‘Contract enforcement, speedy resolution key to boost mfg competitiveness in India’

Laveesh Bhandari is President and a Senior Fellow at the Centre for Social and Economic Progress. He has taught economics at Boston University and IIT Delhi and worked at the National Council of Applied Economic Research, New Delhi. He has built, seeded, and exited from three companies in the research, analytics, and digital domains. Bizz Buzz spoke to him over a variety of issues

Think tanks reportedly play a major role in moulding the Modi government’s policy and decision making. Is this correct?

There are many different kinds of think tanks, some are more oriented towards policy, others on security, some on socio-economic issues, yet others on governance and administration. Some are highly specialized in what they do while others may take a wider perspective. And, of course, the form of engagement and the expectations differ. But in a general sense, it seems to me that the government has been engaging more and more with think tanks and that engagement is more to better understand the options before it, than molding decision-making itself.

You have done work for the Economic Advisory Council to the Prime Minister (EAC-PM). What has been your experience?

I have worked closely with members of the EAC PM in the past on specific issues, though of course, I haven’t been a member of the council. From my arms-length vantage, the EAC PM is essentially about sharing deeper longer-term issues with the PM and his office. Separated from the daily pressures of implementation and economic policy making the council has the space to look into issues that have a much wider and longer span. The EAC-PM fills that role, through a mechanism that is otherwise not possible within the government.

Was your work paid heed to?

I have been given a fair hearing for sure. But I wouldn’t be able to tell whether it is the work presented to the EAC PM or others’ work or ideas emanating from within the government or a combination of all of these that eventually led to specific policies. Policymaking is a complex process and as researchers, our key role is to inform and, on that account, I am satisfied.

Is the post-Covid recovery V-shaped or K-shaped? Or is the truth lies somewhere between?

These are flawed terms and they oversimplify a process and hide the important issues in the process. The fact is, the post-Covid recovery has been far superior to what most people had expected. Economic activity has picked up rapidly and inflation has been fairly under check. Our macroeconomic management has been good, and not just within the ministries; the RBI too has done a fairly good job of being able to maintain stability and not squeeze growth. At the same time, there are worrisome challenges related to growth not being able to throw up employment opportunities, especially for the uneducated, tax revenues have picked up but have stagnated as a share of GDP for more than a decade.

The government is doing a lot to boost manufacturing, from the Make in India initiative to production-linked incentives (PLIs), but neither industrial growth nor foreign direct investment (FDI) is going up substantively. Why?

There have been some movements, but overall this is one of the most important questions we need to ask ourselves. But why focus on recent policies? The post-1991 reforms were intended to bring in competition and lead to increased competitiveness. For all the benefits of the 1991 reforms, it is also true that manufacturing competitiveness just did not play out the way we intended. We continue to blame licensing, and protection, and overvalued exchange rates, inspector raj, large role of public sector, lack of SEZs, poor performance in ease of doing business, and some also put it to cultural factors.

PLIs and Make in India need to be seen in that context. Manufacturing, in general, is seen to be far more difficult, riskier, and less profitable than many services in India.

I think we need some serious research on this matter of competitiveness, the seeming unwillingness or hesitation of industry to embrace or invest in R&D, the missing competitive forces that would have forced firms to innovate, etc. I myself don’t believe it is merely about the high cost of production or taxation as many in industry associations claim. My guess is it has more to do with weaknesses in contract enforcement and the inability to depend on the courts for a speedy resolution that is getting in the way of industry leaders bringing in expertise and technology so critical for competitiveness. But that is simply a guess; we definitely need some serious hard-nosed economic research here.

The second term of the Modi government has seen a predilection for reforms. Privatization, for instance, has restarted. Could the raft of oncoming elections hurt the prospects of reforms?

I wouldn’t know. But I can say, reforms are not just about making an announcement, they are also about helping guide the changes and actions in the right direction after the announcement. Therefore, what we call reform is more about implementation within a complex political-economic setting. So, it is natural for reforms to slow down around elections. Having said that, I also believe that this is not true always, some reforms such as those related to DBT, MGNREGA etc. can also occur at this time and we have history to prove it.

What kind of impact can one expect from PM Modi’s high-profile state visit to the US?

The visit needs to be seen in a larger context of steadily improving relations between the two countries over many years. Also, the fact that despite playing so close to the USA, India has retained its independence on many issues has been an important marker. US policymakers are not used to such independence among their allies (especially related to Russia). It goes to their credit for being so flexible, and of course ours as well. But more importantly, I see closer interactions leading to greater openness in the transfer of critical technologies, some movement in climate finance, and therefore access to funding for green causes.

What I don’t expect to see much movement in the near future is much trade in agricultural produce, and any loosening on the visa front. Both these, I believe, could bring in great economic benefits for India.