India is at a turning point. The first set of reforms undertaken in 1991 have run their course and minor tinkering around the edges is not yielding the desired outcomes anymore. 

The GST has finally made India into one market instead of 28 separate state markets but it is a spaghetti of complexity. There is a demographic dividend possible but in the absence of jobs it could end up into a demographic disaster. 

The China , US rivalry is now structural (inspire of the current ceasefire) and long term and global supply chains are looking for a new home as an alternative to China. But the beneficiaries of this huge but one time opportunity so far have been the south East Asian countries. 
The markets are waiting with bated breath on whether this government will bite the bullet and undertake the second generation of difficult but much needed reforms or lose heart and revert to spin. Whether this slow down becomes structural or cyclical depends on the choices that are made with regards to unleashing the pent up entrepreneurial energies by the government of the day. 

The 10 most important steps that need to be undertaken are: 

1. Judicial reforms to ensure that the justice system has the capacity for quick justice thereby making India a place where there is rule of law and contracts can be easily and quickly enforced. 
2. Simple and low direct and indirect taxation
3. Bureaucratic reforms (including hiring from outside at each level) to ensure that it’s not an ossified and self perpetuating hydra 
4. Privatisation of ALL PSU’s including banks and railways 
5. Single window time bound clearance for all businesses 
6. Unfinished land reforms and more importantly land to be made available for factories and infrastructure 
7. Education sector to be opened up completely for private participation. Vouchers for ensuring universal primary education 
8. Vouchers for ensuring universal primary health availability 
9. Labour reforms to allow full flexibility of hiring and firing. But this then necessitates the need for a social safety net for the losers. 
10. Debt markets opening up to FDI 

There is no doubt that there will be short term pain and resistance but if we need 20 years of strong growth, this is the bitter pill that needs to be swallowed and it would require true leadership and vision to do that. There have been some very good steps such as banking reforms, GST, bankruptcy code, aadhar and using digital tech for direct benefits and focus on hard infra but paraphrasing Walt Whitman  – “there are miles to go before we sleep” ; the unfinished agenda is a steep climb ahead beyond which is India’s real tryst with destiny and the promised land.   

Capital includes money and means of production (including the infrastructure needed to get the products to the market). This is the low hanging fruit. 

Let’s start with money capital in which India is starved and therefore needs to open up FDI more. I applauded when the FIPB (which had morphed into the Foreign Investment Prevention Board in practice rather than the promotion board it was supposed to be) was abolished. The debt markets need to be opened up for FDI.

PSU’s should only be in sectors where the risks are too high for private entrepreneurs to bear. The government has no business being in business and is a very poor manager of scarce capital. It is obvious from the experience of Air India , BSNL or PSU banks, that government managers just cannot compete on a level playing field with private entrepreneurs and the capital being burned (either through direct losses or because of very low returns) should be better used to create a safety net for citizens and their health, education and safety and to invest in infrastructure. 

India has over the last decade created a pretty reasonable power, telecom and roads infrastructure and slowly the ports infrastructure is getting better but a lot more capital is required there. Lack of land availability and poor contracts and poor government support is still a huge issue. Railways is a big bottleneck and the cheapest form of transport is hugely under- utilised compared to its potential. The railway infrastructure (tracks / signalling etc) has to be delinked from the service and private enterprise needs to be brought here to create some competition and dynamism. 

India is still a banking (as opposed to debt market) driven market and a majority of the banking sector is still dominated by PSU banks who do a terrible job of lending. They need to be privatised. 

The real cost of capital is still very high in India due to among other things the crowding out effect of government borrowings and the lack of openness to FDI for the debt markets. 

It is my strong belief that if the GST and income taxes were simple to administer with lower rates and the government got out of business of all kinds, it would create surplus which could be used to fund the social safety , educational and health programs and infrastructure that are needed. 

To be continued….Final article: summary and specific 10 point agenda to get India back to a structural 8% growth link to final article in series

Labour reforms are not just about rules of hiring and firing. Probably because agricultural and early industrial societies required only base labour and capital was the constraint only base labour was considered as a factor. To get into the right mindset, we need to now think broadly about human capital management policies ! 

From an entrepreneur’s perspectives, What is required is :
A) Healthy
B) Appropriately trained and educated workforce.
C) With no restriction on tenure or pricing of contracts (within a set of minimum health, safety and minimum wage rules)  D) Easy exit rules in case of ups and downs in business which is a special case of (c) above. 

