‘Reforms’ seems to be the buzz word these days in talking about addressing long standing challenges to the Pakistani economy, but what exactly does this mean? It is all very well to be talking in generic terms about the urgent need for third generation reforms in Pakistan, but such statements only confuse policy makers or leaders alike and add little clarity on what truly is required or should be done. Along with others, I also have been urging respective government to immediately undertake some necessary reforms instead of sweeping things under the carpet and now with this new but rookie leadership about to be sworn in, this could be the chance to walk the talk of their election rhetoric. Having said this, one does at the same time realize that explaining a comprehensive reforms’ draft can both be technically difficult and rather complex. So for simplicity’s sake and for the ease of understanding of an average reader, I thought that perhaps a good way to present the endless possibilities on reforms would be by quoting as examples of some landmark reforms that have recently been (successfully) undertaken by our neighbor, India. And also on how these reforms there have already started to make a significant difference to the lives of common men. While one can blame the Modi government on many fronts like intolerance, blatant breach of human rights, stoking regional instability, aiding terrorism at home and abroad, genocide of minorities to naked lynching in the name of religion, but one must concede that when it comes to the Indian economy, it has taken some bold decisions on de-monetization, documentation of the economy per se and in ringing some innovative structural reforms, which are already beginning to pay off – the fruits naturally manifesting themselves in the consistently growing electoral strength of the BJP. These structural reforms unleashed by India in the last two to three years have been aimed at providing jobs to a gush of young Indians entering the job market every year and more importantly, at making the resultant economy more equitable, thereby allowing average Indians (or at least the average Hindus) to lead a better life.
So, coming directly to the point, what exactly have they done? Answer: The following: Dismantling of Foreign Investment Promotion Board (FIPB) of India and easing rules on foreign investment to open up the economy – it was done as early as 2015 in their current tenure. This streamlining of a rule based FDI (Foreign Direct Investment) regime is in-turn inspiring confidence in the Indian markets as the FDI touched $60billion in 2017, up nearly 100% over 2014 figures. To achieve this, we saw three main steps taken by the Mr. Modi government: 1) A completely new system on the general sales tax (GST) was introduced that discourages evaders, encourages national harmonization and consciously avoids a culture of coercive oversight. Further, the endeavor with managing the subject of Sales Tax in India has not ended and is being treated by the government as an on-going project. Latest global data on such a tax (known alternatively as the value added tax) suggests that as the global competition heats up and protectionism becomes ripe, more and more governments are reducing the rate of this tax, because this levy, if not rightly priced, can in-effect be counter productive by stoking un-competitiveness amongst domestic manufacturing/industry. Recent examples are numerous where developing countries have re-visited the national rate of this tax and have reduced it significantly: South Korea to 9%, Japan 8%, Thailand 7%, Malaysia 7% & Nigeria 5%. The Indian government has already announced that it will also be rationalizing this tax’s rate in the upcoming budget or even earlier, if necessary; 2) Demonetization of the economy per se where cash transactions are being actively discouraged; and 3) Facilitating an e-commerce and e-banking culture by resorting to maximum possible digital payments on a mandatory basis. These are steps that have been game changing efforts to formalize the Indian economy. With these the transactions that were taking place outside of the tax net and in the informal sector have been brought into the formal sector. In the long term, formalization will mean that, a) tax collections will go up to place more resources at the state’s disposal, b) the sheer size of the GDP will enhance, and c) citizens will be able to establish credit more effectively as their transaction records get more and more digitized.
Indian economy is a place where the government still extensively involves itself in large direct cash dole outs for poverty alleviation or kitchen-support, and where a lot of business is done through licenses and quota allocations. The JAM (Jan Dhan-Aadhaar-Mobile) initiative has been technologically upgraded and better funded and now through the Jam trinity, the government is dispensing an unprecedented level of Direct Benefit Transfer (DBT) with significantly reduced leakages. Just in 3 years, benefits amounting to IRS 1.75 lakh crore were transferred directly to beneficiaries, in-turn weeding out many ghost and fake beneficiaries and cutting out the traditional middlemen. On the latter point, policy making in ministries has been made strictly rule-based: All licenses, e.g. coal, spectrum, UDAN routes, etc., can now only be allocated through transparent auctions. The much-awaited (by Indian businesses) legislations on the Bankruptcy Code and an Alternative Assets Industry are now in place. Thus capital can be efficiently reallocated from unviable industries to newer, faster growing industries.
Freeing up or opening the Indian economy has also yielded other visionary breakthroughs. In that, one suddenly finds India at the forefront of innovations. Just in 2016-17, there were more than 400 new startups from student hostel rooms mainly from IIT (Indian Institute of Technology) campuses. The development is being linked to the Atal Innovation Mission, which is busy creating innovation centers in more than 1,000 campuses, enabling creation of fresh or new incubation centers. In addition, the Mudra program and the IAF (India Aspiration Fund) provide the necessary capital to transition these inventions into actual start-ups. Research tells us that “entirely” new industries or industrious ventures are the ones that carry the optimum potential for creation of new jobs and that these also comparatively incur faster economic growth.
Last but not least, we find that India is well on course to achieve 100% village electrification by the end of 2018 with the number of villages remaining to be electrified having been reduced to only 4,941 from 18,452 in 2014. As the new generation and market economy based structural reforms unleashed by the Modi Sarkar take root in the Indian economy, they endeavor to balance a better life for average Indians where they can now look forward to a basic safety net guaranteeing food, electricity, some form of employment, housing, a bank account, toilet, gas-based cooking, insurance coverage, micro-loans, and an infrastructure that helps ease doing business in India. Also, due to this the very cost of doing business in the Indian economy is fast decreasing, giving the Indian businesses an edge on their regional competitors. In a buoyant Indian economy the economic activity is growing exponentially and just to use as a yardstick, we see that in the FY 2016-17 alone, more than 160 million passengers in India flew from one place to another (an increase of 60% in less than 3 years), simply because these third generation reforms have been able reduce the cost of long-distance air travel (essential to connectivity within & without) in India to a paltry IRS5/km, ironically lower than even the auto-rickshaw fares in New Delhi!
The writer is an entrepreneur and economic analyst.