Arush Kishore comments on the existing policies and regulations in place for major sectors of the Indian economy and recent amendments made to them, or not. Several areas still await reform which is much needed if India is to prosper. While progress has been made, much is left to be done.
“Regulatory and policy reforms needed to facilitate growth”
• We have started believing that along with China, our turn has come to occupy the place at the top of the global economy hierarchy. Are we already a World power? India National Security Review 2010 placed India as the 5th strongest country in the World after US, China, Japan, and Russia. When analyzed deeper, India faces severe challenges of policy, investment and productivity. These need speedy and effective reforms.
• The most important lesson from the global financial crisis is that it would be incorrect to say the days of regulation are over. Market based economic systems, particularly financial markets, need more regulation. However, the focus of this regulatory architecture should safeguard retail investors and customers, while at the same time foster growth and competition.
• India has traditionally been perceived as having too many regulatory constraints. However, these shackles had been largely removed with the first phase of reforms in the early 90s. In addition, regulatory oversight in India has transformed from the administrative controls of the earlier phase into the current and more market-friendly structure of economic regulation.
• India has been posting incredible rates of growth in recent years. However, there is a disconnect between the existing regulations and India’s growth. Moving forward on the second generation reforms has become critical, with a perception that policy reforms in India have stalled. Some of these reforms are administrative in nature, but broadly they require changes in the statutory framework governing the sector. Presently, we can identity some key policy reforms that are needed to address the constraints that are impeding investment and growth and generating negative sentiments.
Financial sector / banking reforms
PricewaterhouseCoopers (PwC) report titled 'Banking In 2050', states that India’s could become the third largest banking sector by 2050, after China and the U.S., leaving Japan, UK, and Germany behind . This is quite possible if the foundations of the mission are laid firmly now. Fitch ratings have stated India is better placed compared to China in regulating the flow of bank credit. India's regulatory environment has remained focused on controlling credit growth .However, the most pressing issue for banks in India is access to capital. There is currently a cap on voting rights at 10% for private banks and 1% for public sector banks, which is deterring equity investors from subscribing to equity issues, given that they will not have the requisite “voice” in board decisions. The Banking Laws (Amendment) Bill 2011 seeks to align the voting rights with shareholding patterns. In addition, the Bill provides more flexibility for Public Sector Banks in increasing the limits of authorized capital and permits the use of additional instruments to raise capital. The earlier this is done, the better it would be.
• Increased insurance cover is required to supplement the social security net, particularly to provide affordable life and health coverage for a wider section of the population. Being a very capital intensive business, the insurance sector needs access to large additional equity funds and domestic capital will need to be augmented by foreign funds.
The proposed Insurance Laws (Amendment) Bill 2008, seeks to raise the cap on FDI (foreign direct investment) from the current 26% to 49% of paid up equity capital. The need to put this on the Statute Book cannot be overemphasized.
Similarly, in the domain of Pension Funds; the New Pension Scheme (NPS) needs to mobilize the massive pension requirement and potential in India, and there is a need to make the regulator a statutory entity in order to provide more certainty for investors. The Pension Fund Regulatory and Development Authority (PFRDA) Bill 2011, lays out the main components of the regulator’s structure, but does not cover foreign investment policies in the sector. This aspect would need to be covered comprehensively.
Moving on to the capital markets, development of a corporate debt market, particularly the long term component, is critical for addressing India’s investment needs, especially infrastructural . While the main impediments – like widely varying stamp duties across states – have been known for a while, it is important to increase the participation of contractual savings institutions – insurance and provident funds – in long dated bonds. One impediment is the requirement of a minimum credit rating of AA for subscription to these bonds. Some selective relaxation of these norms to allow a lower ratings cut-off for instruments issued by infrastructure companies, or permission to banks to guarantee bonds, which will provide a credit enhancement, is necessary to bring in more investment funds into infrastructure projects. Development of commodities markets is critical to allow the hedging of input risks, to which Indian corporates are increasingly exposed. The Forward Contracts Regulation (Amendment) Bill 2011, proposes, among other things, demutualization of commodities exchanges, separate clearing corporations and further empowerment of the Forward Markets Commission. Implementation of this law shall address long entrenched regulatory impediments.
Another current dispensation that hampers faster growth and financial inclusion relates to priority sector lending. Private sector banks are now aggressively expanding their reach in rural areas, using unconventional channels and new technologies. Presently, an interest subvention of 1.5% and additional incentive of 2% on prompt repayment, is available only to public sector banks for agriculture loans upto Rs. 3 lakhs. This interest subvention and incentive should also be extended to all banks to create a level playing field. We note that private sector banks have expanded their direct agri lending from 7.5% of net bank credit in FY05 to 11.1% in FY10, which is close to the 12.8% levels of public sector banks.