Therefore the HR agenda is very clear.
1) Invest in universal affordable primary health and dissemination of health insurance – ideally again using market based mechanisms such as vouchers for insurance and vouchers for primary health access. Globally, government provided healthcare has proven to be suboptimal. The swachh Bharat initiative will also ensure that lack of hygiene which is a big cause of poor primary health is mitigated. The other benefit of universally accessible clean public toilets would be a significant improvement in tourism and its accompanying economic benefits and employment.

2) India has the largest number of government run schools in the world with over 1 million schools but the outcomes are pathetic. The old socialistic mindset has ensured that education remains not for profit and therefore all players skirt at the edge of legality by setting up a web of service companies to take the profits out. However, genuine entrepreneurs don’t want to skirt around the law and therefore the sector has largely been captured by rent seekers who can bend the law. This law needs to go and education should be opened up to the private sector for profit. To get the outcome of universal and decent quality primary education as well as vocational training, globally well proven market based mechanisms such as vouchers should be used. 

3) Labour reforms to allow full flexibility of hiring and firing. But this then necessitates the need for a social safety net for the losers. 

While in India, it’s a concurrent subject which requires states to be on board as well, the right conditions and incentives have to be provided for the states to help themselves. 

To be continued….Next article: how to unleash capital in the service of Indian growth link to next article

China is on track to become the largest economy in the world on the back of massive industrialisation and movement of agricultural labour to factory workers to become the factory for the world. While India remains stubbornly rural with close to 50% of the population still dependent of agriculture. 

The zamindari abolition (redistribution of land to the tillers from absentee landlords) remains an unfinished agenda. The unfinished agenda report has been gathering dust for a decade being “studied” by the Indian bureaucracy. More than 10 million people remain landless labourers and sharecroppers. However, even if the redistribution (which is a state subject) were to be expedited, it is not going to be transformative. The increase in population and therefore fragmentation of holdings has led to a situation where an average farmer has less than 2 acres of land. This is a fraction of the minimum viable size to invest in mechanisation and has ensured that Indian agricultural remains one of the poorest in terms of yields (a third lower than the global average and just a quarter of the best of breed German farms for wheat for instance) and remains subsistence level. 

Because titles are not proper, possession remain 9/10th of the law and that hinders the movement of labour to cities and industries. Restriction of who can own agricultural land (in most states, its a hereditary right and non agriculturists and corporates can’t own agricultural land) has ensured that modern methods can’t be applied and yields and therefore surplus remains low. 

What is really required is easy availability of land to set up industries. Given fragmented holdings, it is very difficult for land to be aggregated by the private sector. I had visited a industrial cluster in China along with one of the companies on whose board I was. The local government official offered us ready build factory shed and a hostel for workers and said that if we wanted , we could start the NEXT day. This is the competition! 

However, the China , US rivalry is now structural and long term and global supply chains are looking for a new home as an alternative to China. But the beneficiaries so far have been the south East Asian countries. We need a massive push into creating land banks and single window clearance and not the typical Indian bureaucratic red tape. Otherwise, we are soon going to be hit with a demographic discount with armies of unemployed young people and the accompanying social strife (a part of which we are seeing on the streets already!). 

To be continued….Next article: criticality of labour reforms link to next article

Free markets allow for everyone to have access to all factors of production equally, for prices to be determined fairly and for anyone to have the ability to enter and exit any business. 

Free markets have a very bad press in the liberal left media. Paraphrasing Winston Churchill’s famous quote on democracy “free markets is the worst form of economic system except the rest”… They are associated with the wild west , robber barons, monopolistic oligarchs and high level of inequality, among other evils. Nothing could be further from the truth. These are all situations of jungle raj (might is right) and not rule of law. Let’s take each one of them and prove that they were not free markets. If readers are to take away one thing for. This article , it should be that.

The west west was not a free market because coercion and violence was used by the settlers to acquire land (which in an agrarian society was the main factor of production). So a critical determinant of free markets (prices to be determined fairly) was never met.

In our previous article , we have discussed why the Russian Oligarch system and the Chinese guanxi systems are not free market systems but system where the markets have been skewed in favour of a few who have captured the rule making / rule enforcing systems. 

The robber barons era in the US, when the industrial revolution was at its peak, was akin to the current monopolistic power that some tech companies such as Facebook and google are enjoying. Monopolies are coercive with customers and also the barrier to entry becomes very high. The robber baron era led to strong anti monopolistic regulations, which unfortunately large companies continue to try and skirt. 

