The government is right in getting rid of the wealth tax, but there’s no need to slap a surtax on high-income earners. That simply hurts capital creation, which India needs.
India is phasing in a reduction in the corporate tax, from 30 percent to 25 percent. Don’t go slow; cut it all at once—and 25 percent is still too high. India should follow the example of Hong Kong, Singapore and others and trim the corporate tax to well below 20 percent.
The government must immediately get rid of the 1997 Minimum Alternate Tax, which has been arbitrarily used to chase after foreign firms. That the Modi administration still applies this capricious exaction is a dampener on foreign investment.
Foreign direct investment: Limits have been raised in certain sectors, such as insurance and construction. Systematic liberalisations each year would prove to be a powerful magnet to overseas investors.
Make starting a business easy: The majority of Indians work in the informal economy. A key reason for this is the expense, time and complexity of setting up a legal business. Doing Business, the World Bank’s annual survey, ranks India as one of the worst countries in this category. Setting up a business involves 13 different procedures, which invite corruption and inhibits even trying. The government is simplifying this process, but not nearly enough. A single portal to apply for all the permits is helpful, but scrapping the need for these permits altogether would do the trick. India should follow New Zealand’s example, where the process is simple, quick and cheap. Growth of a formal entrepreneurial class would also generate political support for changing India’s anti-growth labour laws.
The government is working on positively changing bankruptcy procedures. However, it must also reform other aspects of the economy standing in the way of progress, such as contract enforcement and obtaining various permits. Doing Business could be an indispensable guide.
Land acquisition: A huge barrier to growth has been the difficulty businesses have had in buying land. The government had proposed a legislation to streamline this process, but the Opposition still controls the Upper House. Prime Minister Modi may have to make the two houses vote on the matter together.
In his home state of Gujarat, Modi has seen how factories can spring up when permits and environmental clearances are handled expeditiously. Being labelled anti-farmer is inhibiting, but counter-measures, such as special bonuses to farmers for selling land, could prove useful. This would tie in with one of the government’s major and ongoing initiatives of moving toward direct cash payments to the poor instead of the corruption-laden system of in-kind benefits.
Privatisation: During its first term, Modi’s government must move ahead with privatisation, especially of state-run banks. Sale of shares would be an easy source of cash.
Monetary policy: Raghuram Rajan, head of the central bank, has been a breath of fresh air, as he’s focussed on taming inflation and has moved away from the Keynesian fallacy that cheap money stimulates growth. In fact, countries with unstable currencies have lower long-term growth rates than those with stable currencies.
In fact, India could learn from its former colonial master, Britain, which rose from a second-tier European power into a globe-girdling empire, once Sir Isaac Newton fixed the pound to gold. For starters, India could fix the rupee to the dollar, the way Hong Kong has successfully done for more than 30 years.
Finally, Prime Minister Modi, like Margaret Thatcher, must make the case that free markets are the best way to help the poor achieve higher and higher incomes.
(This story appears in the 29 May, 2015 issue of Forbes India. To visit our Archives, click here.)