potential. Addressing
these structural bottlenecks would help India secure its energy requirements and boost
its mineral exports, thereby removing a constraint on growth. Our estimates show that
the increase in coal imports and decline in iron ore exports likely added close to 0.8% of
GDP to Indias current account deficit between 2005 to 2014.The new government
policy action needed in Coal block allocations; Surplus coal usage policy and the
environmental clearance process; Monitoring of Coal India projects.
The government should embark on a sustained process of meaningful SEB reforms,
especially for the bigger loss making states, many of which have had their loans
restructured recently. The process of State Electricity Board reforms should include:

Consistent and regular tariff hikes by states aimed at reducing and
eventually eliminating the tariff gap
Incremental funding by banks should be stopped for SEBs that stops
adhering to the reforms process.


Other Economic Reforms

The macroeconomic environment is expected to improve and growth is expected to
accelerate gradually over the next years. The baseline scenario in this Update is
conditional on further improvements in the macroeconomic framework, benign global
conditions, and continued efforts by the authorities to strengthen the business
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environment and improve fiscal sustainability. Under these assumptions, the pace of
economic activity is expected to accelerate appreciably in the second half of FY2014,
bringing economic growth to 4.7 percent for the entire fiscal year. Growth is expected to
improve further to 6.2 percent in FY2015 as manufacturing growth accelerates and new
and existing investment projects come on stream. The acceleration in growth is unlikely
to create inflationary pressures as several years of growth below potential have opened
a positive output gap, and inflation is expected to decelerate to 5.3 percent and 5.2
percent in FY2014 and FY2015.

Key Reforms in following sector is also needed,

Financial Sector
Agriculture
Regaining Growth in Employment Opportunities
Industrial Policy and Foreign Investment
Public Sector Policy
The key challenge for economic governance, hence, has been to find the right balance
between democratic politics and free-market economy. Another challenge has been
reluctance on the part of state to cede more space to the private sector. There is
needed to relook at the terms of engagement between state and the private sector. And
to strengthen this engagement through measures such as reforms in regulation and
institutions that manage the state and private sector interface through state and citizen
participation. A new growth agenda is needed. Micro, Small & Medium Enterprises
(MSMEs) and agriculture are cornerstone sectors in the Indian context generating
employment for 55 per cent of Indian population and make a significant contribution to
the GDP. However, financial inclusion has slowed down with just 5 per cent of MSMEs
and 12 per cent of farmers having access to institutional finance. The financial sector
has failed to meet the needs of this sector.

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It is only natural that the definitive post-election dialogue towards an agenda for an
aspirational India should begin with a discussion on Economic Governance & Reforms.
Three factors drive this priority: one, all the major political parties have highlighted
economic governance and reforms as an integral part of their manifesto. It is therefore
imperative that the new government implements its promises and, strengthen the
economic governance.
In light of recent economic problems, governments must achieve more with fewer
resources. In addition, new policies are required to address global challenges in areas
such as public safety, climate change, and the transition to renewable energy. New
approaches are also needed to manage an aging society, changing lifestyles,
urbanization. Public Administrations today have to serve informed and educated citizens
who have high expectations and hold governments accountable. EGovernment enables
a more mature and deeper relationship between the public and the private sectors,
greater collaborating among all levels of government, and new service delivery models.
EGovernment also allows us to reduce costs, corruption while at the same time
improving the quality of services and increasing civic participation. At a time when
macroeconomic policies are under acute pressure in many countries, the role of
structural policies has come more into focus. Structural reforms are important both on
the conventional grounds that they boost long-term growth and welfare but also
because they can take some pressure off macroeconomic policies. Better structural
policies will help achieve fiscal sustainability and provide greater leeway for monetary
policy. Importantly, structural reforms can bolster confidence. Priorities aiming at
strengthening competition and increasing the flexibility of resource allocation increase
the responsiveness to market-based environmental policy instruments, and hence are
complementary to the latter by making green growth policies more cost effective.

For India to continue its rapid growth while also expanding this growth across regions,
sectors, and people, I suggest remove key binding constraints of poor infrastructure and
high fiscal deficits, focus on reforms that both improve economic efficiency and spread
the benefits of growth, employment and reforming financial sector; raise agriculture
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productivity by returning to investments in technology and infrastructure and empower
the poor community through policies and programs that assist them to take part in the
market on fair and equitable terms. As we looks towards further liberalization, we must
prepare our economic institutions by re-orienting them from managing the economy to
regulating the economy. The adverse economic factors, such as higher level of fiscal
deficit, expanding trade gap, deteriorating current account deficit, rising inflation and
resultant higher interest rates which have caused industrial slow down and worsened
economic environment in continue to prevail with serious challenges to Indian economy.

