McKinsey's 8-point reform plan for India

Global consultant McKinsey has come out with an 8-point reform agenda for India in politically difficult areas like labour, privatisation and opening up of retail sector to achieve an higher 8-10 per cent economic growth.

In its latest quarterly journal, McKinsey also identified three major steps to stimulate domestic demand, crucial for high growth -- to keep interest rates regionally competitive, introduction of VAT in all states and reducing burgeoning deficits of states.

Having picked the "low hanging fruits" since economic liberalisation started in 1991, the global consultant said it was time the government resolved to deregulate politically sensitive sectors like retailing, banking, the news media and defence.

Exposing the retailing sector to world-class scale, skills, technology and capital would not lead to greater unemployment as feared and instead it would lead to more jobs besides benefiting consumers from better quality, it said

McKinsey said government was giving priority to attract investment in infrastructure to upgrade ports, telecommunications and highways, but several important areas like power, water and sewerage, railways, and airports remain troublesome partly because "intransigent" state governments often block progress.

On labour reforms, it said that to increase exports of manufactured goods rapidly, the government must permit the free use of contract labour for all work and repeal a law forcing companies with more than 100 workers to obtain state approval before cutting jobs.

In tandem, McKinsey said India's labour benefits should be extended to all workers, not just those in the organised sector. Reform legislation should also consider establishing safety nets and policies that ease the retraining of workers.

"Simplifying labour laws could unleash unprecedented levels of foreign direct investment and foster brisk growth in light-manufacturing industries like toys, leather, shoes, textiles and apparel, where India's cost advantage and skilled workforce should help it become a strong global presence," it said.

On privatisation, McKinsey said in India as in other countries, selling state assets was controversial, but the government must build on its success in privatising Indian petrochemicals, Hindustan Zinc, Bharat Aluminium and VSNL.

To manage political opposition, the government might consider creating a trust or special purpose vehicle to act as a holding entity, much as Singapore's Tamasek does.

After the assets have been transferred, the holding company could be taken public, effectively diluting the states share in the companies without privatising them and releasing them from statutes applying to the public sector.

"As long as these companies, representing 60 per cent of the country's capital stock, remain in the state's hands, their full potential will not be realised, it said adding proceeds from the sales could also be used to bring down the public deficit.

Dwelling on land reforms, it said one the greatest problems plaguing India today was confusion over land titles because of high stamp duties. 

On urban renewal, McKinsey said the Centre has budgeted an initial $1 billion to finance its National Urban Renewal Mission, but states must also do their part.

It suggested that states increase usage charges such as property taxes, water and sewerage fees, improve collection rates for fees and taxes, enhance efficiency of municipal corporations, and make better use of assets in and around cities.

Pointing out at Mumbai where terrible flooding recently underscored the need for quick progress, the global consultant estimated that the state could immediately finance about $10 billion in infrastructure improvement through measures such as reforming the property tax regime and improving collections from their current minimal levels.

Public investments of this kind could attract an additional $40 billion in private funding, it said adding these investments could greatly improve the quality of life for Mumbai's population.

In the field of asset recovery, it said the government must continue to expedite the recovery of assets from bankrupt companies.

To address the new market realities and to sustain the economy's long-term  health, it should bolster measures that help lenders recover dishonored checks and assets from indebted companies.

In particular, the government should clarify the mandate of the asset reconstruction company of India, established recently by a consortium of banks, by giving the company a more active role in debt restructuring and recovery. Foreign institutions must also be allowed to invest in such ventures.

Moreover, the government should encourage the sale of non-performing loans by allowing foreign banks to purchase them and by making these transactions exempt from stamp duty, Mckinsey said. The global consultant also called for enforcing measures to protect intellectual property.

Observing that the evolution of knowledge sectors such as pharmaceuticals, biotech, and IT services has been phenomenal, it said the government should enforce IP protection measures effectively and expeditiously to sustain the country's cultural, scientific, and technological development.

To improve the protection of IP, India should also align its patent regime with global standards in order to prevent the sharing of proprietary information in areas such as data exclusivity and to improve the overall capacity and quality of the infrastructure and resources in the country's patent offices.