Food security / agriculture policy reforms
Nearly 30 % population of India lives in poverty. This segment needs to be provided with foolproof food security. The prevailing high inflation, and particularly the high food prices, make them the most vulnerable. While availability of food grains may not be limited, the supply constraints are significant. The World Bank has recently introduced an Agriculture Price Risk Management (APRM) Product to provide upto $$4 billion to developing countries to protect them against volatile food prices. This product stresses the importance of innovative financial mechanisms to urgently address the risks of a serious global food deficit and price volatility. These include many market-based insurance and other mitigation instruments. Food supply logistics is an important aspect of increasing efficiency in the farm-to-fork chain. One aspect of this is to allow farmers more choice in alternative marketing channels for their produce, instead of the mandated selling to respective mandis (local grocery markets) run by the state-level Agricultural Produce Marketing Committees (APMC). The Government of India had formulated a model Agricultural Produce Marketing (Development & Regulation) Act, 2003 to replace the Agricultural Produce Marketing Committee (APMC) Acts of respective states to end, or at least mitigate, the monopoly of the state-level APMCs and allow corporates to source produce directly from farmers. A Committee of State Ministers in-charge of agriculture marketing has been constituted in early 2011 to promote market reforms in agriculture. There is an urgent need to allow myriad flowers to bloom in this activity by breaking the monopoly of APMCs.
• India imports 90% of its crude and petroleum requirements; hence it is very exposed to crude price increases. It is imperative to increase efficiency in consumption of petroleum products, and move the prices of regulated products towards market prices. However, this move will expose lower income households to price shocks, and effective subsidy delivery mechanisms for fuel purchases need to be established. The present system of subsidies in this sector are inefficient, a half way house, measure not aligned to market.
Subsidy delivery mechanisms
• Food, fertilizer and fuel subsidies now constitute 16% of India’s revenue expenditure, having increased sharply in FY09. A transition to cash transfers or provision of entitlement coupons to deliver subsidies, particularly related to food and fuel, are likely to reduce leakage and bring better target delivery. An increasing transition to cash transfers of specific subsidies to directly target households can be increasingly feasible with the progressive rollout of the Unique Identification Number (Aadhar).
Coming to Foreign Direct Investments (FDI), it should be noted that FDI inflows into India had been slowing down significantly in 2010-11, whereas they had risen significantly for other emerging markets.
• The Department of Industrial Promotion and Policy (DIPP) of the Union Government has recently issued a discussion paper proposing an increase in the FDI caps across the board to 49%, which, if implemented, will benefit sectors like insurance and modern retail, where FDI is capped at lower limits or are prohibited.
Infrastructural constraints are the biggest and most significant factor impeding India's growth. If India has to reach the inflexion point, it has to make massive investment in this sector. Estimated investment required is over Rs 39 lakh crores over next 20 years.
Land – its acquisition and its titling are most crucial elements in the entire process. Land acquisition has become probably the most contentious issue in the political economy of India. The Land Acquisition (Amendment) Bill 2007, redefines “public purpose”, requires corporate entities to acquire 70% of the land required, and pay adequate and timely compensation. There is a built-in value – added sharing provision .One of the reasons for real estate illiquidity – and consequently the lack of transparency – is the absence of a nation-wide title registry. Besides setting up a pan-India electronic registry of all immovable property, it provides for a resolution of disputes via special tribunals. The government would only retard development if implementation of this legislative measure is delayed.
Mining and minerals and Environment
• A “Go-No Go” zone classification for coal mines, introduced in 2009, represents an important dilemma for India. While an appropriate balance between the need to access minerals and preventing environmental degradation is desirable, the policy must be sensibly implemented. India’s energy needs for sustaining growth are enormous and will likely rely predominantly on coal. A cautious relaxation of the norm was permitted a few days ago with a Stage-1 forest Clearance given to a mine project in Chhattisgarh, indicating a pragmatic approach to resolving the problem.
• Recent instances of inappropriate corporate practices have raised concerns about the corporate governance in India, which could have implications for investor perceptions of investment attractiveness, security and productivity.
The Companies Bill, 2009 includes provisions for more detailed disclosures, greater responsibility for independent directors and a framework for resolution of insolvency, liquidation and winding up for corporate entities. This latter provision addresses long standing lacunae in terms of the difficulty of exit and closure of businesses.
Today, as never before, benign forces are matched by more malign ones that are equally global. The world is full of "problems without passports”. If India has to achieve a centre stage in the global comity of nations, the debottlenecking has to begin now.