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Reforming Reforms Process the Imperative

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Reforming reforms process the imperative Prof. R. Vaidyanathan, DNA, September 25, 2007

The focus so far has been on corporate India and its interface with govt India is a fascinating country where miniscule groups with the strongest vocal chords and in control of media grab public attention and unusual focus of planners, policymakers and the government. This aspect of our debates will be humorous but for its deleterious effects. One illustration could be the media attention and preoccupation with the reforms process, which have been undertaken from the early nineties. The discussion centres on the corporate aspects of the reform or pertaining to the foreign sector. The reforms initiated in the early nineties have focused on the following: * Industrial policy (licensing, MRTP, FDI) * Private (domestic/foreign) sector in infrastructure-ports/ containers/ airports/ airlines/ telecom/ TV, etc * Opening up of defense manufacturing for private sector * FDI in manufacturing/ infrastructure * Forex and trade policy (negative lists for imports/ exports, capital goods imports and customs tariff rates) * Foreign investments (more than 50% equity allowed, technology imports, usage of foreign brands, etc) * Tax structure (reduction in tax rates, tax incentives to FII, reduction in exemption notifications) * Capital market (pricing of shares, regulations on MB/ MF/ FII, etc) * Completely computerised exchanges in shares/ derivatives * Holding/ trading/ clearing/ settlement, all using IT * Investments abroad by MFs/ corporates / individuals * Banking sector (interest rates deregulation, policy on asset classification and provisioning, capital adequacy norms, and starting new private banks) * Opening up of insurance sector * Moving from defined benefit to defined contribution in pensions in government sector Understandably, the focus of reforms is mainly on corporate India and its interface with government.

The drivers of our growth are not the government (which has a share of 20% in GDP) or the corporate sector (share in GDP of around 15%) as much family run enterprises (40% share in GDP). They are the dominant players in construction, road transportation, whole sale and retail trade, hotels and restaurants, and all types of services like plumbing, carpentry, electricals, etc and have been growing at over 8% in real terms in the last decade and they are the real engines of our growth and the focus of reforms should have been on this sector. More than 60% of their credit need is met by “unorganised” markets. Their performance and role in our growth story is not due to the government, but in spite of it. The distorted reforms debate is currently regarding the government controlling the commanding heights versus the corporate sector getting more space through market mechanisms. The other debate is regarding the role of foreign firms and domestic corporates and the need for a level playing field for domestic companies. These two aspects of the debate have not only distorted the reforms debate, but have also highlighted the dominance of the government and corporate sector in our national psyche even though they are not significant players in terms of wealth creation. The regulations pertaining to the activities in which non-corporate (India Uninc) sector dominates are in the realm of state governments. Some of them are: * Commercial tax * Road tax * Entertainment tax * Excise duty on liquor * Urban land ceiling & regulations * Shops and Establishments Act * Laws governing educational and medical institutions, etc * Money lending regulations * Stamp Duties Act * Food and Adulteration Acts-municipalities * Water/power/drainage regulations-Acts * Registrations/ Contracts Act These Acts and regulations create massive amounts of black money and act as fountainheads of corruption at the lower levels. This destabilises small businesses and increases the cost of operations. The main issue is the future of these sectors, which involve a significant number of people and run into crores. Let us look at the scenario. The Udupis/ Iranis/ Adiga’s/ Kamath’s/ Saravana Bhavans’ and other such small restaurants and dhabas run by family enterprises spread over the length and breadth of

the country are expected to face competition from McDonald’s and KFC’s. The street corner grocers and wholesale dealers are expected to compete with Sears and Wal-Mart’s. Small contractors involved in roadwork are expected to compete with global construction firms. Transport operators having a fleet of up to 5 trucks are expected to compete with Federal Express or Greyhounds. Local fishermen using catamarans are expected to compete with trawlers of global players. The important issue is, in the long run, should the millions of partnership/ proprietorship firms get corporatised? Is that the objective of reforms? Should we welcome the process of the self-employed becoming wage earners due to reforms (a street corner cobbler employed by Adidas or Nike or a street corner tailor by Van Heusen and street corner grocer by Metro’s or Wal-Mart’s)? The globalisation and FDI process is pitting the Uninc against the MNCs in competition. Is it a fair competition given that the global companies have deep pockets and hence longer waiting time? The reforms debate should be refocused on the following: * Social security for Uninc (proprietorship and partnership firms) * Financing of Uninc (credit delivery systems to these groups) * Insuring Uninc (both life and general) * Contract enforcement - (legal processes at lower level to be made corruption free and timely) * Issues of corruption /bribery by government officials and Uninc * Child labour and Uninc sector * MNCs and Uninc - unequal competition Unfortunately, the reforms debate and policies have been hijacked by the global corporates and domestic biggies. The sooner we have saner debate, the better it would be for orderly growth. Professor of Finance & Control, IIM Bangalore [email protected]

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