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 Redeem Last Year’s Promises

Arvind Panagariya

            Capitalizing on the popular support he received for the determined military intervention following the 9-11 attacks, U.S. President George Bush has gone on to take a bold initiative on the economic front: he has made concessions that were unthinkable two years ago at Seattle and successfully launched a new round of trade negotiations.

            Prime Minister Atal Bihari Vajpayee has responded with a similar resolve to the 12-13 attacks on the Indian Parliament and received popular acclaim for it.  And he, too, may now want to capitalize on this popularity by taking bold initiatives on the economic front in the forthcoming budget.  India’s reform program has come to a standstill in the current year and there is unlikely to be a better opportunity to jumpstart it.

            Last year, in what was a truly historic budget, Finance Minister Yashwant Sinha had announced several major reforms.  But the Vajpayee government utterly failed to deliver on them.  The forthcoming budget must offer credible commitment to undo this failure.  Building on last year’s budget, let me suggest just three sets of reforms that could add several percentage points to industrial growth in India in the next five years. 

First, Sinha had promised last year to bring the highest tariff rate down to 20 percent by April 2004.  Currently, this rate is 35 percent (not counting the Special Additional Duty) and is topped by a 10 percent surcharge.  To send a strong signal that he is committed to reforms, Sinha must cut this tariff rate by at least 10 percentage points and drop the surcharge altogether.  His goal should be to take all tariff rates to levels below 10 percent by 2006.  This is an essential step if India is to expand the manufacture of labor-intensive goods.  To provide temporary cushion to the liberalized sectors and also stimulate exports, the rupee may be allowed to depreciate. 

            Second, it is now time to let go of the Small Scale Industries (SSI) reservation entirely.  This reservation has been a major cause of India’s failure to capture the world market in labor-intensive goods in a big way.  For example, India accounts for a paltry 1.6 percent of the total apparel imports of top 10 non-quota importers of this product.  In contrast, China’s share in this market is 38.1 percent.  Small producers are neither able to offer the quality and service nor build marketing networks necessary to capture a large share of the market in the rich countries.  Even the employment argument traditionally made in favor of the SSI is not defensible.  Just imagine how much more employment apparel alone could have provided if India had been able to acquire half the share China has in both quota and non-quota markets?  The same question may be asked for toys, footwear, cutlery and many other non-durable consumer goods.

Mr. Sinha made an important beginning last year by announcing the withdrawal of apparel from the SSI list.  This year, he must complete this process by ending the reservation altogether.  Far too many products that India can export in large quantities—toys, plastic products, utensils, cutlery, umbrellas, leather products and footwear, to name just a few— remain subject to the SSI reservation. 

            Finally, Sinha must make good on his promise, made in budget speech last year, to amend key growth-retarding labor and industrial-restructuring laws.  These amendments are necessary to maximize the benefits from reforms mentioned above. The first amendment relates to the Industrial Disputes Act.  According to Chapter V.B of this act, added in 1976 and strengthened in 1982, an enterprise employing 100 workers or more is effectively denied the right to retrench workers under any circumstances.  Sinha had promised last year to limit the scope of this chapter to enterprises employing 1,000 workers or more.  In turn, establishments of less than 1,000 workers were to be given the right to retrench provided they gave the worker 45 days of salary for each year worked.

            The second amendment relates to Section 10 of Contract Labor (Abolition and Regulation) Act, 1970, which effectively precludes the use of contract labor for services that are performed on factory premises and are of a regular nature.  For instance, cafeteria services on the factory premises cannot be contracted.  Sinha had promised to bring legislation that will restore the employer’s right to outsource any activities it chooses and at the same time strengthen the rights of contract workers with respect to health, safety, welfare, social security and compensation upon retrenchment.

            Finally, currently, India lacks proper bankruptcy laws.  The restructuring and winding of companies is handled through Bureau of Industrial and Financial Restructuring (BIFR) under the Sick Industrial Companies Act (SICA).  This process has been totally ineffective and, indeed, counterproductive.  By the time enterprises can be declared sick under the current definition, it is too late for restructuring.  Moreover, the long drawn BIFR process gives the enterprise promoters enough time to tunnel out all the assets leaving workers and creditors high and dry.

In his budget speech last year, Sinha had promised to repeal SICA and the BIFR process and replace it by alternative legislation.  Since then, a Reserve bank of India Advisory Group on Bankruptcy Law has offered a detailed road map of a comprehensive Bankruptcy Law modeled after the U.S. Chapter XI process.  Under this approach, if an enterprise misses a payment exceeding hundred thousand rupees, creditors are given the right to take legal action leading to the filing of bankruptcy by the enterprise.  This process cuts through the current bureaucratic procedures while providing better protection to workers and creditors.

            Unfortunately, promises on all three of these legislative changes have remained unfulfilled.  Labor Minister Sharad Yadav, who must initiate the legislation amending the Industrial Disputes Act and Contract Labor Act, has simply refused to cooperate.  The matter is far too important to be allowed to languish in this manner.  Vajpayee and Sinha must find a way to break the impasse.

Economic Times, January 30, 2002