Concluding Observations

A common conclusion from the discussion of individual issues in this paper that
economic reforms will help to improve governance by reducing the scope for
discretionary power and increasing the degree of transparency in policy and
procedures. But economic reforms are no guarantee against malfeasance. Governance
problems can arise in any system and improved governance is therefore only likely if
the political and administrative system and civil society generally works jointly to
achieve it. One thing is certain. India's democratic politics and free press will ensure that
these issues will remain in the forefront of public consciousness and therefore on the
political agenda, and there will be continuous pressure for improvement.

More generally, Going for Growth provides a wealth of recommendations aimed at
fostering efficiency gains through higher investment in skills, technology and
infrastructure. In this regard, earlier gains from greater openness to international trade
and investment should not be rolled back, openly or covertly, as this would undermine
efforts to sustainably boost productivity. Raising economy-wide productivity also comes
through a shift in resources from inefficient sectors and firms to more productive ones.
Policies can assist this process with reforms in the areas of product market regulation,
general taxation, subsidies as well as a more efficient provision of public services. The
sources of economic growth are;
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Increasing Physical Capita
The first pillar of economic growth is increases in physical capital, which enables
workers to produce more goods and services, because it reduces the governments
borrowing, deficit reduction will remain the key to how much of national saving is
available for private investment in physical capital.

Improving Human Capital
The second pillar of economic growth is improvement in what economics call human
capital the knowledge, experience, and skills of the workforce.

Expenditure Trade
The third source of increasing efficiency in the economy is more open markets abroad,
like the freeing up of domestic markets, opening of foreign markets shifts resources into
relatively more productive area. For good Inclusive growth we need broad-based and
significant improvement in health outcomes, universal access for children to school,
increased access to higher education and improved standards of education, including
skill development. It should also be reflected in better opportunities for both wage
employment and livelihood, and in improvement in provision of basic amenities like
water, electricity, roads, sanitation and housing.

As for Indias place in the global economy, given the vast developmental challenges that
remain domestically, it would be difficult to imagine India asserting its economic
dominance in international markets any time soon. Processes of institutional change
tend to take decades rather than years, and, as a result, the rise of India as an
economic superpower will only occur over a long period of time. The new governance
structure will need to be based on representative institutions that reflect the changing
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economic weight of emerging economies in the global economy by doing following
reforms;

Institutional reform to enhance the capability of public sector institutions to ensure
the effective delivery of core services,
Sustaining rapid growth and making the process of economic growth more inclusive
across sectors, across regions, and bringing the benefits of higher incomes and
living standards to more people.
Initiate policy changes to manage wage growth in line with productivity
Cut the fiscal deficit
Improve the business environment
Rethink urbanization policy
Address structural rigidities in the economy to unleash the growth potential
particularly in energy and mining sector





Reference

1. UNCTAD 2013, The Least Developed Countries Report 2013, UN Publications, Geneva.
2. UNCTAD 2012, Twenty years of Indias Liberalization; UN Publications, Geneva.
3. India Economics; 2014, Morganstanley Research Asia.
4. Principle of Economics: Case and Fair, Prentice Hall, NJ 07458, 1999.
5. Campbell R McConnell, & Stanley L Brue, Economics, McGraw Hill, USA.




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Indian Economic Reforms for a strong and balanced Economic
Governance Regaining Growth with Employment



By



Mukesh Kumar Mishra
Secretary General
Krityanand UNESCO Club, Jamshedpur
(United Nations ECOSOC-accredited NGO)
knunesco@yahoo.com

Krityanand UNESCO Club Jamshedpur is an NGO Registered Under Societies Registration Act,1860
working for the aims and purpose of the United Nations. At the 41st plenary meeting, On July 23rd, 2012,
Krityanand UNESCO Club Jamshedpur was officially granted special consultative status as a Non-
Governmental Organization (NGO) with the United Nations Economic and Social Council (ECOSOC).
The ECOSOC is one of 6 principal organs of the United Nations System established by the UN Charter in
1945 and serves as the central forum for formulating policy recommendations regarding international
economic and social issues.