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In my last column, I spoke on the need for an “in-the-trenches” mentality towards fostering further reforms in the Indian economy. This reflects the fact that the easier, or first phase, of mostly macro reforms are over and growth rates of 8% plus can only be engineered if more clusters, or sectors reach a critical mass — enough to begin having an impact on the entire economy. Obvious examples of such successful sectors are IT/ITeS, pharma, automotive, financial services, telecom, etc.

There is one interesting similarity between all these fast growing sectors: government activity in these sectors — defined by either government monopoly, or significant dependence on government for regulations — was either non-existent, has been severely reduced, or removed altogether.

Take the automotive sector where the government protected the Indian car industry for fear of overseas companies swamping domestic ones, and the fear of using precious forex on luxury goods imports. With the reduction of import tariffs and the entry of foreign manufacturers, the Indian automobile sector has benefited in several ways. Consumers now have a veritable feast of models to choose from. And foreign car manufacturers are realising that India can be a manufacturing hub for Asia and Europe. In addition, in a perfect illustration of the law of unintended consequences, auto component exports have taken off. This will also lead to higher demand for steel, aluminum, carbon black, rubber, glass and a host of other tertiary products. In hindsight, this reflects the short-sightedness of the “command and control” type of economy where politicians and bureaucrats arrogated the right to take decisions on capital allocation in the oftentimes misplaced understanding of the national good.

Telecom is another perfect example. Until the whole WLL/CDMA imbroglio was continuing, telecom companies were operating in a highly government dependent sector and could not aggressively go after customer acquisition and improving their service offering. Once the government decided to open up the sector, regulatory uncertainty was removed and the entire sector began an explosive phase of growth. Mobile connections now outnumber fixed line connections. In a matter of just a few years, private cellular companies have added more lines than the government added in 50 years of monopolistic services through MTNL and BSNL.

Take the case of financial services. In mutual funds, UTI is now one of several large companies and the sector is growing at over 20% a year. In insurance, where we still have FDI restrictions, the sector is growing at almost 100% a year and we have only begun to scratch the surface yet. Consumer finance, led by ICICI and HDFC, is also taking off.

• Growth rate of 8% possible only if more clusters reach a critical mass
• Politicians and policymakers should reform individual sectors quickly

In all these sectors, there are other similarities. Post opening up, each of the sectors witnessed a brief period of turbulence (longer in case of telecom) while the market and competitors settled down to a period of intense competition. Second, each of these sectors is experiencing a period of explosive growth. Third, these sectors will also see a period of consolidation. Fourth, in all these sectors, erstwhile government monopolies are managing to hold their own after initial fears to the contrary. Fifth, as market activity takes over and deepens, the government will inevitably privatise their owned monopolies, either through the capital markets or strategic sales. Sixth, while government companies are managing to compete, growth is being driven by aggressive private competitors.

The message, therefore, is clear. One way of fostering faster consumer-led, competition-driven growth is for the government to get out of as many sectors as possible, and to do it fast. This could be achieved either by the government opening up their monopoly areas for greater competition, or by removing their heavy regulatory hand. Among the sectors which come immediately to mind for the former are airlines and airports, railways, fertilisers, pensions, property and casualty insurance, public distribution systems and defence equipment. Sectors in the latter category, in which I would include restrictions on competition through FDI limits, are infrastructure, power, airports, granting of mining leases, real estate, retail, banking, etc. The evidence is clear and growing (rapidly) by the day. Policymakers and political parties should pay heed—reform individual sectors and do it quickly. Let private enterprise lead.

Source: The Financial Express