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As the new government takes office, it is time to reflect on some of the most critical areas that need attention to boost the investment and business climate in India. While structural reforms around land acquisition and labour laws remain on the top of the agenda, the new government would do well to focus on implementing incremental policy changes and addressing gaps in the various sectors that would significantly boost the investment climate.
Incremental reforms refer to a slew of smaller steps that help facilitate investment into the critical areas of financial services, energy, transportation and real estate amongst others.
In an economy of the size, diversity and complexity of India, facilitating change through incremental steps has a significant role to play. Smaller steps will allow the government to gauge the effect of policy changes through a feedback mechanism, which in turn will assist the government in improving and altering the policy, when required, in the right direction. Changes and tweaks to policy in India will have a significant multiplier effect in an economy of the size of India. True that comprehensive structural reforms have the advantage of being "big bang" events, but incremental policy changes can be game changers once their effect is viewed over an extended period. It is vital that incremental is not confused with "small".
The government must continue on the path of improvement for strategies that have yielded positive results over the last few years, like the transparent auction mechanism for renewable energy, newly introduced Infrastructure Investment Trust (InvIT) mechanism for fundraising, and auctions to monetise infrastructure assets. These innovative and successful policy changes must continue, and more importantly, the learnings from these must be applied to other sectors.
For instance, can the government bring further clarity around auction rules, revenue sharing, and asset sales to help India boost energy exploration in India, especially in the light of India's increasing dependence on Petroleum, Oil and Lubricant (POL) imports? Could the first Toll-Operate-Transfer (TOT) highway auction conducted by the NHAI lay a template to boost infrastructure fundraising in other sectors for the government? These are questions worth pondering over by the government.
The government needs to evaluate reasons that might be currently hindering the investment process. A slowdown in the investment process is not necessarily a problem if done for the right reasons. But, for instance, in sectors where a slowdown has been seen such as a series of auctions in renewable energy that did not find takers and the liquidity crisis that the NBFC sector is facing, there needs to be a reassessment of existing policy. But the aim must not be to just tide over the current issues but to create mechanisms that improve the system to reduce and eventually avoid the problem going forward.
In some cases, such as renewable energy, allowing market-pricing arrangements might be the solution, while in others such as lending markets, transparency might be the solution. Necessarily, adjustments in existing policies to eliminate bottlenecks must be a government objective to attract and boost investments.
Then, it is essential that as policy changes are implemented, the government has its eye on the "rear-view mirror", primarily, for an understanding of the impact of the policy change on the ecosystem and the related supply chains which are vital. Most policy changes, if not all, have winners and losers. It is crucial that the overall impact is positive, with the downside reduced significantly, and more importantly, a strategy addresses the stakeholders facing the downside.
Having an eye on the "rear-view mirror" also implies the need for the government to be mindful of the ripple effects that policy changes cause to ensure policy consistency. For instance, whether it is access to credit for businesses and individuals or rapid infrastructure creation, policy changes must try to remain as consistent with the overall objective as possible. If the government considers renewable energy development as a vital area that needs focus, then duties on solar module imports probably need a relook. Primarily, with limited resources, it is challenging to boost all areas. The government, thus, needs to push for policy changes that help boost areas with the maximum multiplier effect.
While large-scale structural reforms can transform economies, in an Indian context, incremental policy changes in the right direction have the potential to yield significant results. While speed is of the essence, speed must not be at the cost of precision. Therefore, gradual but well thought-out policy moves are the need of the hour. In the tortoise-hare story, India would do well to be the patient tortoise even as it dynamically transforms its economy.
(The views expressed are personal. Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. He is reachable at firstname.lastname@example.org or @Taponeel on Twitter)