Business Today

The desirable and the doable

Prime Minister Manmohan Singh can harvest several low-hanging fruits in his second term— most of them in the first three months.

Print Edition: June 28, 2009

Prime Minister Manmohan Singh can harvest several low-hanging fruits in his second term— most of them in the first three months.

Arvind Panagariya, Professor of Economics and Indian Political Economy, Columbia University
Arvind Panagariya
There are several low-hanging fruits that the United Progressive Alliance (UPA) can harvest in its second term in office—most of them within 100 days. They include deregulation of petroleum prices, hike in the foreign investment cap in insurance to 49 per cent from the current level of 26 per cent, the legislation to set up a statutory pension fund regulation and development authority, cut in the minimum public sector ownership in banks to 30 per cent from the current level of 51 per cent and establishment of a uniform goods and services tax. These reforms had the approval of the UPA earlier, but were held back by the opposition from the Communists.

Going beyond the UPA agenda, if I were asked my wish list, the top item on it would be the restoration of the right of firms to terminate workers under appropriate conditions. This right is currently denied to all manufacturing firms with 100 or more employees. A good beginning will be to exempt all firms with 1,000 employees or less from the regulation. There is also a need to relax the current onerous conditions governing the right of a firm to reassign workers from one task to another.

The second item on my list would be a proper exit policy. The current Board for Industrial and Financial Reconstruction (BIFR) exit procedure under the antiquated Sick Industrial Companies Act of 1985 must be replaced by something equivalent to Chapter 11 of the US Bankruptcy Code. The National Democratic Alliance (NDA) had attempted this reform through the Companies (Second Amendment) Act of 2002 but challenges in the Supreme Court blocked its implementation. The UPA never followed up on this reform.

Good business environment requires not just smooth entry of firms but also smooth exit. The third important area of reform is higher education. The reform of primary education is important but setting aside some issues, such as vouchers to the poor to access private schools, this reform is more or less on course. But when it comes to higher education, the University Grants Commission (UGC) is a big obstacle to reforms, zealously guarding its monopoly rights. The government must break this monopoly and open proper entry channels for private universities, both domestic and foreign, and give full autonomy to all universities and colleges in all areas, including curriculum, degrees, employee salaries and tuition fees. Just opening more UGC-controlled public universities cannot pass for a reform.

Closely related, the UPA had earlier committed to raising the expenditure on health to three per cent of the GDP from one per cent. But it has given no thought to expand the supply of qualified doctors and nurses. The highly corrupt and inefficient Medical Council of India guards its monopoly over the system, putting roadblocks in the way of rapid expansion of medical colleges.

Responding to the resulting shortage of doctors, service providers with no formal medical education whatsoever have proliferated. In rural areas, they are the only private providers and provide 80 per cent of the outpatient care.

Two final areas on my list would be: infrastructure and public institutions. Priority items in the infrastructure include rural roads and rural electrification, power and highways. Two crucial items in public-institutions reforms are the judiciary and police. We need rapid expansion of judiciary to clear the vast backlog of cases. Judicial delays retard India’s productivity. And reforms that restore public faith in the police would greatly increase its welfare.

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