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Policy Uncertainty, Short Term Structural Reforms Causing Economic Slowdown in India - Analyst

© REUTERS / Brendan McDermidPolicy Uncertainty, Short Term Structural Reforms Causing Economic Slowdown in India
Policy Uncertainty, Short Term Structural Reforms Causing Economic Slowdown in India - Sputnik International
New Delhi (Sputnik): To check the economic slowdown, the government of India should focus on the long term land and labour reforms rather than making short structural adjustments, says an Indian trade expert.

The Reserve Bank of India's historic transfer of Rs. 176,051 crore ($25 billion approx.) of surplus reserve was recently made to the government. A section of economists have termed the move as a "lifeline" for the government amid an economic slowdown that is generating scepticism for the future of Indian economy.

In an interview, Manoj Pant, director of the Indian Institute of Foreign Trade, Ministry of Commerce, said he believes the global economy is going through a slowdown and the problem is not India-specific.

Sputnik: Was RBI’s recent fund transfer to the government initiated to contain the fiscal deficit in a situation of economic crisis in India?

Manoj Pant: RBI’s transfer of the surplus reserve cannot be taken as a sign of some specific crisis only in India. There is a crisis going on the world over since the 2008 global recession and its impact has been steadily reflecting on India. With the transfer of surplus reserve, the government has surely tried to address the concerns of the Indian economy. However, it would be wrong to suggest the economic crunch is India-specific. It’s part of the global crisis.

Sputnik: NITI Aayog’s Vice Chairman Rajiv Kumar recently suggested that the current economic slowdown is unprecedented since India’s independence. Would you agree?

Manoj Pant: While there is a definite slowdown in the economy, calling it the worst in 70 years would not be just, as trade in India prior to 1991 was negligible. The present economic situation is a trade-driven crisis and there wouldn’t be any crisis if there is no trade. It is only after the economic reforms of 1991 that India has integrated a lot [into the] world economy. The inclusion has brought about the present situation, where around 40% of the commodities in India are exported or imported. Thus, talking about the last 70 years would not hold much relevance.

Sputnik: Critics of the government’s economic policies have raised concerns about the slowdown in the automobile industry. Some experts have suggested a loss of around a million jobs. Why do you feel the automobile sector has suffered so dearly?

Manoj Pant: The problem in the automobile sector is partly due to the general global slowdown, but partly also due to policy uncertainty of the government towards the sector. To curb the vehicular pollution problems, the government introduced “Bharat VI” norms to check on emission standards. The government also constantly changed deadlines for compliance of the norms and the automobile players had to adjust to the fluctuations. Then it was announced [the] government would be envisaging bringing in electric vehicles by 2030.

The automobile sector is immensely essential, as it has led to shooting up of Indian exports at a large scale. Thus, changing rules of the industry after every two-three years is going to have considerable ramifications on the economy. As far as electric vehicles are concerned, it seems much of international optics as the Indian economy is not prepared for it.

Sputnik: To resurrect the economy, should government look into industry-specific concerns or look at larger reforms in the land and labour market?

Manoj Pant: When there is a problem of demand recession, the way forward is not to look at specific sectors. There are two broad issues - the structural adjustment problem of the industries and the other would be regular demand problems. The problems of the automobile and real estate sector could be addressed by structural reforms which would provide immediate relief. However, for the regular demand problems, the government would have to look at the long term reforms in the land and labour market.

Solely making short structural adjustments wouldn’t take the economy far. For instance, if the automobile sector feels there would be no upliftment in demand, they would only adjust the inventories. They wouldn’t make any new investments and hence there wouldn’t be job creation. The focus should thus remain to increase the general demand in the economy.

Sputnik: The Indian Finance Ministry recently announced the release of Rs. 70,000 crore ($9.72 billion approx.) worth of capital upfront and the withdrawal of surcharge of Foreign Portfolio Investments (FPI). How do you see the recent reforms?

Manoj Pant: The releasing of the Rs. 70,000 crore capital has been brought about for the benefit of MSME (Micro, Small and Medium Enterprises) sector as the sources of funds have dried up for them. The move however, would again amount to a structural adjustment for MSMEs but the long term question of increasing the demand in the economy would still pertain.

The removal of the surcharge on FPI was an important symbolic move. It showed the government was backing the private sector economy of the country. It was a move to attract foreign investors into the country’s private sector.

The amount of money raised through surcharge wasn’t too significant. Thus, the symbolism of removing the FPI holds more than the actual substance in the move.


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