covid-19: See: from the Covid-19 disaster comes privatization and other reforms

After Prime Minister Narendra Modi’s announcement of a Rs 20 trillion revival package, and the clarification of Finance Minister Nirmala Sitharaman’s measures in five tranches, the response was appalling. Sensex crashed by 1,069 points on Monday. Goldman Sachs forecast that GDP growth this year would collapse to –5%. Former chief statistician Pronab Sen considered that it could be –9%.

Unfortunately, the package is a pain reliever sedative, not a stimulus that will revive a bankrupt economy. Sedatives have their uses, but should not be confused with stimuli, let alone cures. However, the package could go down in history as a turning point in economic reform.

“Never waste a crisis” is an old saying, and Modi is not wasting this one. But he and Sitharaman have not explained details of many proposed reforms in land, labor, and the legal system. But his dramatic embrace of privatization is unequivocal and surprising.

Homemade Moan Logic

The Bharatiya Mazdoor Sangh (BMS), the labor wing of BJP, has always opposed privatization. Swadeshi Jagran Manch (SJM) has not been enthusiastic either, as he is concerned that hated foreigners may acquire public sector companies (UPM). Last year, these two organizations campaigned against India by joining the Comprehensive Regional Economic Association (RCEP), a free trade area of ​​15 nations, including China, and Modi surrendered to their point of view.

Despite his great victory in the general elections, he felt that he lacked the political capital to nullify the anti-reformers in his party. That seemed to confirm his image as a cautious incrementalist.

But the Covid-19 crisis has ended business as usual and created an urgent need for drastic changes in the medium term that will accelerate growth once this crisis is alleviated. GoI will notify a list of strategic industries in which a maximum of four UPMs will coexist with competitors from the private sector. This implies that all public sector banks (PSBs) will be consolidated into four megabanks.

In all non-strategic sectors, all UPMs will be privatized, as possible (some UPPs will not attract bidders). This thoroughbred liberalization deserves applause.

Two additional measures are required. First, the national security list must be short. Second, history shows that each ministry tries to sabotage the privatization of the UPMs it controls. Therefore, the jurisdiction for privatization should completely change to a new ministry for divestment, such as that headed by Arun Shourie at the time of Atal Bihari Vajpayee. Air India’s experience shows that suppliers of power supply units should be allowed to downsize.

In extreme cases, GoI will have to pay off much of a PSU’s debt to make it salable. Today’s deep global recession is not suited for privatization, but preparations for big auctions should begin in the 2021 rebound.

In agriculture, the proposed reforms will end the farmers’ current compulsion to sell on mandis, making them free to sell anywhere to anyone. Such freedom is very necessary, but the cooperation of the states is also needed. The abolition of the Commodity Law (ECA) is essential in itself to allow the storage and unhindered movement of all products. This will encourage massive investment in warehouses and cold chains by the private sector, investments deterred today by the fear that every time farm prices rise, state governments will impose stock limits, halt interstate sales and arrest merchants. .

India also needs new agricultural tenure laws that ensure that a landlord can get his land back at the end of a lease period. This will incentivize smallholders to lease land to large farms with economies of scale. In fact, the time has come to allow corporations to start commercial farming, something that is still prohibited.

Working Laws

Several state governments governed by BJP have suspended all but a few labor laws to attract investment, especially from investors leaving China. But a temporary suspension will not attract any investors: new laws that seem irreversible are needed. These, while imparting job flexibility, must also provide unemployment insurance and training for new jobs.

Gujarat’s special economic zones (EEZs) already give 45 days of salary for each year of service to laid-off workers, a good model. State governments should learn from Bangladesh, whose labor laws attract giant garment factories with 50,000 workers each. The electricity sector is in a mess. State distribution companies have accumulated losses of almost Rs 1 lakh crore.

Reform should be incentivized by limiting central permission for states to borrow unless they reform this sector; reduce theft and transmission losses (in part by creating a police station in each district dedicated to controlling theft); installing smart meters that allow remote payments and disconnection; and privatize distribution companies to improve efficiency. Sitharaman says that all distribution companies in the Union territories will be privatized.

Why not those in BJP-ruled states as well? Atmanirbharta, Modi’s new catchphrase, can be translated as “self-sufficiency” or “self-sufficiency”. Ambiguity may be politically convenient, but Modi needs to be clear that self-reliance, trying to do everything in India, was tested by Jawaharlal Nehru and Indira Gandhi and turned out to be an economic disaster.

A worthwhile interpretation of self-reliance is to create institutions and policies so strong that India can flourish without the concessions of others and compete with the best. The constant increases in import duties in recent budgets have been disappointing. Here, too, Covid-19 should become an occasion for liberalized change.