Can’t celebtrate wealth if taxes are sky-high, or promise water conservation without fixing agriculture policies.
Not surprisingly, given his ability to spot the economy’s exact pain points and splendid oratory, prime minister Narendra Modi’s Independence Day speech made many important points while, at the same time, indicating the policy direction over the next few years. In an economy that is showing few signs of emerging out of its current morass and where the rich are viewed with suspicion, Modi did well to say that wealth creation was a national service, “let us never see wealth creators with suspicion”, “those who create wealth are India’s wealth and we respect them”. But, having said this, the question is what this means in terms of action; the budget he just cleared announced a large hike in income taxes on the rich and, in the bargain, also ensured taxes on a large section of portfolio investors also rose sharply. Are investors to read the prime minister’s speech as a signal that these taxes will be rolled back in the coming weeks and, indeed, there will be a much-needed overall cut in both individual and corporate tax rates? If not, the prime minister’s words will be, well, just that.
Given how the government is too cash-strapped to spend its way out of the current growth trough and how private consumption – once a growth-driver of GDP – is also flagging, rapid exports growth is perhaps the only way to boost GDP; indeed, in the past, all periods of rapid GDP growth have been ones where exports growth has been quite rapid. In which case, Modi did well to stress on the need to think of strategies to boost export. But, since Modi has come to power, however, India’s exports growth has been a third that of the world’s exports; and that growth too has been slowing. India cannot possibly boost exports until it becomes more competitive locally, and that means sweeping labour reforms, top-class infrastructure, globally bench-marked tax rates etc. While Modi’s government is trying to improve the quality of infrastructure, there has been glacial progress on fixing tax rates and, instead of making labour laws more flexible, the government has actually gone and notified uniform wage rates across the country.
It is also difficult to see how the prime minister can say that India has a predictable policy regime when, in the run-up to the elections, the ecommerce law made a dramatic U-turn – after Walmart spent $16bn to buy Flipkart – or when, in the budget, corporate tax rates were not cut to 25% despite a promise several years ago or when arrest provisions were brought in for the CSR work companies do; there are a host of other such examples across various industries.
Similarly, given how quickly India’s water crisis is spreading, the prime minister did well to say that water conservation has to take place at the grassroots level; a 2018 report by Niti Aayog speaks of 21 Indian cities, including Bengaluru, Delhi, and Hyderabad, running out of groundwater by 2020. But, as this newspaper has consistently argued, the roots of India’s water crisis lie in its agriculture. A study by Ashok Gulati and Gayathri Mohan of Icrier points out that around 78% of India’s total freshwater resources are consumed by agriculture, and within this, rice and sugarcane – the two water-guzzlers – consume more than 60% of the country’s irrigation water while accounting for just 24% of its cultivated area. In other words, no meaningful water conservation can take place till India’s agriculture policy stops incentivizing water-guzzlers; there is, as yet, little sign of this happening. Prime minister Modi raised most of the relevant issues in his Red Fort address; now he needs to deliver on them.