DESPITE several terror attacks worldwide, including in Mumbai, India’s growth story has not weakened. It will take a lot more than terror to slow them down. Faulty policy by both the Union Finance Ministry as well as the Reserve Bank of India are what is slowing down the economy of India, preventing the country from benefitting fully from the bounty presented by the steep fall in global commodity prices during the past year. In the case of most commodities, the benefits of the lower price has not been distributed to consumers, and has gone to either the government or to private conglomerates in the form of tax and profits. Not content with such a windfall, it is expected by economists that on February 29,the conservative, indeed hyer-cautious, officials in the Finance Ministry will ensure that tax rates not decline but actually increase, especially in the case of Service Tax. Throughout past two decades, it has been the service sector that has ensured greater levels of employment in the economy, thereby providing a safety valve to damp social unrest, especially amongst youth.
However, from the first years of the 2004-2014 Manmohan Singh government to the present Narendra Modi regime, the Golden Goose which is the Services sector is being taxed and regulated in such a way that growth within it is getting stifled. The Service Sector tax is implemented in so draconian a manner that it has to be paid immediately, despite situations where payment has not yet been received by the service provider, and in many cases may never be received at all. Very recently, senior managers of a travel portal faced imprisonment over a Service Tax dispute, thereby sending shivers across companies in India, a country that has almost as many regulations as it has people. Thus, the total tax paid at what is by global standards a moderate level of income comes to more than 45% of the income earned, clearly a disincentive to many and has become a cause for unaccounted payments rising in order to escape such an onerous tax burden.
The worst sufferers are honest taxpayers, who these days are wondering when the “Acche Din” (Good Days) promised by the BJP during the 2014 election campaign will arise. Of course, the overall economy is also the victim of a hyper-cautious and text bookish policy that has its intellectual roots in the economic theories of select universities in the United States, the country from which the present Economic Advisor to the Finance Ministry, the Reserve Bank of India (RBI) Governor and the head of Niti Aayog (which has replaced the Planning Commission in name and occupies the offices of the old agency). The BJP seems to have as profound a fascination for those who have spent decades in countries very different from India as the Manmohan Singh-Sonia Gandhi dispensation had, and predictably, the performance of such individuals in terms of actual results is dismal, although of course the “Pink Press” in India goes gaga over them, besotted as it is with the assumption that what is good for New York or London must be even more so for Mumbai or Kolkatta. Certainly there are “birds of passage” in other countries as well, including China and Pakistan.
Here we have among others in sensitive posts RBI Governor Rajan, who is reasonably transparent about the fact that his present sojourn in India is a temporary one, before he returns to the US. Under his watch, Non-Performing Assets (NPAs) of banks have ballooned alarmingly, in large part because the high interest rate regimen he has inflicted on industry and trade in India is resulting the several companies and units falling “sick” ie financially unviable. At the same time, foreign financial entities do unobstructed in India what they pay billions of dollars in compensation to US and UK authorities, who find and fine such practices as unethical and often criminal The tragedy for the people of India is that this country is in a “sweet spot” where the global economy is concerned. It is much better off vis-a-vis Europe, Africa and South America than it was two decade ago, and indeed is attracting the attention of investors worldwide, along with smaller competitors such as Vietnam.
Both China as well as the Gulf Cooperation Council (GCC) states are looking at making major investments in India, but are hesitating because of tax and regulatory problems that are still to be resolved. Even after a year, the BJP has still to get passed the Goods & Services tax in Parliament, nor has it succeeded in getting passed several other items of legislation important in creating a climate for massive investment, such as a Bankruptcy Law and a Land Bill to dilute some of the provisions of the law passed by Sonia-Manmohan (without opposition from the BJP), which has made the takeover of land for industrial or most other purposes by the state or central government close to impossible. Those who have studied the functioning of Narendra Modi in Gujarat say that there is a period of two years in which he adopts a “Wait and Study” approach to several issues before moving in decisively. They point to the fact that this period is coming to a close on May 25 this year, and are therefore expecting major changes in economic policy that would jump-start stalled platforms and sectors.
However, there are many who say that this two-year wait for policies on the economy that are as innovative as Modi’s approach to foreign policy has been too long, and that such a pause will make the repair of the faltering growth story more difficult. Very few expect an innovative budget, such as would place growth above a British-style focus on collection of revenue from the natives. Tax rates are expected to remain high, and indeed go up, including in the stricken “Golden Goose” sector, services. In the US, in most of Europe, in China and Japan, a policy of low interest rates is being enforced to try and energize the economy. India is the outlier, with a central bank insistent on rates that are murderously high, thereby causing the same potential damage to the economy as similar policies caused in South America in the 1970s.
Those who voted for Prime Minister Modi in 2014 are waiting for him to assert his innovativeness in economic policy, and fashion measures that make sense in the Indian context rather than which are based on the foreign textbooks favoured by those who have been placed in charge of economic policy in India and who refuse to understand the ground reality : that unless more jobs get created, many more jobs, the road ahead will be filled with troubles. Of course, by then they will be safely back in their US and other foreign universities, giving lectures to students there on why the Indian economy is doing so badly despite their efforts at rescuing the country. It’s never their fault!
—The writer is Vice-Chair, Manipal Advanced Research Group, UNESCO Peace Chair & Professor of Geopolitics, Manipal University, Haryana State, India.