By K R Sudhaman
All is not well with the Indian economy, which is on a downslide, more pronounced after a grave economic blunder, demonetisation. The recently rolled out Goods and Services Tax is of course a game-changing indirect tax reforms move but the haste with which it has been implemented has pulled down the economy further, though temporarily. Multiplicity of GST rates has resulted in several teething problems and the desired increase in GDP growth by two percentage points is not going to happen in the short or medium term. Two percentage points increase in GDP would have happened rapidly if there had been a single or two-rates GST. The heavy taxes on petroleum products, which is out of GST, have added to the woes of the people as India had one of the highest petrol and diesel prices when they have been falling globally.
Demonetisation, which was intended to deal with the stock of black money, has not happened. Demonetisation is good economics in theory but in practice cannot be successful in an economy where there are so many imponderables. India is still an archaic cash economy with the informal sectors dominating small scale industries, agriculture and rural economy, accounting for 60 per cent of GDP. Also the prevailing tax system, imperfect with a plethora of exemptions including no tax on agriculture income, has resulted in generation of black money and cash, which at times is legitimate. The government talks of eliminating shell companies and black money stashed abroad, but what about the black money being generated within the system, which according to one global estimate, is around $650 billion? This black money is generated due to corruption right from a peon and police constable in Kanyakumari to the topmost functionary in the government. This can be eliminated only through political, electoral, administrative, bureaucratic and judicial reforms and that is not going to happen. Demonetisation can never eliminate this flow of black money because of vested interests for which the entire political class and bureaucracy are responsible. Prime Minister Narendra Modi might talk of stringent action to root out corruption like his predecessors but in reality no one is interested in ending this rent seeking. This has been the bane of Indian economy and is one of the reasons for the country having missed the bus several times to become a high growth economy on a sustained basis like China.
The government led by the Hindutva party, through its actions, has ensured India moved back to the Hindu rate of growth. The latest quarterly growth figures clearly indicate this trend. The old estimate of 4.7 per cent growth in 2013-14 was revised to 6.7 per cent GDP growth as per the new estimate. Going by that 5.7 per cent growth in the first quarter of 2017-18 as against 7.9 per cent in the first quarter of 2016-17 is certainly below 4 per cent GDP growth as per the old estimate and that means the economy has returned to the low growth rate cycle of the pre-economic reforms era. So the Modi government, despite tall claims to curbing black money, has neither been able to tackle stock nor flow. Of course, he has taken some feeble actions against some adversaries.
So the moot question is how does India move forward to put the economy back on rails and get back to high growth trajectory. Also high growth has to be inclusive, giving thrust to job creation to take advantage of the demographic dividend, which otherwise could become a ticking bomb.
There are 3-4 issues in which the government will have to concentrate to ensure that this declining trend is arrested. India is now a $2.2 trillion economy. It has to become at least $ 7-8 trillion economy overtaking Japan and Germany to become the third largest economy after United States and China. This means the economy has to grow on a sustained basis at around 9 per cent GDP annually for the next two decades like China. Also it has to be inclusive so that jobs are created at a rapid pace considering 65 per cent of the 1.3 billion people are below the age of 35. Money is not the issue for investment. It is now available in plenty globally but the question is how to kick-start the economy, which at the moment is not firing. Many foreign investors are waiting to invest as India, now at a bright spot, is the only country that offered investment opportunity.
A bullet train project costing Rs 1.08 lakh crore between Mumbai and Ahmedabad is not the answer. India should have high-speed trains but that should not be the priority at the moment. Instead the money should be spent first in creating rail freight corridors connecting four metros and two diagonals of Mumbai, Delhi, Kolkata and Chennai so that industrial clusters along the corridors can be developed. Small and medium industries with an investment of Rs one lakh each create at least one job each whereas it requires Rs 6 lakhs in capital intensive industries to create one job. This will also prevent migration to urban areas. Six freight corridors alone would have created many times more jobs all over the country than Mumbai-Ahmedabad bullet train with the same amount of investment on one bullet train. Also the industrial clusters around the freight corridors would spur construction activities all over the country, reviving the steel and cement industries that are in doldrums now. This would have incentivised more private investment, which is not forthcoming due to excess capacity. Bullet train might help Modi in the Gujarat elections next year, but is certainly not good economics at the present juncture. Bullet train will only help Japan revive its economy and certainly not India.
Opening up of multi-brand retail would have helped the economy much more and that is not happening because of the traders constituency in BJP. Despite aa bumper harvest, farmers are in distress, who account for 60 per cent of the population. In a year when the country has had good monsoon after two successive droughts, agriculture has grown by just 2 per cent. This explains the plight of farmers. Potato is sold at Rs 2 a kg by farmers, less than the cost, whereas it sells at over Rs 20 a kg in retail. Where does this Rs 18 go? Clearly into the pockets of middlemen. If multi-brand retail is opened, surely farmers would get Rs 4-5 a kg of potato and for consumers at Rs 12-14 a kg. So it’s a win-win for all. Also farmers do not have to take their produce to mandis as cold storage vans will go to their field and collect. Studies show nearly 70 per cent of sales in multi-brand chains are food products. So opening it up would create cold storage and hi-tech food processing clusters country-wide. This means more jobs. The fear of kirana shops is unfounded. At present retail is around a $500-billion industry, which will double to $1 trillion in the next 7-10 years if India grows at 8-9 per cent. So multi-brand retail will only take away the new opportunity and not the existing ones. The only thing that will happen is kirana shops will have to become more competitive and the scope for generating black money will get minimized. This perhaps is the reason that BJP, a party of traders, does not want multi-brand retail as it does not serve vested interests.
The third area where government has to act is direct tax reforms. All income including farm income beyond a threshold has to be brought into the tax net. All exemptions should go and rates needed to be lowered so that everybody earning beyond certain income pay the same tax so that there is no rent-seeking and corruption.
The government will have to immediately address the woes of power and banking sectors to incentivise infrastructure and industrial development. Banks have so much liquidity but lending can start only after cleaning up the balance sheet, which is in a mess due to the huge NPAs. The bankruptcy code will certainly help in putting the banking system back on rails. Good economics is bad politics. Prime Minister Modi seems to be good at politics and hence perhaps the corollary applies to the Indian economy. (IPA Service)