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Opt for sops-free, robust, market-driven growth process

SEPTEMBER 30, 2015

By TIOL Edit Team

INDIA needs to reinvent in its economic growth model in the wake of conflicting pressures on growth process and diverse signals about medium-term prospects.

The agenda for reform of the development process was taken forward other day by Reserve Bank of India (RBI) Governor Raghuram G. Rajan. He proposed that India should discover its core competencies through free enterprise and market and leverage competencies for accelerate development. "Growth has to be obtained in the right way," he said while delivering C.K. Prahalad Lecture.

He noted that it is possible for the country to gallop with substantial stimulus, as it did in 2010 and 2011. This later backfired with spurt in inflation, higher deficits, and lower growth in 2013 and 2014.

Mr. Rajan said: "India must resist special interest pleas for targeted stimulus, additional tax breaks and protections, directed credit, subventions and subsidies, all of which have historically rendered industry uncompetitive, government over-extended, and the country incapable of regaining its rightful position amongst nations."

He added: "We have to have the discipline to stick to our strategy of building the necessary institutions and creating a new path of sustainable growth where Jugaad is no longer needed. For this, we need the understanding and cooperation of business, not impatience and pressure for quick impossible fixes."

This might well sound geek to Ivory Tower ministers who believe India is already leading the global change towards growth. Both Prime Minister Narendra Modi and Finance Minister Arun Jaitley have lately been sounding highly bullish about current & future prospects without visualizing fundamental change in growth process.

Addressing a huge gathering of non-resident Indians in Silicon Valley during his latest visit to the US, Mr. Modi exuded: "everyone is saying India is the fastest growing economy of the World."

Such irrational exuberance is expected to perpetuate status quo in the growth process. An exercise in make-believe would fall like a house of cards in the wake of another pan-global melt-down.

The over-optimism must thus be tampered with signals from other quarters to facilitate right eco-system for revamping growth process. The first rational input is that India is not the fastest growing economy. The country is the eighth fastest growing economy as per a study published by World Economic Forum (WEF). It compiled a list of 13 countries with the highest projected compounded annual growth rate (CAGR) from 2014 through 2017 based on World Bank forecasts. The fastest growing nation is Ethiopia.

Consider now Asian Development Bank (ADB's) update on its 2015 Asian Development Outlook released on 24th September. It notes: "India's growth acceleration wavered as external demand turned anemic and reform implementation fell short of expectations, such that it is now projected to grow at 7.4%, or just slightly better than in 2014."

Now, take a look at chinks in the growth process. ADB update says: "India's projected current account deficit this year, unchanged from March, reflects the slump in exports over the past few months and modest growth in services, which are expected to continue for the rest of the year due to delayed recovery in the major industrial economies." It has also pointed out that Indian companies are highly leveraged and the share of foreign currency loans in the total debt is "quite high."

The Government must attend to such alerts as well as signals emerging from the ground. Conglomerates, which serve as Bellwether of economy, have disputed the growth story spun by the Government. Larsen & Toubro (L&T), for instance, is operating several of its factories at sub-optimal capacity for want of orders as reported by Reuters recently. It quoted L&T Chairman A.M. Naik as saying: "In terms of economic revival, it is not happening on the ground."

Similarly, ABB India Managing Director Bazmi Husain, in an interview to the Hindu, said: "the signals that we are getting from sectors and equipment that we provide for power, steel, cement and other core sectors and are not in a good direction. Our transformers business has gone down close to about 20 per cent decline year on year, big drop in motors business, among others. Large infrastructure projects are witnessing slow growth. Most of our customers' facilities are underutilized."

Metallurgical group Vedanta has already started phased shut-down of its aluminum and zinc plants. Construction business has not picked up. Such harsh realities underscore the need for putting the growth process on a sound footing.

The first and most important requirement for reinventing growth process is creation of stable policy and regulatory environment. This should obviously include stable tax regime for five years. The revenue earned through stability would far exceed the one illusive targets set by annual tinkering of taxes under the annual budget obsession.

Second, the Government must unveil a statutory roadmap for phased rollback of tax incentives linked to the existing average effective tax rates. This would obviously also require matching reduction in tax rates. Put simply, tax changes must be fixed and frozen to enable entrepreneurs to take decisive steps.

Third, the Government must end the process of hidden subsidies given to handpicked sectors such as textiles in the form of interest subvention, and an euphemism for cheap loans whose interest subsidy is borne by the exchequer.

Fourth, the Government must cap total non-tax and tax revenue to be collected from industries to prevent them from becoming unviable, leading sickness and non-performing assets. These, in turn, result in slow-down investments and flight of capital abroad. The revenue articulation approach should cover statutory imposts implied on companies to transform them into State's instruments for social welfare.

Fifth, the Government should reinvigorate social welfare schemes and their implementation with robust annual hike in their outlays. There can be no better investment than in healthcare and education, which are enablers of higher and sustainable growth.

Sixth, the Government must aim for robust and stable growth of agriculture and mining sectors to sustain its 'Make In India' initiative.

Seventh, the Government must go whole hog in controlling growth in population that has so far largely offset the benefits of development since the Independence.


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