Jumat, 28 Maret 2014

Grow baby, Grow

If you saw India's financial position in the previous post, you could be excused for opining that we must cut expenditure. For most other countries, that would be the answer. But not for India. For India, the mantra has to be grow baby, grow.

India is uniquely positioned. It has all the ingredients for rapid growth - a hitherto underdeveloped economy, a dynamic and large domestic market, a large and young population, an education ethic coupled with hard work (mostly), and all the institutions that can enable growth. The trouble is that it has been constrained all these years - first by socialist claptrap and second by the neta babu raj.

You can see why growth has to be the single most important mantra for the next 10 years

  • The only way to provide economic upliftment for large sections of the population is through facilitating employment. The only way to facilitate employment is through economic growth - not by giving doles under the guise of the NRGEA.
  • Economic growth will lead to explosion of tax revenues to the government - helping close the yawning gap between revenues and expenditure and enabling big rises in productive expenditure.
I submit we should target a 8% GDP growth year on year for the next 10 years. We should completely forget about equality of wealth  during that period (let a few people get rich; remember the immortal words of Deng Xiaoping when he set China on the growth trajectory). A decade later we can stimulate more equitable growth. For now, go full blast for growth. Let us have the enviable problem of the economy overheating through too much growth, a la China.

Growth can be achieved by the following strategy

  • Reform the land acquisition policy - this is the most difficult reform of all.  Set up an independent body that will adjudicate on land acquisition issues. Set fair purchase price, insist on all families selling land to be provided employment, and establish the principle of 75% acceptance means the other 25% have to compulsorily give in.  The independent body shall be a quasi judicial body and the courts should refuse to intervene. Decision making by the body must be in short frames of time - say 3 months. Establish fair and transparent process and public acceptance would come. Ruling party , in its own self interest, should not instigate trouble in opposition ruled states.
  • Single window clearance of industrial proposals by the government. Speed of clearance is essential - no more than 1 month, else clearance is deemed to have been made. No bureaucrat is to be made the subject of a CBI investigation for a decision that may later prove to be correct or incorrect - he should only be investigated if he has personally made money in the process.
  • Trawl through all the laws relating to commercial enterprises - be it in agriculture, industry or services and repeal 75% of them, taking some risks in the process. Strict laws should only be in some limited areas such as consumer and worker health and safety, pollution, etc. In other areas, the government should stop its utopian meddling. There is a precedent for such action - when the 1991 reforms happened, this is exactly what Manmohan Singh and Chidambaram did in the field of exports . Some unintended consequences may happen, but that is a price to pay for growth and can be subsequently corrected.
  • Enact the new Direct Taxes Code and the Goods and Services Tax, which has been in legislative limbo for a decade. This will make India one economic entity rather than each state erecting boundaries. If some states with opposition governments do not fall in line, they should be ignored and the rest should proceed. This will give stability in taxation.
  •  Throw open every sector to domestic, foreign or extra terrestrial investment. Frankly it doesn't matter in today's world where the capital is coming from. If it comes from outside, all  the better - government's finances will be eased.
  •  Big push to infrastructure for the next 5 years - power, ports, roads and railways. The government needs to do very little - simply allow private capital to do its job and not come in the way. Power sector reforms are essential - this is a specialist area by itself, but India has tied itself into knots. I won't get into the details of power reforms, but it just needs a strong leader to remove all the shackles, price power  economically (no freebies), buy / bully peace from the environmental lobby (no dilution of pollution standards however)  and let the problem solve by itself in 5 years.
  • Access to capital is already good for economic enterprises - both equity and debt. The government needs to do nothing different and simply maintain status quo
  • Make regulators independent, arm them and leave them alone to do their job. SEBI and RBI are two excellent examples that do this today. In every sector, simply clone this model.
  • No subsidies, tax holidays, nothing,  for industries.  The sheer economic opportunity will spur investment. No sops needed.
  • The industry and services sector do not need government intervention or help. Agriculture does. I am not an expert on policy measures required in agriculture, but entrust that task to experts like  M S Swaminathan and simply implement whatever they say.
  • Above all, glorify speed. Introduce a law that specifies time limits for every governmental or regulatory action. No sitting on files. Making a wrong decision in haste is not a crime. Making no decision at all IS a crime. 
  • Shift government's approach to economic activity to one of facilitation and not of investigation. Shamelessly court economic activity of any kind without making moral judgements on relative merits of one over the other. In that process a few (even many) rotten apples may slip through. I submit this is an acceptable price to pay for growth.
  • Create an overwhelming momentum for growth. When the momentum is overwhelming, opposition is difficult and might be restricted to a few areas. Backtrack there and let loose the rest of the push.
Growth will not be smooth - there will be some areas where things will turn out badly. Some (the 1%) will make huge money. Some will be left out. But a large and overwhelming majority will be uplifted. The example of China proves that this is indeed the case.  It is worth taking the risk, because inaction and not growing is sure to doom the majority of our brothers and sisters to perpetual poverty. That is a bigger crime.

What of corruption ? That is such an important topic in India that it will be the subject of  a full post that shall follow.

How can this be politically sold. Again a topic that deserves a full discussion in a separate post, also considering the implications of the proposals on the expenditure side.

Simultaneous with the growth push, the government should also remove income tax exemptions for agricultural income, for house property if reinvested, for long term capital gains etc. Very few (preferably nil) exemptions must exist in the tax code and the rates should remain at the current 33%. This has been the direction of tax laws anyway since 1991 - that's why income tax collections are such a success relatively speaking.

A GDP growth of 8% plus the removal of exemptions will result in tax revenues rising by at least 10% per annum. That will mean an additional Rs 1 lakh crores of revenues each year. Coupled with sensible policies on the expenditure side, the country can actually step up productive expenditure, and bridge the deficit, at the same time in 5-10 years.

Will such an approach work ? Yes it will. There are two examples in history. India itself in 1991, did something like this. The result is plain for all to see. And then there is China from 1980 to 2000. The Chinese example has one major difference - it was all government led with most of the investments coming from the government. I am recommending the opposite of this. The growth will be private led with governments only facilitating - for the Indian government today is not financially in a position to do any better.

For those interested internationally, this strategy can work only for India, and partly for Nigeria and Indonesia. It will not work for any other country. For those interested, happy to debate offline !

In the next post, we shall turn our attention to the expenditure side.

What do you think ?
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