At a time when we were dreaming of becoming the world’s third largest economy we have been pushed down to the seventh spot from the fifth that we were occupying earlier. A tepid Union Budget has dampened market sentiment leading to a slump in the share market. Government statistics are being seriously questioned, with Government economists of the recent past questioning the very figures that they themselves had put in the public domain. External factors too are unfavourable; we have been caught in the cross-fire of the full-fledged trade war that has broken out between the world’s largest economies, the USA and China.
Additionally, our traditional trading partner, UK, is feeling the pangs of Brexit. Domestic sentiment is also subdued. The suicide of the CCD founder and his explosive suicide note has highlighted the difficulties faced by genuine entrepreneurs. The corporate world is now questioning the long rope given to tax authorities at a time when the Government is patting itself for easing taxation and business processes. On the other hand, GST is not yielding anticipated revenues and the functioning of the Insolvency and Bankruptcy Code has got mired in judicial and procedural quicksand. The path to economic salvation is not easy.
The panacea of revamping the economy by garnering foreign capital, prescribed by the hurriedly prepared Economic Survey 2019, may be wide off the mark. First, foreign investment is not easy to come by with foreigners being genuinely uncomfortable with our legal and taxation systems and everchanging Government policies. Second, deployment and repayment of large-scale foreign investment may have many unintended consequences. Our role model in this respect, China, has attracted foreign capital by creating a bubble for overseas investors with different tax laws and labour regulations, which may not be possible in our democratic set-up.
As we prepare to woo foreign investors, the difficulties faced by China, as foreign capital leaves its shores, should also be kept in mind. The antidote to the slowdown in our economy can be found closer home. A cache of reforms is overdue. Remember, the last time we fundamentally reformed our economy was in the wake of liberalisation in the 1990s. The taxation system was revamped, income-tax rates and Customs duties were cut, controllers were replaced by regulators and most importantly, the licence-permit raj was marked for dismantling. These moves paid rich dividends; from a lessdeveloped country (LDC) we leapfrogged to becoming one of the world’s leading economies.
Most Indians are now enjoying undreamt of prosperity thanks to the reforms undertaken more than a quarter century ago. However, the earlier reforms have run their course. Times and circumstances have changed but we have not reviewed our systems to bring ourselves in sync with the changed reality. Another round of reforms is now needed to address issues that have damaged our economy in the new millennium. Paradoxically, Mr Amitabh Kant, CEO of Niti Aayog, has stated that one of the reasons for the economic slowdown is that the Government had undertaken too many reforms.
This begs the question that if what had been done by the Government was indeed reformative, then why had it led to a slowdown? An endless debate on this question is possible but what cannot be denied is that headline reforms like GST and IBC are still dogged by poor conceptualisation and poorer implementation. The consequences of the most earth shattering ‘reform’, demonetisation, are better left unsaid. The need, therefore, is of well thought out and well implemented reforms and not to shun reforms per se. Consider the investment crisis. Desperate for investment, the Government is gearing up to issue overseas bonds to tap foreign capital which is often of dubious origin.
But, surprisingly, the Government offers no incentives to locals to invest. Rather, abysmal returns are offered to domestic investors. Returns on Savings Bank accounts in the State Bank of India have touched rock bottom at 3 per cent while the highest rate of interest on Fixed Deposits is a measly 6.8 per cent, all liable to tax. No wonder, money is flowing out of bank accounts, compounding the Government’s problems. On the other hand, banks still provide loans to businesses at rates exceeding 12 per cent, which in most cases, works out nearer 15 per cent, disincentivising bank borrowings.
It can be said with some certainty that given the crises in NBFCs and periodic upheavals in the share market, non-business people with money to spare have few avenues of investing their money in a way that it remains safe and still beats inflation. An easy way to garner domestic investment could be to offer 8-9 per cent tax-free returns on Fixed Deposits held in Public Sector Banks. It is a safe bet that the investment that the Government seeks from abroad would flow in locally. If more investment is required, the Government can exempt individual deposits of up to Rs.10 lakh from Income- tax scrutiny. Another significant reform could be rationalisation of our tax structure.
Our tax system, conceptualised by the economist Nicholas Kaldor has been twisted out of shape. Collections from indirect taxes (GST and VAT), which are regressive, far exceed collection from direct taxes, which are progressive, resulting in the poor bearing the brunt of taxation. Indirect taxes are inflationary also because the price of every item gets increased, for the consumer, by the taxes levied thereon. On the other hand, taxes on wealth, inheritance and gifts have been abolished resulting in concentration of wealth in the hands of the rich. The social ill effects of inequality ~ disharmony, increased crime and social unrest ~ are now playing out in our society.
Concentration of wealth is not desirable from the economic point of view. First, persons with huge wealth do not spend a significant part of it. A family with limited means would spend the major portion of its income, but a really rich family would need to spend a very small proportion of its income. Thus, money would get locked up ~ away from productive use. Moreover, scarce resources would get frittered away in catering to fancies of the rich. The healthcare industry is a glaring example of this phenomenon; we have no dearth of world class super speciality hospitals but we have very few facilities offering affordable healthcare because there is huge money in advanced healthcare.
Then, concentration of wealth perpetuates income inequalities because really rich people need only to invest a part of their wealth to earn more than what they spend. Another problem depressing business sentiment is ‘tax terrorism’, which has its genesis in unrealistic tax collection targets. The current Union Budget expects a rise in revenue collection by 28.24 per cent. Unsavoury confrontations between tax payers and tax officials can be avoided if the Government fixes revenue targets in consultation with revenue collectors, keeping in mind the revenue potential for that particular year. A revitalised tax and interest structure would promote ease of businesses in the true sense and would definitely increase employment and wealth.
The agriculture sector, which provides employment to maximum people also needs the Government’s urgent attention. Around 45 per cent of our population depends on agriculture which accounts for only 15 per cent of our GDP. A comparison of prices of agricultural products with those of other commodities, over the last fifty years, would show a huge worsening of the balance of trade against agriculturists. Sadly, successive Governments have neglected agriculture. Piecemeal measures like providing a subsidy of Rs.3,000 per year under PM-KISAN, increasing MSPs or propagating “Zero Budget Farming” would not achieve the Prime Minister’s promise of doubling agricultural income by 2022.
Rather, to end agricultural distress, we could implement the comprehensive Swaminathan Report on Agriculture of 2006 or have a policy like the Common Agricultural Policy of the European Union. Blaming reforms for the slowdown is an easy option but the alternatives suggested by Government economists can best be described as quick-fix solutions for long-standing problems. For example, the CEO of Niti Aayog has suggested privatisation of railways, oil and gas, mining, coal to drive growth, little realising that the effect of privatisation would be minimal on job and wealth creation.
Also, in the current business climate it is questionable whether the private sector would be able to find the required finds for investment. A comprehensive overview of the economy is imperative. A piecemeal approach has been the bane of the economy in the recent past. Catchphrases like ‘privatisation’, ‘kickstart’, ‘race to the third spot’, ‘five trillion-dollar economy’ are good rallying cries but provide little help in dealing with concrete economic problems. For that, more not less reforms that too of the basic kind are required.
(The writer is a retired Principal Chief Commissioner of Income-Tax)