There’s indeed a 2-minute quick fix for the economy
We are a sub 5% growth economy now. We can talk ourselves up whichever way we may want or we could debate the causes of this – cyclical or structural. These won’t hide the writing on the wall. The Indian economic engine seems to be in no hurry to go anywhere. It’s stuck in a slow lane. The data coming out makes for difficult reading – IIP is down, unemployment is at a 45 year high, tax collections for the current year are below target by a distance, inflation is creeping up and the financial sector is still a mess. The twin blows of demonetisation and GST have compounded the legacy issues of the realty and the NBFC sector. The avowed goal of a $ 5 trillion economy is a chimera right now.
The government has rightly been pilloried for its delay in acknowledging the problem we have on hand. The instinctive response has been denial in the hope the problem shall go away. Unfortunately, this problem won’t resolve itself over time and no degree of tetchiness on part of the Finance Ministry is going to stop people from demanding answers. Thankfully, there seems to have been a belated acceptance of the task on hand and the recent consultations involving the PM and various industry leaders, economists and subject matter experts suggest a willingness to engage and look for solutions. This couldn’t have come a day sooner.
As any observer of Indian economy will tell you there are no new problems to solve here. The structural problems and their likely solutions have been discussed at various forums over the last decade since the economy started stalling circa 2011. In these times of attention deficit, I will point out 3 key areas as quick fixes that can get the growth flywheel going.
Firstly, we need to rationalise and simplify the Indirect and Direct tax regimes. We have too many slabs, exemptions and an enormous amount of state capacity is spent on administering a complex, byzantine tax system. We had an opportunity to simplify indirect taxation with GST but we didn’t take it. There’s still time to rectify this. A simpler regime that’s easy to understand and implement will improve compliance, spur demand, reduce state capacity in running the system and over a short period of time will widen tax base.
Secondly, we need to get the confidence back in the financial sector. A faster resolution of the legacy hotspots in the NBFC sector (IILFS, DHFL and others) through some kind of quantitative easing by RBI, facilitating transfer of rate cuts from banks to consumers and a plan to privatise infrastructure financing to build capacity in power, roads, ports and other such sectors.
Lastly, the investment in education and skill sectors can’t wait any longer. The focus on creating labour intensive manufacturing and services jobs should be taken on priority. The window of opportunity with US-China trade war and of China retreating from labour intensive sectors should be capitalised through a mix of trade regulations and ease in doing business in these sectors in India.
These aren’t new ideas. In fact, the lack of novelty in ideas is a good omen in public policy discourse. It suggests a boring continuity and unanimity among experts on what needs to be done. These are necessary (but not sufficient) conditions for the likely success of the implementation of these ideas. The government should make haste for once.