In my last column, I wrote that the monetary, taxation and spending measures announced for reviving the economy were not adequate. To summarize, the government’s intention to spend is not enough. It must happen quickly and be spent efficiently. There must be a quick revamping so that efficient ministers and administrators are in charge of major expenditure programmes — like the National Highways Authorities of India, Rural Roads, National Rural Employment Guarantee scheme and Sarva Shiksha Abhiyan — to improve implementation. Lenders must resume lending. The government must institute a massive insurance programme to de-risk banks and lending institutions so that they resume lending with governmental guarantees against defaults. Housing, car and consumer-loan defaulters must be supported by the government through the lenders for a limited period until they revive. Excise duty reduction by 4 per cent could reduce some prices. But state governments must also sharply reduce registration costs for new properties for a limited period. India must enlarge its foreign exchange assets through borrowing maximum funds from multilateral institutions. The safety net for those laid off must be widened, with government guarantees of a portion of their last-drawn salaries, till they find other jobs. Blue-collar laid-off workers must be given special support.

The government has further cut the cash reserve ratio to improve liquidity, removed ceilings on external commercial borrowings, reduced interest rates, cut excise duties, will cut fuel prices further, and has added to the already massive expenditures proposed on infrastructure. All this is necessary, but how do you make people spend?

There is no change in administrative systems, procedures or people. There is no special scheme to reassure banks so that they resume lending. There is no action by state governments to reduce taxes or fees. We cannot expect any massive extra public expenditure in the near term for stimulating the economy. The government’s ambitious plans to spend massive amounts for infrastructure will remain bogged down in the procedural bottle-necks that have held up, for instance, the national roads programme under the United Progressive Alliance’s rule. Increasing public expenditure, through Keynesian means, does not have a chance of success because of the administrative morass that is development expenditure in India.

Removing limits on external borrowings is of theoretical value. For this to happen, there must be surplus funds overseas, foreign institutions confident enough to resume lending at all, interest costs must be lower than in India as they were early last year, and foreign lenders must have confidence in Indian companies to lend to them. That will depend on a global economic revival. The best guess seems to be that global revival is 18 months away. Hence, for India to benefit from external borrowing is to wait for 18 months.

Improved liquidity has not reached the banks and borrowers so far to any significant extent. It will remain scarce. One reason is the deficit in the balance of payments, which might increase as our major service exports get hit further. The Reserve Bank of India will have to continue selling dollars to prevent further erosion in the value of the rupee. Oil companies are still cash short. They will keep borrowing from banks on government bonds given in lieu of reimbursement of their below-cost sales of petroleum products. Others like the Food Corporation of India and fertilizer companies will also take away much of the extra liquidity.

Lower interest rates will benefit the bottom line of those who actually apply for and get loans. But banks are unlikely to increase lending when they are already refusing existing borrowers. Similarly, households in the income classes that use loans to buy houses and durable products, including cars, might well hold back from borrowing despite cheaper loans from banks, because of the general fear of a slowdown, possible loss of jobs and salary cuts, and the desire to have as much saved up funds as possible. Much new borrowing and spending activity will not take place merely because interest rates are lower.

What we have to avoid is defaults on old housing and consumer loans. These will crash the market far more than we have experienced so far. Manufacturers and housing providers will then find it even more difficult to raise money. Banks will lose confidence and further avoid lending to companies and households. A safety net for banks whose customers are losing jobs or defaulting because of the economic situation is an urgent necessity. Export units in goods and services will also need support, so that they can continue employment till export and domestic demand improve. Government guarantees for loans against their assets might be an answer that banks might accept.

The Administrative Reforms Commission must quickly cut through the procedural quicksand that our bureaucracy has created at the Centre and states and that has slowed down public investment as well as investment in public private partnerships. The government must ask the Supreme Court to immediately speed up environmental approvals now held up in the Supreme Court committees, so that large projects can get going.

Inefficient states like Karnataka or Maharashtra have allowed complex procedures, lack of accountability, interfering political families and poor planning to hold up project concepts and implementation. They must be told that they will lose Central funding altogether for these projects if they do not get moving immediately. The Centre should give them help in this speeding up.

We are still hankering for the volatile foreign institutional funds to come into our stock markets and take advantage of the exemption given them from short-term capital gains tax. Instead, this is a good time to gradually put an end to this special treatment for volatile funds that collapsed our stock markets and the rupee’s exchange value.

For the future, we must turn our backs on the old days of soft regulation following the Americans, respecting their high sophistication in financial regulation. The American system failed and we must make sure that ours does not. Regulators must play a much larger role in regulating financial products and practices than they have done. They should stop rating agencies being paid by clients. Instead, the regulator must pay for the ratings and raise fees from individual ratees. Quality standards must be laid down, monitored and enforced for rating agencies, who must be barred from earning anything else from clients rated by them. The regulator must review the quality and reliability of the ratings given by each agency.

We must close the door to easy entry by overseas banks and financial institutions. New financial products must be evaluated first by the regulator before a bank or other body is allowed to market them in India. Regulators must look for and eliminate off-balance-sheet items. In the financial world, securitization, credit default swaps, and such other practices must be subject to full disclosure of the components and their standing. Corporate books will close in March. Companies that borrowed overseas will show large hits because of the rupee decline. The Securities and Exchange Board of India must consider if it should get the Institute of Chartered Accountants to grant a one-time waiver for six months from marking all such liabilities to market. Of course, this is a fudge and should not be repeated. But it will avoid a flood of bad corporate results from further devastating the market.

The present package is insufficient to revive the economy. It ignores the hidden factors of confidence and expectations that need to be revived. We must urgently improve the ability of the administration to clear projects and allow them to be executed without hindrance.

The author is former director-general, National Council for Applied Economic Research