Do more, piecemeal reforms won’t help

The latest set of reforms to restart stalled road projects, stimulate exports through a three-per-cent interest subvention, divestment of 10 per cent of its stake in Coal India and changing some 13 archaic laws of the Maritime Act are welcome and should be followed by further reforms. These piecemeal reforms may lift market sentiment a bit but much more needs to be done if the climate for investment leading to growth is to be strengthened.

For instance, in the revival of stalled road projects the government is compensating projects that have been delayed due to government policies by increasing the concession period of the concessionaire. This is a minuscule  issue as far as the national highway builders are concerned. They have been demanding  compensation for escalation costs, which is their major loss as these amount to 15 to 20 per cent per year. The government has not addressed this issue, so the likelihood of the stalled projects being restarted doesn’t look encouraging.

Even the three per cent interest, though rather late in the day when global trade is down and may take a while to pick up, is welcome; it was a long-standing demand of exporters. The government needs to do much more to incentivise the export of high-technology goods which are more in demand than the traditional exports on which India depends.

The real hurdles to investment by the private sector are lack of demand, huge inventories and the fact that they are highly leveraged. The government has found a way out for the heavily debt-burdened power distribution companies by transferring 75 per cent of their debt to the banks. Incidentally, finance minister Arun Jaitley is depending on the banks to even finance the ambitious renewable energy programme. This would have come from the private sector in normal circumstances.

The Seventh Pay Commission, which will see a significant hike in the wages of government employees, is expected to give a fillip to consumer spending. This was reflected in the shares of consumer goods companies turning frisky on Thursday on the expected announcement. However, this will still not be enough to stimulate demand across sectors to deplete the inventories piled up with manufacturers.

Besides, food inflation is still very high and the poor and economically weaker sections spend almost 60 per cent of their income on food items. Protein items like milk, eggs and pulses are expensive and the government has paid little attention to increasing the production  of pulses. Today the price of chicken is about Rs 138 per kg while tur dal costs Rs 200 per kg.

It is amazing that this shocking fact does not galvanise the government to tackle the problem of pulses cultivation on a war footing and even build a buffer stock and sell pulses through the public distribution system.

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