The Road Ahead For The Indian Economy

Updated: May 27 2004, 05:30am hrs
The dust has settled on the Indian political scene. We now have two proven reformers, Manmohan Singh and P Chidambaram, in supreme command over economic policy. They will be ably aided by Kamal Nath as minister of commerce and industry. So what should be their goal There is bound to be a lot of rhetoric in the official pronouncements in the forthcoming budget and EXIM policy, but I hope they set a clear vision of the economy in their own policy programme. In my opinion, the goal should be to put the Indian economy in the major global league within a decade.

What are the characteristics of a major global economy

* Per capita income of at least $1,500. Indias present per capita income is $480.

* Low levels of abject poverty. India needs to bring down the number of people below the poverty line to around 100 million in the coming decades from about 300 million now.

* Good governance with low corruption index. We need to sharply improve our dismal rank of 83 out of 133 in the Corruption Perception Index of Transparency International.

* Full integration with the global economy, with exports paying for a large volume of imports needed to modernise the economy. Indias share in the world exports of 0.7 per cent is a reflection of Indias presence outside the major global league.

* Demonstration of fiscal discipline with a modest overall public sector deficit. Our combined fiscal deficit is 11 per cent.

What targets do we require against each of these

* To reach a per capita income of $1,500 by 2020, the Indian economy needs to grow by at least 8 per cent per year. We can accelerate the process by stepping up growth to 10 per cent per annum.

* Poverty will be reduced through high GDP growth and high export growth that will require a large contribution of exports of agro-industrial and marine products.

* Good governance should be the main aim of the governments at the Centre and the states. A starting point could be a sharp reduction in transaction costs of trade and doing business in India, by eliminating face to face contacts between public authorities and traders and investors.

* Our target should be to increase our share of exports in global exports to 2 per cent by 2010. This translates into an annual growth rate of 25 per cent which is achievable if we focus on policies suggested in the latter section. The share of exports of services in global services export should rise to 5 per cent from the current $24 billion to $110 billion. This will require an annual growth of 35 per cent in the coming six years.

* The current overall fiscal deficit at 11 per cent of GDP is not sustainable in the long run. The government must take steps immediately to raise the tax/GDP ratio from 9 per cent at present to the Asian average of 16 per cent. This should be done through widening the tax base, reducing tax rates and removing most exemptions. On the expenditure front, we need to increase public investments and reduce current expenditures. While subsidies may continue given that we have a coalition in power, immediate steps need to be taken to downsize the bloated bureaucracy. Mr Chidambaram with his experience in both finance and personnel is in a good position to do this.

Finally, some concrete suggestions towards a dynamic growth in exports.

First, introduce a low uniform tariff with no exemptions. If Chile can introduce a rate of 6 per cent with very positive results, I dont see why we cant start with a 15 per cent rate. This will stop all lobbying, make the system transparent, and the revenue gains from removal of all exemptions and increasing all the lower rates to 15 per cent, could easily outweigh the revenue losses, and may even leave room for helping some deserving losers (for instance, life-saving drug importers).

Second, transaction costs should be reduced through full implementation of electronic data interface, reliance on self-certification by importers, and developing the system of risk analysis and management. The target should be to bring cargo dwell times to international norms. Also, we need to streamline the procedure of exports and imports which is too cumbersome and requires a large number of approvals, most of which are outmoded.

Third, the ministry of commerce and industry needs to have a strong trade policy focus. The present trade policy department should be revamped to take the lead in multilateral (World Trade Organisation) and bilateral (Free Trade Agreement) dialogues, taking into consideration views of other ministries and agencies and the private sector. For this, it must have a well-known economist and a reputed lawyer on a permanent basis. It also should have a strong information centre with data and analysis of all relevant topics.

The author is principal advisor, CII and former economic advisor, ministry of commerce. These views are personal