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November 12, 2014

"Incremental reforms will push up growth, but fail the youth": Former Chief Economic Adviser Shankar Acharya

Writing in Business Standard, former chief economic adviser to the government Shankar Acharya has evaluated the notable economic and financial developments during the first six months of Modi Sarkaar. Extracts:
Both the July Budget and subsequent developments have made plain this government's aversion to attempting "big bang reforms" through legislative amendments to populist entitlement laws (rural employment, food security, education), the onerous new land acquisition act, the Indira Gandhi vintage, job-destroying central labour laws or even the notorious, retrospective "Vodafone amendment". However, since the disappointing July Budget, clear signs of a pragmatic, incremental approach to policy improvements have emerged.
...Will incrementalism work? That's the big question. As Zhou Enlai reportedly said about the success of the French Revolution, it's too early to tell. One has also to ask whether there really is an alternative? The so-called "big bang reforms" of the early 1990s relied more on administrative measures (within the framework of extant legal authority) than on legislative changes. The latter are always more challenging for a government, especially when the ruling party is far short of a majority in the Rajya Sabha. One can also take hope from Mr Jaitley's recent reported statements that where legislative amendments are deemed essential (as perhaps in the case of the land acquisition act), they will be vigorously pursued.
My guess is that this multi-strand, incrementalist approach could achieve quite a lot. Economic growth may rise from 5-5.5 per cent this year to 6-6.5 per cent in 2015-16 and perhaps cross seven per cent by 2016-17. But such improvement will not yield the pace of job creation that the "youth bulge" requires. For that we need a more urgent and focused dismantling of constraints to labour-intensive manufacturing, whether they be labour laws, infrastructure deficiencies, foreign trade restrictions or skill shortages.
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