Tucked away in a corner of a draft Twelfth Five-Year Plan document is a sentence that would warm the hearts of many private players in the financial sector.
It goes like this. “The principal lesson we should learn (from the global financial crisis) is that we should continue with our strategy of gradual liberalisation in the financial sector.”
There is no case for reversing the process of gradual liberalisation (in the financial sector), or even stopping it, says the document prepared by the Planning Commission.
With expectations running high that RBI will move forward in 2013 on issuing new bank licences, this stance on financial sector liberalisation has come as a relief for the private sector.
Coming as this does at the end of the current year, one is tempted to reflect on the economic policy developments over the last 12 months.
The UPA-II Government had this year come in for criticism on the way it has systematically gone about in damaging and destroying lot of economic engines of growth.
Ask about “policy paralysis” to some well-heeled investors, the immediate retort is India has lots of policies. But the refrain is many of them are bad or ill-suited for the current economic milieu. It is more of paralysis on the implementation side, say policy analysts.
“This Government (UPA-II) has economically taken us back significantly,” rues Rahul Bhasin, Managing Partner of Baring Private Equity Partners India.
Contract enforcement
It is time the Government fixes some of the lacunae and shortcomings such as ‘contract enforcement’, according to Bhasin. He pointed out that India has been consistently ranked amongst the lowest on this front.
“You can’t have a country whose economy runs unless you make sure contract enforcement works. What is so difficult about this?”
He also highlighted that India had the same per capita as China in 1978 and Singapore in 1965. “Look where have these countries gone and where are we?”
All the gains made in UPA-I (2004-08) seem to have been frittered away and the country is now staring at a gloomy economic position and lower growth rates of 5.5-6 per cent.
The Budget 2012-13 move to introduce General Anti Avoidance Rules (GAAR ) and retrospective amendments to bring offshore indirect transfer of shares to tax had put off the investor fraternity.
But the current Finance Minister has sought to douse the flames with some corrective actions on the policy front.
The UPA Government can also claim a victory of sorts with Parliament allowing FDI in multi-brand retail.
However, there are still thorny issues like land acquisition where Governments at the Centre and States have miles to go.
Going back to the Twelfth Five-Year Plan document (draft), on the real sector, the document has said there is no reason to backtrack on the use of market mechanisms to achieve efficiency or from an open economy, including a freer flow of foreign direct investment.
“No such reversal is taking place anywhere in the world and we should act no differently,” says the document.
protectionist noises
The Twelfth Five-Year Plan document has also noted that protectionist noises have certainly increased in industrialised countries, which is disturbing, but actions have been relatively contained thus far.
The G20, of which India is a part, have regularly called in their Summits for an avoidance of new protectionist measures. It is to be hoped that this high level consensus will be translated into action.
“None of this justifies a retreat from international openness on our part. Those arguing for protectionism in industrialised countries are fighting to protect their economies from the loss of competitiveness vis-à-vis emerging markets,” says the document.
It is not in India’s interest to support such voices by willingly redirecting our own policies in that direction. On the contrary, it is in our interest as we gain in competitiveness to ensure that global markets remain open, the Plan document has said.
But the larger question in minds of policy analysts is the recent decision of the Government to extend the validity of interest subvention to certain export sectors.
While this is being dubbed as an incentive to push exports, many critics of this move contend that interest subvention to exporters is not WTO-compatible.
They feel that this may not stand the test of WTO compatibility if and when challenged.
srivats.kr@thehindu.co.in