Structural Reforms Need Of The Hour

The economy continues to worry sceptics and the government alike. In the last two weeks, the Finance Minister Nirmala Sitharaman has taken a series of steps to revive the economy. In continuation to the stimulus package rolled out on 23^rd August 2019, she announced the merger of ten public sector banks into four, with the aim of creating fewer but stronger large banks who could eventually become large-scale lenders with the capability to back globally competitive projects. Post the mergers, the landscape of Indian public sector banks will reduce from the existing 27 to 12. This step will be a long drawn project for the impacted banks and one should not expect any short-term benefit emanating out of this step. Instead, such large-scale mergers involving unionized employees is always a tough task to accomplish. What is worrying is that over the next five years, the merger will consume maximum bandwidth of the leaders of these banks, thus leaving hardly any productive time for them to focus on other important priorities, which eventually could prove to be vital to revival of the India economy.

Though the Finance Minister has categorically stated that not even a single job will be cut in the process of amalgamation of these banks, it is anybody’s guess as there will be hundreds of overlapping roles particularly in enabling functions which would impact their profitability. Recent reports suggest that the economic slowdown has led to a reduction in hiring in sectors like automobile and telecom whereas sectors like e-commerce and food tech have seen a hike in demand of hiring.

The Union cabinet also approved easing FDI norms in coal mining (100 percent FDI via automatic route), contract manufacturing, digital media and single-brand retail. This is another attempt at undoing some of the budget measures which led to quick flight of FIIs out of the country. One hopes it’s not a step too little, too late.

If one ignores the 5% GDP rate for academic purpose and focuses on employment generation, that picture is not a bright spot either. Every day companies are laying off employees or suspending production (as in the case of Maruti which announced a step to this effect earlier this week) for a couple of days in view of slowing demand. Formal job creation is possible in the private sector at a scale and duration not feasible in the government sector. But, this needs to be driven by the manufacturing and services sector which should be the focus of all government stimulus and policies.

If one goes with a contrarian view, Prem Watsa, Chairman of the Canadian company,  Fairfax Financial Holdings exuded confidence in India’s ability to attract global investment and bounce back with ease during his short visit to India earlier this month. Given his interests in Indian companies where his organization has invested, this may not be an off-the-cuff remark. To bolster such optimism, India needs to tread on the path of structural and labor reforms which in the short term would enable the ease of doing business and will be a long term solution leading to sustainable development. Corporate India is doing its bit. Teamlease Services earlier this week launched a compliance cloud website and app named RulezBook to put together India’s 58,000+ compliance rules and 3000+ returns across 1000+ Acts for the easy access of employers.  

The first 100 days of Modi 2.0 has focused on strong administration, decisive actions and piecemeal band-aid stimulus packages. It has fallen short of administering strong antidotes to cure the present malaise of the Indian economy which might be short-term pain but long-term gain. Perhaps, the compulsions of political economy is pulling back one of the strongest governments elected at the Centre in the last few decades from unveiling economically viable and practical structural reforms.