ECONOMIC REFORM IN INDIA Task Force Report Fall 2013 Authored By: Donald Casler Amy Couture Brandon DeBot Ashneil Jain Diana Ming Ayushi Narayan Shoshana Silverstein Joseph Singh Ashley Ulrich Kevin Wang Eric Yang Lorelei Yang PBPL 85: Global Policy Practicum Professor Charles Wheelan Rockefeller Center for Public Policy Dartmouth College Contact: Nelson A. Rockefeller Center, 6082 Rockefeller Hall, Dartmouth College, Hanover, NH 03755 http://rockefeller.dartmouth.edu/shop/ • Email: [email protected] 1 TABLE OF CONTENTS EXECUTIVE SUMMARY……………………………………………………………………....i Blueprint to Economic Reform………………….…………………………………………………4 1. INTRODUCTION…………………………………………………………..………………...6 1.1 Macroeconomic Trends and Relative Progress……………...……………..…………………6 1.2 Bottlenecks…………...……………………………………………………..…………………8 1.3 Corruption…………...……………….……………...……………………..…………………9 1.4 2014 Elections…………...………...………………………………………..………………..10 1.5 Political Will.………......................….……………………………………..………………..11 2. FISCAL POLICY…………………………………………………………..………………..11 2.1 Tax Policy…………………………………………………………………..………………..12 2.2 Subsidy Reform……………………………………………………………..………………..13 2.3 State-Owned Enterprises………………………….………………………..………………..15 3. INFRASTRUCTURE AND RESOURCES…………………...…………..………………..17 3.1 Land Acquisition……………………..…………………………………………....................18 3.2 Community-Level Resource Management…………………………………………………...19 3.3 Public-Private Partnerships…………………………………………………………………20 3.4 Urban Development and Land Sales………………………………………………………...22 4. EDUCATION……………..……………………….………………………..………………..23 4.1 Teacher Absenteeism and Pedagogical Reform……………………………………………..24 4.2 Primary and Secondary Education…………………………………………………………..26 4.3 Higher Education…………………………………………………………………………….27 5. LABOR POLICY………..…………..…………….………………………..………………..28 6. GOVERNANCE……..…..…………..…………….………………………..………………..33 6.1 Political Reform………..…………..…………….………………………..…………………33 6.2 Administrative Reform..…………..……..……….………………………..…………………34 6.3 The Judiciary and Police Force…………..…………...…………………..…………………36 7. WELFARE AND SOCIAL INCLUSION……….…….…………………..……………….38 7.1 Public Distribution System..……………...…………...…………………..…………………38 7.2 National Rural Employment Guarantee Act………...…………...………..…………………40 8. HEALTH……..…………..…………….…….………………………..………………..........42 8.1 Accredited Social Health Activists…………….……………………………………………..43 8.2 State-Level Public Health Agencies………………………………………………………….43 8.3 Mid-Level Medical College Education………………………………………………………44 8.4 Fortified Foods………………………………………………………………………………44 8.5 Primary Care…………….…………………………………………………………………..45 8.6 Community-Based Insurance………………………………………………………………...46 2 9. AGRICULTURE………..…………...…………….………………………..………………46 10. MONETARY POLICY………..…………..…….………………………..………………..48 10.1 Inflation……………...……………………………………………………………………...49 10.2 Credit Access……...………………………………………………………………………..50 10.3 Productive Savings……………………..…………………………………………………...51 10.4 “Directed Credit”…………………………………………………………………………..51 11. TRADE………………....…………...…………….………………………..…………………...53 11.1 Tariffs………...…………………..…………………………………………………………54 11.2 Foreign Direct Investment………...……………………………………..…………………55 11.3 Regional Trade………...…………………..………………………………..………………56 12. FOREIGN AFFAIRS…....…………...…………….……………………..………………..57 12.1 The U.S. and India…………………………...……………...……………..…………………57 12.2 India-Pakistan Relations………...…………………………………...…..…………………59 13. CONCLUSION…....…………..…...…………….………………………..……………………61 REFERENCES…....………….………...…………….………………………..……………….61 3 EXECUTIVE SUMMARY The tidal wave of growth carrying India for the past decades following the 1991 reforms has proven to be just that – a wave that is now subsiding, leaving the world’s largest democracy stranded on a barren beach. Time is cheap, poverty is plentiful, and growth has taken leave as the GDP annual growth rate plunged from 10.1 percent in 2010 to just above four percent in 2012. From a fiscal deficit growing alarmingly fast to a population growing even faster, India faces both problems and potential that, if addressed in time, can lead to a new and greater time of growth. Based on our research and meetings with leaders in business, academia, politics, and social reform movements, we present recommendations in the areas of fiscal policy, infrastructure and resources, education, labor, governance, social inclusion, health, agriculture, monetary policy, trade, and foreign affairs. Ordered in this memo by both importance and political feasibility, these reforms, many of which will take years before all their benefits will be felt, cannot fix every problem India faces. However, they will begin carving out a path so that, what was a single wave of growth, can evolve into a steady current of change. Methods This report stems from more than 12 weeks of research