Indian economy is in shambles. Limited options ahead for government
Economists agree that there is a lack of money and the government is stepping up investment in order to keep up the growth rate.
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Two recent talks by respected economists and strong supporters of the present government have stoked fears about the Indian economy. The first was a talk by the famous economist and politician Dr Subramanian Swamy with renowned journalist Vir Sanghvi.
Dr Swamy pointed out that the economy was in a tailspin and if corrective action was not taken quickly the economy could collapse. The second was a talk by the economic commentator and editor of Thuglak magazine S Gurumurthy. Speaking in Chennai, he said that the economy has hit rock bottom and urgent steps are needed to arrest the downslide.
What has happened? India till recently was the fastest growing economy in the world and suddenly the mood has changed from optimism to pessimism. It is important to sit up and take notice when two of government's closest advisers talk of the economy sinking into depression.
The economy grew at a healthy 9.1 per cent in the first quarter of 2016 but started slowing down gradually through the four quarters of 2016 and more sharply in 2017 to 5.7 per cent at the end of the second quarter of 2017. It is imperative to analyse the causes and look at some suggestions.
There are two types of problems the economy has faced in the last 18 months. Let us look at the abnormal problems caused by policy directed disruptions first. The first was demonetisation of November 2016 due to which 86 per cent of cash was withdrawn in one go and new notes were introduced in a slow manner till about March 2017. That phase is over and there is little that can be done about it.
It is clear that the economy was slowing down and the disruptions may have accelerated the decline.
The second disruption is the Goods and Services Tax (GST) which was introduced in July 2017 and is a work in progress. What was the impact of these two factors on growth needs to be questioned. The GDP had dipped to 7.6 per cent just prior to the demonetisation and has fallen further to 5.7 per cent as of June. It is clear that the economy was slowing down and the disruptions may have accelerated the decline. The only possible remedy for the disruptions is to make the transition to GST simpler.
The government can think of three monthly returns for small payers and continue with both manual and online returns for some time. This may help small industries and traders to switch over with less difficulty. Penalty and late payment fees can be waived off for some time.
This may help in reducing the fear that has gripped the traders and small units.
Besides the disruptions, there are some structural problems which the Indian economy is facing. I strongly feel that there is a case for sharp reduction in both direct and indirect taxes across the board. Dr. Swamy may have been too ambitious when he called for abolishing income tax but his thinking is in the right direction. Heavens will not fall if income tax exemption limits are raised to Rs 10 lakh and the rate of tax for the slab Rs 10 to 20 lakh is brought down to 10 per cent.
This will increase the disposable income and kick-start demand helping in better capacity utilisation for industries. There is a case for reducing petrol and diesel prices too. The taxes are too high. A Rs 10 drop in taxes will restore the faith of the people in the government. The oil subsidies now are a thing of the past and the government can think along these lines. Certainly, there will be a revenue loss in the short term. This can be made up for by spectrum auctions, higher fiscal deficit and most certainly by cutting government expenses. The boost to growth will make up for the revenue loss within a year or two.
All economists agree that there is a lack of private investment and the government is stepping up investment in order to keep up the growth rate. The sharp reduction in taxes will boost the savings rate and in turn step up private investment. There is also a need to change the sentiment of the people who have been hammered by demonetisation that led to a slowdown as well as GST's teething troubles. The economy is as much about sentiment as hard economic numbers.
The time is ripe to loosen up on fiscal numbers as well as black money hunting. Economic policies are dictated as much by the circumstances and the market sentiments. The Reserve Bank of India is an independent body but it can be urged to reduce lending rates. Economic theories are all fine but one cannot be dogmatic. The alternative is most certainly a slowdown, sharp rise in unemployment and a sullen electorate waiting for the 2019 elections.