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Reforms: Clear the Clutter

September 16, 2013 in Economics

By Swaminathan S. Anklesaria Aiyar

Swaminathan S. Anklesaria Aiyar

Economic reforms should be clear and simple, not cluttered with endless terms and conditions. This has long been forgotten by the UPA government, which tries desperately to ensure that any change satisfies several vote banks simultaneously, supposedly to ensure inclusion. This approach clutters even the most desirable changes (like the land acquisition bill) with loads of conditions, delays and red tape. A refreshing contrast comes from the new banking reforms of Raghuram Rajan, the new RBI Governor. He has decreed that any bank can now open a new branch without RBI clearance. Earlier, the RBI viewed every new bank branch as a special dispensation, to be approved only after long scrutiny. Indeed, the RBI once wanted to approve even individual ATMs, viewing these as bank branches of a sort! Rajan has jettisoned the approach of everything being forbidden till approved. By freeing banks to expand as required, subject only to the usual rules, he has produced clean, uncluttered liberalization.

The UPA government shows no interest in raising productivity or competition, and focuses instead on a clutter of conditions, quotas and permits to woo sundry vote banks.”

Contrast this with the cluttered approach of Anand Sharma, supposedly one of the most market-friendly ministers in the Cabinet. He championed, and won Parliament’s approval, for 51% foreign direct investment in multibrand retail. He also got Cabinet approval for 100% FDI in single brand retail. He thought this should impress all foreign investors. In fact, one year after the supposedly revolutionary new multibrand policy, not a single dollar of FDI has yet come in (though Ikea and some others will hopefully come in soon).

The distinction the government makes between single brand retail and multi-brand retail does not exist in other countries. It has no business logic, and simply tries to buy off the vote bank of small shopkeepers. If FDI in retail is a good thing, it should be allowed without clutter. If it is a bad thing, it should be banned. Sharma justified the cluttering of FDI as an India-specific model. That’s precisely the problem: India specialises in clutter that more sensible countries avoid.

Sharma obliged foreign investors in multi-brand retail to source at least 30% of their products from small companies with less than $2million of fixed investment, and to invest at least half their initial investment in back-end infrastructure. This raised so many possible complications …read more

Source: OP-EDS

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