The virus crisis is an opportunity for India to finally reform its economy

NEW DELHI: An impending economic crisis triggered by the coronavirus pandemic is an opportunity for India to enact sweeping reforms to fix crisis sectors and attract more foreign investment to the country.

That is a call made by a former central banker and a former government official, as well as by financial market participants, who say India needs to liberalize and deepen its financial markets, and take political steps to fix the banking and agricultural sectors.

There are early indications that this is already happening, with the central bank giving foreign investors greater access to their sovereign bonds, allowing local banks to take advantage of currency markets and companies with a selection of more complex hedging tools. .

India faces its biggest crisis in decades, with a three-week blockade in a nation of 1.3 billion people that is likely to cause an economic recession, millions of job losses and possible hunger among the poor.

India is said to only reform in crisis, Raghuram Rajan, the former governor of the Reserve Bank of India (RBI), wrote in a LinkedIn post this week. Fortunately, this unmitigated tragedy will help us see how weakened we have become as a society and will focus our policy on the critical health and economic reforms we so desperately need.

India has a history of taking reform measures during periods of crisis. For example, in 1991-92, it freed the private sector from a myriad of government controls, deregulated financial markets, reduced import tariffs, and opened the economy to increased foreign investment to avoid a balance of payments crisis.

Chronology of crisis-induced reforms:

* 1991-92: With the economy on the brink of a balance of payments crisis, the government then lowered import tariffs and abolished industrial licenses to encourage competition. A stock market scam during that period led to the formation of the capital market regulator: the Securities and Exchange Board of India (Sebi).

* 1997-98: Economic sanctions following India's nuclear weapons tests and the Asian financial crisis led to the large-scale divestment of state assets for revenue.

* 2014: After the Federal Reserve tantrum, authorities began working on an inflation targeting regime for the central bank and an asset quality review that made disclosure of India's bad loans more transparent.

Prime Minister Narendra Modi has championed a number of reforms since he first came to power in 2014, including the introduction of a nationwide sales tax and insolvency law, the reduction of corporate tax rates, and the start of the largest sale of state assets. At the same time, it raised import tariffs and pulled out of trade deals, slowing progress.

With public finances stretched and likely to worsen amid the shutdown, fiscal policies also need a review, said Arvind Subramanian, a former chief economic adviser to the finance ministry. The government had projected a budget deficit of 3.5% of gross domestic product (GDP) in the year until March 2021, but some estimate that it could reach up to 6.2%.

The focus on unattainable objectives, the fact that the Fiscal Responsibility and Budget Management Law has been respected only in non-compliance and the consequences in terms of budget integrity and transparency need serious revision, including revision, in our opinion, he wrote in a local. Newspaper together with Devesh Kapoor.

For many analysts, the latest moves to open the Indian bond market and allow banks to trade foreign currencies abroad were unthinkable a few years ago given India's deep mistrust of debt capital and its inability to recognize even the existence of a foreign exchange market trading the rupee.

But more needs to be done to attract long-term foreign capital to close the internal savings-investment gap, according to Sonal Varma, ex-Japan head of Asia economics at Nomura Holdings Inc.

In the current context, the biggest challenge facing India is the shortage of growth capital, he said. India has historically bitten the bullet in times of crisis.