The Indian economy is in bad shape. Most discussions about the economy’s woes focus on the external sector: a high current account deficit/gross domestic product ratios, dwindling foreign investment inflows, rupee depreciation and debt repayment that will be due near the end of the fiscal year.
Most of the knee-jerk government reactions also are related to the external sector, like the little bits of movement to further open foreign direct investment and increases in import duties. The actions are all understandable because a crisis will always be in the external sector through the balance of payments, which includes trade and foreign investments.
However, the external sector is a manifestation of what’s going wrong domestically. Until recently, the government confidently spoke of 6.7 percent real growth in the 2013-14 fiscal year, but outside the government, no one expects G.D.P. growth to be significantly higher than 4.5 percent. A young India expects 8 to 9 percent growth, which is also required for the sufficient creation of jobs. Meanwhile, retail inflation is chugging along at around 9.5 percent annually.
Given the political uncertainty, it is unrealistic to expect any significant reforms from the incumbent government. My proposal for fixing the economy is more for the incoming government, regardless of its political composition. Many policies foisted by the current central government, which lead to inefficient public expenditure, fail to create assets and fail to target subsidies, and distort markets, will be impossible to reverse - food security, land acquisition, “mandatory†corporate social responsibility programs. An incoming government will have to work around those constraints.
Nevertheless, there are options. First, let’s look at taxes. The goods and services tax, whose implementation has been postponed indefinitely because not enough effort was made to persuade state governments was expected to give G.D.P. a one-shot increase of 1.5 to 2 percent. The tax should be resurrected to apply uniformly to all states in place of all other taxes, including stamp duties. In the same vein, the Direct Taxes Code needs to be simplified by eliminating exemptions for both direct and indirect taxes. Altogether, these tax exemptions amount to 5.5 percent of G.D.P. The procedural costs of tax compliance will not decline if the exemptions are allowed to continue, nor will the tax base be broadened. Since it’s almost a given that public expenditure will increase, all exemptions should be whittled down.
Next, the government should look at selling off its stakes in banking, insurance, and aviation sectors. Even if privatization is a dirty word, there is no reason there shouldn’t be an aggressive sale of government assets, open to foreign investors, notwithstanding arguments that market conditions aren’t quite right.
By decentralizing and devolving, public expenditure can be made more efficient by reducing administrative costs. For example, many ministries and departments in Delhi need no longer exist. When such cuts are added to tax reforms and divestment, the fiscal deficit will take care of itself. The deficit should also be regarded as a symptom, not the disease.
One of the most common complaints about doing business in India is the lack of proper infrastructure. Land acquisition and forest and environmental clearances have mucked up the entire infrastructure sector, roads and power included. But the government can set clear deadlines for these. It can make forest and environmental clearances parallel, rather than sequential, as they are now. It can also ensure that clearances, once granted, will not be opened up retrospectively.
Complaints have also been made about onerous regulations in India, but there is a place for regulation, as long as the powers of regulators are unified. They need to be made independent and their recommendations need to be made mandatory. While this is important for physical infrastructure, it is also important for social sectors like education and health, where there is a pending liberalization agenda.
The bane of the last four years has been that the private sector has been made to feel unwelcome and has been subjected to other bits of government intervention, too numerous to mention. The investment-G.D.P. ratio has declined by around 4 percentage points compared to high-growth years between 2003 and 2007, but that too is a symptom, not the disease. The private sector needs to be accepted as creators of wealth, from the biggest conglomerates to the smallest firms, and the petty government interventions need to be removed. During the high-growth years, it wasn’t just the private corporate sector that drove investments and growth. It was also the micro, small and medium entrepreneurs, and in the last four years, they too have been shackled by the government.
The government’s collapse in India has been bureaucratic and executive. It isn’t just about coalitions and legislative collapse. There has been executive collapse because the Cabinet doesn’t collectively function and has been taken over by Group of ministers and Empowered Group of Ministers. There has been executive collapse because bureaucrats, who are naturally risk averse, are no longer insulated from bona fide (not mala fide) consequences of their decisions. The so-called steel frame of the bureaucracy has become rusted.
Had one had complete freedom to chalk out a center-right agenda, it would be a long wish list, including reversal of several decisions taken after 2004. But that’s a pointless exercise. We are stuck with those center-left policies. However, there are different definitions of reform, and within the constraints set by those inherited center-left policies, there is plenty one can do to push the reform agenda.
In fact, two bills that were approved by Parliament this week could act as the catalyst for much-needed changes. The land acquisition legislation, which is designed to prevent government seizures of agricultural land, could be used as a trigger to push for a restoration of the right to property, which was excised from the Constitution in 1978, and establish a satisfactory database of land titles, among other changes.
The second piece of legislation, the food security bill, which guarantees a legal right to food for 70 percent of India’s 1.2 billion people, could help lead to the decentralized identification of households below the poverty line by village councils.
That will enable targeting of subsidies, which is important because the government should end the practice of the deciding the prices at which retail petroleum products can be sold. It discourages investments, because prices are too low, and also leads to across the board subsidisation, not just for poor. Decentralized identification of households below the poverty line will mesh with the government’s efforts to assign a 12-digit ID to every Indian through the Aadhaar program and provide cash transfers directly to the poor through bank accounts, which would make it more difficult for corrupt government officials to steal their benefits.
India doesn’t deserve 4.5 percent growth and 9.5 percent inflation. It deserves 9.5 percent growth and 4.5 percent inflation, and it is possible. If one takes care of the endogenous (domestic problems), the exogenous (balance of payments) will take care of itself.
Bibek Debroy is a professor at the Centre for Policy Research in New Delhi.
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