oday, we see a lot of vigour in India. There is a growing sense of optimism and renewed hope. This extremely positive outlook has been fuelled by significant developments over the past 18 months. Let me highlight a few.
To start with, we have a government that has been elected to office with an extraordinary and decisive electoral mandate for higher growth, investment and employment, with a focus on the revival of the manufacturing sector. Under the dynamic leadership of Prime Minister Narendra Modi, the government is expected to undertake wide-ranging economic and social reforms, and pro-growth initiatives. Some of these, ‘Make in India’, ‘Financial Inclusion’ and ‘Digital India’, have already been rolled out.
Next, of course, is that macroeconomic parameters have improved dramatically in the past year-and-a-half. Back in the middle of 2013, India was counted among the hapless “Fragile Five” emerging economies. The exchange rate had fallen sharply. The current account deficit (CAD) had reached an alarming level. Inflation ran into double digits. Manufacturing growth and investment had come to a halt and financial savings had dipped. However, in 2014, thanks to some nimble economic management, India’s currency has become the best performing in the world. CAD is down to 1.7 percent of the GDP and may also soon lead to a surplus. Inflation has reduced considerably, and investment sentiment is high. Huge foreign inflows have been drummed up, reflecting investor confidence. India’s superior macroeconomic performance is in sharp contrast to many other emerging market economies, which continue to face currency depreciation and a deteriorating growth outlook.
The third reason for this optimism is a fortuitous external development. Oil prices globally have fallen rapidly by more than 50 percent, giving the Indian economy a lift since it is largely dependent on imported oil for its energy needs. Cheaper oil would mean a much lower fiscal deficit (almost by 1 percent of GDP), a far reduced CAD and lower inflation. Downward energy costs will bolster manufacturing and consumer spending. Hence, this is akin to a fiscal stimulus without any side effects! The fiscal savings from cheaper oil will enable the government to deploy its spending and capital in productive areas such as infrastructure, banking and the social sector without causing any fiscal slippage. A pared import bill, coupled with increased inflows of investors’s dollars, would also mean that there is virtually no risk of a run on the currency, like in 2013. If there is a surge of inbound investment dollars, it will lead to an increase in the much-needed liquidity as well as foreign exchange stock.
The reasons for such optimism should not blind us to the many serious concerns around the world. Major economies like Japan, Brazil and Russia face prospects of recession. There is a deflationary and very low growth environment in Europe coupled with high unemployment and still higher sovereign debt of many countries. Most importantly, there is a lurking anxiety about unexpected flare-ups in geopolitics, which can affect investor and growth sentiment. Opportune time to articulate an inspiring economic vision
That said, it is clear that India’s growth impetus primarily derives from domestic factors. Hence the upcoming budget is of great significance. This would be the Modi government’s first full annual budget and one looks forward to a truly transformative budget. It is an opportune time to articulate an inspiring economic vision and a bold reform agenda.
The single biggest imperative is to get growth back to a higher orbit. In the past 14 quarters, the average has dipped below 5.5 percent, compared to 9 percent achieved in the earlier three years. Since the external environment is not supportive, the growth stimuli should come not from exports; it should rather be driven by investment and consumer spending. Public spending on infrastructure needs to gradually rise to about 8 percent of the GDP. Construction of highways, additional ports, new airports, low-cost housing, rural housing and upgrading of urban infrastructure are already on the government’s radar. Such expenditure crowds in rather than crowds out private spending.
Facilitating ease of doing business
The prime minister’s aspiration is that India should rank among the top 50 in the world in the global ranking of ‘Ease of Doing Business’. Currently, India is at a lowly 142nd position. This focus can concomitantly address various reform issues like improving access to electricity and other infrastructure, reducing the unnecessary regulatory burden (the so-called “Inspector Raj”), reduce tax related and contractual disputes, and speed up the approval process.
“Make In India” is a clarion call to improve manufacturing competitiveness, and not a call for protectionism. To this end, the Union Budget and economic policy can ensure that all the factors that handicap manufacturing be suitably addressed. Lowering the overall tax burden, giving incentives for skilling and training of workers and enabling credit flow would be worthwhile. Regulation should increasingly move toward e-governance and self-compliance wherever possible. India can and must exploit a window of opportunity that has arisen as China moves away from low-cost labour-intensive manufacturing. Those businesses should be welcomed and attracted to India, and whatever policy inducement can make this happen should be explored.
Incentivise financial savings
The budget could also initiate reform on direct transfer of benefits to recipients, be they subsidies or social security payments, given their potential to trim the total spending and prevent leakages. One troubling aspect of recent years is that of India’s total national savings, the financial savings component has been declining. In effect, it means a lesser proportion gets deployed productively. The budget can address this phenomenon by incentivising financial savings. New and creative offerings are needed to wean savers away from gold. A moderate rate and increased width of taxation would help augment resources. Tax incentives may be considered for long-term infrastructure-oriented contractual savings products. The finance minister has indicated that the relationship of taxpayers and tax collectors needs to become less adversarial. Recent decisions of the government about long pending tax disputes bear testimony to this approach, and further reduction in “fruitless” tax litigation can be undertaken.
A more level playing field
As the nation looks towards higher growth rates in the coming years, we must ensure that India’s consumer market doesn’t become easy pickings for below cost dumping by our trading partners. Already domestic manufacturers work under the disadvantages of infrastructure and logistics costs. In fact, some sectors suffer an inverted duty disability, i.e. they pay duty on their inputs, but their output competes with duty free/lower duty imports. Such anomalies must be removed.
Fulfilling promises: Rollout of GST, divestment
Finally, one of the biggest reforms, which will add one percent to GDP growth on a sustained basis, is the nationwide rollout of the Goods and Services Tax (GST). The government has set 2016 as the target for its implementation. GST’s potential to raise tax revenues is phenomenal, largely due to interlocking incentives for greater compliance. The GST consensus among all states of India must be forged and signed, so that we truly become a single economic market.
Alongside consolidation of the fiscal deficit, divestment of government stake in public sector companies should gather momentum. It will augment the government’s resources for long-term investments in physical and social infrastructure.
On the eve of the Union Budget 2015, the prospects for India are bright, as even corroborated by assessments of the International Monetary Fund and World Bank.
The tailwinds are favourable because of the steep fall in energy and commodity prices. The sails have been set in the proper direction by a reformist and pro-growth oriented government eager to harness the tailwinds.
The helmsmen should now set the pace and race toward our glorious future. It should be a year ahead of fulfilled promises.
(This story appears in the 06 March, 2015 issue of Forbes India. To visit our Archives, click here.)