Eternal vigilance to ensure that monopolies do not get created is the price to be paid to ensure that the principles of free markets (easy entry/exit and no coercion) are protected. Letting Free markets without any coercion are the polar opposite of jungle raj where power determines outcomes. 
powerful monopolies like Facebook buy WhatsApp and Instagram is a failure of these higher level principles.

While admittedly, there is a fudge involved in government interventions to prevent monopolies, and extremist free market theorists are against it, I believe it supports the higher principles but again eternal vigilance is required to ensure that the monopoly busters are not misusing their power (which is highly likely in the Indian bureaucracy). Like all practical things, balance is required. 

The Indian bureaucracy has a deep rooted suspicion of free markets and a deep seated socialist mindset. As a bureaucrat friend reminded me – the Indian politician is the body but the bureaucracy is the soul and the soul is indestructible !!

India is going through a cyclical slowdown. However, the creeping bureaucracy and command and control license raj creeping back in over the last few years (including the much discredited but strangely back in fashion price controls) and deep rooted suspicion of entrepreneurs is creating a structural slowdown as well. We should not waste this crisis and really exorcise this socialist “soul”out of the body of this country. 

This vicious cycle can be broken by simple and stable rules with little leeway for discretion or exceptions. India has to learn from the success of India’s biggest global success stories – IT and Pharma, where companies grew and were left alone to face market forces without government intervention. 

To be continued….Next article: how to leverage Indian entrepreneurial culture in nation building link to next article

A stable, fair and transparent rule of law allows for 2 very important things :

1) No coercion of any sort and 2) Contracts can be enforced. 

Let’s take the latter first. If contracts can be easily and timely enforced, it creates a high trust society, which increases efficiency all around. In the absence of ability to quickly and cheaply enforce contracts , societies rely on family and clans and their social enforcement mechanism like ostracism, which by definition reduces the talent and partners pool and therefore the size and output of the enterprise. 

If entrepreneur 1 has setup a b2b business – supplying to entrepreneur 2 under a contract and entrepreneur 2 refuses to honour the contract for whatever reasons, entrepreneur 1’s business is impaired and if it takes years for restitution, many such businesses will not even start reducing the overall output. Therefore countries in which the legal system is slow, complex (like in India) and consequently expensive lose out by having a less thriving economy. 

Ability to function without coercion is equally if not more important. Coercion of any kind , including misusing monopolist power, anti competitive employment contracts, coercive unionisation etc act as sand in the gears of a well functioning economic system. The purpose of “rules” is to ensure that there is a level playing field and coercion is not possible. I have personally seen very closely a situation where a powerful competitor used the threat of a series of frivolous legal cases (which would involve high cost and time to defend which the startup could not afford) to effectively shut down a startup competitor- a situation which would not have been possible in a place with quick justice. 

Stability and transparency in the “rules” is important to ensure fair play and long range planning which are needed to build complex economic machines by entrepreneurs.

If rules are not fair ; ie, if the rule making system is captured by vested interests, you get Russia’s oligarchs who capture a disproportionate share of the economy but are themselves subject to sudden seizures and changes in fortune. 

If the local governments apply the rules whimsically and where the courts are suborned to the executive and not independent, then you get the “guanxi” (personal connection) driven economy of China – which is a milder version of the Russian oligarch situation where economic outcomes at the province level depend on guanxi and restitution is not through courts but through appealing to a higher power (the central government). In the absence of a fast and effective judiciary, rules can be applied whimsically by local authorities without any fear of being called out in the short term and therefore it increases friction and one of the critical success factors for entrepreneurs becomes guanxi and not necessarily the strength of their ideas and execution. 

If the government itself does not honour fairly entered contracts (for example state governments choosing to default on their commitments to buy renewable power at premium prices or disputing and delaying regular payments ), it greatly reduces their credibility all around and only entrepreneurs with guanxi (who have the confidence to “manage” the system ) thrive in such an environment. 

There is therefore a very high correlation between rule of law and economic activity and therefore prosperity. It is the foundation on which economic systems are build.

More than any other policy, judicial reforms to make justice quick and efficient would be the biggest contributor to the Indian economy. Simple and stable rules with little leeway for discretion or exceptions is a related and equally important mindset shift. 

To be continued..Next article: free markets and confusions relating to it link to next article