Fundamentals Within Esoterica

Written by Subhash Agrawal | Updated: Sep 9 2004, 05:30am hrs
Much attention these days is focussed on the future of Indias outsourcing industry, the impact of monsoon and the up-down needle of inflation. But the country faces serious long-term issues which need to be addressed outside the usual cycle of budgetary promises and hype. First, India has not had amazing growth in the last decade even though it may feel like it in the cities. While Indias post-reform average growth rate of 6% is respectable, far too much growth has been concentrated in services such as IT, telecom, financial services and even government jobs.

Sure, there has been a significant rise in unorganised employment, but these are low paid jobs, often temporary and mostly with no retirement benefits. In comparison, organised sector employment has not grown in the last decade, especially in manufacturing. In fact, the share of industry and manufacturing has dropped from 30% to about 25%, perhaps the lowest in Asia. And the share of private investment has dropped to about 6% of GDP.

To get back to 12% or even 10%, which is the acceptable norm at this stage of development, India will have to shift growth from services to industry, agriculture and exports. For that, we need favourable policy, infrastructure and laws, and also aggressive privatisation and banking reforms.

Second, the total fiscal deficit, including borrowing by both central and local governments, has gone up sharply in the last few years to exceed 10% of GDP. India is now in worse shape than Kazhakastan, Indonesia or even Belize. While the bulk of borrowing is internal, it keeps interest rates high, crowds out private investment and disallows valuable investment in crucial areas like infrastructure.

The primary reasons for the deficit are a large government and huge user subsidies. Almost three-fourths of all public expenditure goes into interest, salaries, pensions and repayment of sovereign loans. In fact, over 60% of all government revenue goes just to pay interest, leave alone repaying old debt. Moreover, despite a decade of reforms, there still exists a remarkable absence of user charges. And just when something was being done about this, the latest twist in politics has made this worse.

Sustained growth needs favourable policy, laws, reforms and infrastructure
Problems of narrow tax base and subsidy raj also need redressal
Thus, there is subsidy on food, water, energy, fuel and fertiliser, to name just a few, and on top of that indirect subsidies. All told, subsidies cost roughly 10% of all government expenditure and allow less than a fifth of all taxes and government revenue to be available for any worthwhile development such as building roads, hospitals or water-treatment plants.

Lastly, we may not be in as bad a shape as China, but our bad debts are huge. A great majority of these are attributable to the organised private sector, instead of farmers or small businessmen as is commonly thought. Though this problem is in fact getting better very gradually, bad debts compounded with Indias lengthy recovery procedures and a creaky judicial system have resulted in a situation where many potentially profitable assets are lying around unused or tied up in litigation.

A related problem is the narrow tax base. The number of income tax assesses has grown dramatically in the last few years due to more rational laws and better oversight, and the number now approaches about 27 million. But that is still only about 2% of the population. In fact, unlike most countries, income tax revenue comprises less than 10% of GDP, which is half the figure of other Asian countries.

Most tellingly, there are only about 6 million income tax payers those who actually pay tax, not those who merely file a return. Till 1997, there were in fact only 1.2 million income tax payers. The twin problems of bad debts and a narrow tax base are more than just problems of financial mismanagement; they are in effect a subsidy for the affluent. Even further, they reflect a sort of nexus between the political class and special interest groups in India.

And so, even as the monsoon and the debate about the future of the outsourcing industry are making headlines right now, there are far bigger issues that policy planners and even corporate chiefs need to look at. India has many elements in place for a sustained growth path, but only if these public finance issues are addressed with some urgency.

The author is editor of India Focus