From: Vaidyanathan R
http://centreright.in/2011/12/reforms-do-not-mean-just-fdi-and-fii/
Reforms do not mean just FDI and FII
Posted By Professor Vaidyanathan on December 9, 2011
Whether it is the Pink business papers or Economic experts on TV, the word reform immediately evokes talk of allowing Wal-Mart in retail or increasing the limit for foreign capital in insurance from 26 percent to 50 percent. We have reached a pathetic situation where reforms are equated to FDI and FII only. This shows our mindset which is connected with umbilical cord to London and Washington. Our policy formulators are also US trained and reflect the thinking of the US corporations. If someone says that reforms are far more needed at lower levels then he is painted as Swadeshi left or worse socialist. Actually our economic policy formulation has been hijacked rootless wonders trained in investment banks or think tanks of Europe/USA.
Corporate Sector Focused
Unfortunately the reforms initiated in the early nineties when Manmohan Singh was Finance Minister under PVN have focused only on the corporate sector and Government at the Centre.
The focus of the reforms has been
• Industrial Policy (Licensing, MRTP, FDI)
• Private [Domestic/Foreign] sector in Infrastructure—Ports/ Containers/ Airports/Airlines/Telecom/TV/etc
• Opening up of Defense Manufacturing for Private sector
• FDI in manufacturing/Infrastructure
• Forex & Trade Policy (Negative lists for imports/exports, capital goods imports and customs tariff rates)
• Foreign investments (more than 50% equity allowed, technology imports, usage of foreign brands etc).
• Tax structure (reduction in Tax rates, tax incentives to FII, Reduction in exemption notifications)
• No tax on Dividends
• Capital market (Pricing of shares, Regulations on MB/ MF/ FII/ etc)
• Completely computerized exchanges in Shares/derivatives
• Holding/trading/clearing /settlement all using IT.
• Investments abroad by MF’s /Corporates /individuals
• Banking sector (Interest rates de-regulation, Policy on asset classification and provisioning, Capital adequacy norms, and starting new Pvt. banks)
• Opening up of Insurance Sector
• Moving from Defined Benefit [DB] to Defined Contribution [DC]in pensions in Government sector
We find from the above that the focus of reforms is mainly on the Corporate India and its interface with Government. Most helped crony capital crooks
‘Unincorporated’ India
But the economic structure of India is different from that of the USA. Nearly 65 percent of our GDP comes from partnership /Proprietorship firms or “Unincorporated” India. Contrast it to USA where more than 70 percent is from corporate activities. Less than fifteen percent of our GDP is only from the corporate India even though we spend maximum time and energy in discussing the Corporate India and changes in Sensex. Even in manufacturing activities nearly 50 percent of the share of value addition is from “unorganized” or non-corporate sector
Not only that, the share of service sector consisting of Construction, Whole sale and Retail trade, Transport, Hotels and Restaurant and other services like fitter ,plumber ,carpenter, priest- in our GDP is around 65 Percent and more than 80 percent of the service sector is Partnership Proprietorship firms. Service sector is growing at more than 8 percent real growth rate in the last decade and the India Unincorporated which is the engine of our growth is crying for reforms.
Same thing on employment side. Nearly 90 percent of our economy is self-employed while as nearly 90 percent of US economy is salary-employed. The structure of our economies is totally different and imposing that model here will be disastrous. If one state this bare fact one is considered as “anti-modern” and “traditionalist” and back ward looking or worst “ Swadeshi left”
The Financing of our growth is due to domestic savings which is around 38 percent of our national income. Substantial portion of our domestic savings more than 75 % is due to household savings. And from that point of view average Indian housewife is more responsible for our growth process than the FDI and FII which are considered as all curing Chawanprash. FDI and FII put together is never more than 8 percent of our investment since more than ninety percent of our investment comes from our domestic savings.
Reforms Needed
The actual areas where reforms are needed are
Ø Commercial Tax
Ø Road Tax
Ø Entertainment Tax
Ø Excise duty on liquor
Ø Urban land ceiling and regulations (ULCRA)
Ø Shops and establishments Act
Ø Laws governing educational, medical etc institutions
Ø Money lending regulations.
Ø Stamp duties Act
Ø Food and Adulteration acts—municipalities
Ø Water/Power/Drainage regulations—Acts
Ø Registrations / Contracts act
These regulations pertaining to the activities in which Uninc sector dominates are in the realm of State Governments. There is a need to have an Inter State council only to focus on reforms in all the above mentioned areas instead of just being obsessed with FDI and FII.
When the Tsunami stuck the Indian coast I got lots of mails from Insurance professors abroad about possibility of Insurance companies going down under similar to 9/11 terror attack. But interestingly no insurance company was affected substantially since most establishments were not insured. The reason is that they do not have “clean paper” of ownership. Same is about bank loans against lands and other assets of poorer segment. No clean paper no loans, no insurance. Creating clean paper to establish ownership rights of poor groups is critical for economic growth. Not exotic derivative products which no one understands including those who create them!
We do not want to have basic and important reforms and do not even discuss it since they are not “sexy” and sadly unimportant to the CNBC crowd. We think having more funds from abroad will solve all problems. That is not a sign of free marketer but a sign of sold out sepoy of global capital.
Unless and until we focus on the reforms at the State and lower levels we are not going to sustain our growth rates. We must come out of our thinking on the corporate or put it colorfully “Sensex” economy. Our corporate sector is only an “item number” in our economy full of glamour and that “ooch” factor. But from substance point of view it does not have much importance. Still we as a nation have an uncanny ability to focus on the inconsequential and immaterial and spend lots of time and effort on them and abuse others as Swadeshi left or worst socialist.
Delhi centric reforms can only benefit fat cats and not the most productive sectors and engines of our economic growth namely India “Unincorporated”. They are struggling to get adequate credit at reasonable rates of interest and deal with corruption at the lower levels of our system. What India needs is reforming our reform process to focus on the real India.
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The author is Professor of Finance, Indian Institute of Management-Bangalore.The views are personal and do not reflect that of his organization.
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