By Nirvikar Singh
India’s recent Union Budget had the flavour of “staying the course”, which is not surprising, given the continuity of the government at the Centre. There were proposals for adjusting personal income taxes, incentivising private sector research and development (R&D), providing more credit to micro, small, and medium enterprises (MSMEs), development of nuclear energy, and the usual number of more-or-less targeted welfare schemes. The Indian economy has demonstrated that it can grow comfortably at 6% a year, given its current capabilities and policies. Only major global events, such as financial crises or pandemics, affect that trend. The challenge is accelerating growth so long as the country enjoys favourable demographics, while also facing some global headwinds caused by conflict and an inward turn by the US.
One key aspect of India’s economic strategy has been to be more “pro-business”. This can mean many things. Broadly, it means less regulation of businesses, a process that has been going on for decades, but not in an even manner: in some dimensions, regulations remain cumbersome and even irrational. Of course, they are meant to protect workers, consumers, and citizens in terms of health, safety, and uncompensated harms of any kind. So, deregulation is not a trivial exercise. This year’s Budget and Economic Survey seem to get into the details of this issue more than in the past, and the focus on reducing the regulatory burden of MSMEs has increased. The Economic Survey emphasises the importance of building greater trust between government and business, and one can add consumers and citizens into that mix — trust is a multisided phenomenon. Here, one might argue that good governance — the provision of public or other socially desirable goods such as infrastructure and primary health and education — is as important in building trust as deregulation.
The government continues to pay attention to rationalising archaic and poorly written laws as well as regulations that derive from them. The Economic Survey, although less so than in one or two earlier years, continues to recognise the importance of improving the functioning of the judiciary, and, for that matter, the entire legal system. But this is an example of where enough resources are not being allocated. Good intentions, however eloquently and clearly expressed, always need money and skill to be realised.
India’s political economy, operating within its federal democratic system, has long favoured expenditures meant to appeal to particular interest groups or voting blocs, and that continues to be the case. Therefore, raising enough tax revenue has always been a challenge. The reform of India’s tax system has been one of the “unsung heroes” of the last three decades, culminating in the goods and services tax which continues to iron out its kinks. At the central level, there does not seem to be much the government can do to increase tax revenue except to stimulate growth. Cutting corporate tax rates a few years ago did not help much on the growth front, and raising exemption limits for individuals will also have a marginal effect since the number of income taxpayers is relatively small. The Centre continues to go after a few corporations for supposed tax evasion, but this mostly just undermines trust. The tendency to impose high tariffs for some goods also has no revenue benefits and does little to stimulate growth in a world of regional production networks. If there is one short-term revenue measure to prioritise, it is public sector disinvestment which keeps failing to meet stated targets.
In my opinion, the evidence for the growth-enhancing effects of openness is among the strongest of all the dimensions of Indian economic reforms since the 1980s. The latest Union Budget reduced some tariffs, especially on intermediate goods that are used by domestic producers. There is ample room to do more of this, and it is politically better to do it independently of any pressure from the new Trump administration. There is also scope for streamlining processes for foreign direct investment, and opening up more of the economy to it. While the government can do many things to level the playing field for smaller, domestic, and foreign firms, the latter can bring in capital and expertise at rates that can accelerate growth right away.
The Economic Survey emphasises quality over quantity, arguing that efficiency is more important than higher savings and investment rates. But this is not an either-or choice. On the investment side, foreign firms see India not only as an attractive destination for production, but also as a growing market. And greater competition, along with knowledge spillovers, should improve the efficiency of Indian corporates, perhaps even incentivising more R&D. Allowing greater foreign entry into higher education would have similar effects, as well as addressing perennial skills shortages among its growing cohort of young people. Greater competition among large firms can also improve the lot of MSME suppliers, along with the existing steps to improve their access to credit and the timeliness of the payments they are owed from larger buyers. At the same time, there is significant untapped potential to increase household financial savings, particularly through new defined contribution retirement savings schemes which can use tax deferral to create incentives.
In sum, there are several policies available to the central government (and potentially to the states as well), none of them radical, which can lead to India not just staying the course, but accelerating growth in the short run while its demographics are still favourable.
The writer is professor of economics, University of California, Santa Cruz.
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