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Raghuram Rajan suggests 11 point approach to revive distressing Indian economy

Raghuram Rajan

Former RBI governor Raghuram Rajan warned that sectors of India’s economy are “ticking time bomb”. A term coined by famous author Eduardo Galeano in Open Veins of Latin America was used to describe deepening economic and political crises in Latin America.

Rajan said the real estate, construction and infrastructure were in “deep trouble” and non-bank finance companies, which lend to these sectors, should have their assets quality reviewed.

Mr Rajan, also a professor of Finance at the University of Chicago, Booth School of Business prescribed certain measures to revive troubled Indian economy.

Here are 11 main points, which he focussed on in his essay on India Today magazine:

1- Make forcible land acquisition extremely rare: Asking the government to accelerate the mapping of land and the process of establishing ownership titles, especially in the poorest states he suggested making forcible land acquisition extremely rare. He also asked the government protecting the interests of sellers.

2- Labour: He gave an intermediate remedy for hire and fire practice prevalent in industrial firms. He said that the government needs to amend legislation, after discussions with unions and employers, to allow for an intermediate contract where workers gain rights steadily over time (such as greater severance pay) but do not have to be permanent.

3- Decentralise Power: He asked the centre to empower ministers and engage states. Government can start by amending the terms of reference of the 15th Finance Commission. “”A massive new reform thrust is needed, along with a change in how the administration governs. Decentralisation is critical for economic growth,” the essay read.

4- Affordable and accessible electricity : “Ensure electricity is adequately priced,” he suggested. Encouraging competition among power distributors.

5- Investments: He wrote, “India has to become more predictable on tax and regulatory changes.” Discuss proposed changes publicly and give the industry time to adapt. Consider an independent economic watchdog agency. “Investors will gain more confidence that regulatory changes are appropriate, and there will be less resort to an untrained judiciary for remedial action.”

6- Disinvestment: Disinvestment is not primarily about raising resources. Avoid selling to already dominant family enterprises to avoid concentration of power. “India needs fiscal space to deal with its legacy problems, as well as to target resources to its most needy citizens in rural areas. India has to cut back on unneeded spending,” the essay read.

7- Real Estate/Construction/Infrastructure: “Fast-track bankruptcy for developers in default. Some steady pressure should be placed on real estate developers, especially those that get financial help, to reduce the overhang of unsold property,” he suggested.

8- NBFCs: The RBI could do a quick asset quality review of the largest NBFCs. Give a clean chit to those that are well-capitalised, while those that are undercapitalised should be asked to raise capital quickly, with a government-supported fund providing capital to those who cannot at a stiff price, he suggested.

9- Telecom: Preserve sufficient competitors in the telecom sector in the short run. In the longer run, re-examine regulatory processes to ensure a level playing field.

10- Encourage Competition: “There should be more competition within state-owned distribution companies, especially among units facing customers— for instance, by breaking up that function, and possibly privatising some of it,” the essay read.

11- Agriculture: Mr Rajan suggested that agricultural reforms should ensure easier access to inputs like seeds, technology, power, finance and insurance. They should effect greater connectivity, both virtual and through logistic networks, of the farmer to warehouses, rural industry and final consumers.

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