and study, including two weeks traveling in India meeting with leaders in the public and private sectors. We analyzed works on India’s economics, politics, culture, and history, met with individuals from the CEO of the Bombay Stock Exchange to teachers and principals, and travelled from Mumbai’s towering financial sector to its slums, from the rural village of Kasar Malai to the factories of Noida. In addition, we examined best practices in relevant areas from other developing and developed countries, as well as successful policies implemented at the local, state, and federal levels in India. The following document draws on these experiences and research, creating a plan of action addressing some of India’s most urgent problems. The following is a summary of those recommendations. i Putting the Nation on Sound Fiscal Footing With 15 times more phone subscribers than taxpayers, India is home to a convoluted tax system that is both difficult to enforce and unnecessarily harmful to businesses. From politicians to business owners to academics, there is near total agreement that the best alternative to the current system is the Goods and Services Tax (GST). In addition, direct cash transfers must replace energy, agricultural, and food subsidies, which are both significant burdens on the government as well as highly distortive to the market and often poorly targeted. Finally, unproductive and inefficient state-owned enterprises (SOEs) must be cautiously disinvested. Although perhaps the most politically difficult of the fiscal policy recommendations, scaling back government control in these enterprises will ultimately increase productivity as well as transparency and competition, reducing potential for corruption. Opening the Physical Bottlenecks Slowing Growth Sedan-swallowing potholes, unruly traffic, and over-crowded and poorly maintained roads make travelling in much of the country slow to impossible. Although perhaps the most apparent when jolting through the streets of India’s urban centers, roads are far from the only infrastructure problems the country currently faces. Land acquisition regulations and water and electricity shortages plague the country, from the very richest as witnessed by power outages in Delhi’s five star hotels, to the very poorest as they struggle to access clean water. The use of an electronic database to register land titles, streamlining of urban land sales, improved eminent domain policies, and development of a master plan for urban development will target many of the issues surrounding land use and ownership. Resource issues can be addressed through fostering greater public-private partnerships, while addressing issues of water and sanitation through elected committees, and energy through the subsidization of household and farm power grid separation in rural areas. Leveraging the “Demographic Dividend” From professors to CEOs to social workers, nearly every conversation we had featured the term “demographic dividend.” But without a robust education system with high quality institutions from primary through higher education, the great advantage of the demographic dividend will be lost. ii The government must focus on reducing teacher absenteeism with the use of technology, school visits, and tying salaries to teachers’ presence in the classroom. Pedagogical reform, changes to grade advancement regulations, and student and institutional evaluation development will improve primary and secondary school quality. Finally, higher education will be more competitive with the best universities in the world by allowing the expansion of private and foreign schools, as well as improving financial aid allocation mechanisms. Unfettering the Labor Force The power of India’s demographic dividend cannot be fully levied without addressing harmful labor regulations hobbling the country’s workforce and business growth. To make India’s manufacturing sector internationally competitive, the Industrial Disputes Act (IDA) must be reformed significantly, including addressing its regulation of disputes between employers and employees, and the hiring disincentives created by Chapter VB. Other crucial reforms include reducing firms’ regulatory burden by replacing inspectors with Internet resources and technology, and an overall reduction of inspectors and inspections, instead utilizing spot checks and higher fines. The creation of special economic zones for manufacturing, as well as modernizing the bankruptcy code, will make India far more competitive with such countries as China. Finally, the adverse effects of labor reforms can be blunted with the adoption of retraining programs and unemployment insurance funds. Curbing Corruption In many countries, a prison record can get in the way of a career in politics.