How to get India on the highway to high growth

June 11, 2014

(Any opinions expressed here are those of the author and not of Thomson Reuters)

The president’s address to parliament this week lays out the new government’s roadmap to get India’s economy back to high growth. That will take time and is not easy either.

True, the BJP government led by Narendra Modi inherited a weak economy – growth was a mere 4.7 percent; industry was static; there was no employment generation; and inflation was at over 8 percent. The only comfort was that foreign exchange reserves exceeded $312 billion.

New concerns have also emerged. The India Meteorological Department has confirmed that this year’s monsoon will be 93 percent of the long-term average and will hit production of rice and horticulture, particularly in the south and the north-east. This will raise food inflation further, reduce exports of agricultural commodities as well as part of the demand for industrial goods, and delay an upswing in the investment cycle. It will, therefore, take a little longer to get the economy back on the rails.

The roadmap, however, is clear. The government has identified five complementary ways to create an environment that will foster growth.

First, the government will do away with laws and regulations, administrative structures and practices that are obsolete and replace them with e-governance. This will help create a policy environment that is transparent, predictable and corruption-free.

Second, the government will rationalize and simplify tax laws. The next budget, to be presented in early July, will possibly take the first step in that direction. Finance Minister Arun Jaitley has had interactions with industry as also state finance ministers. To what extent the Direct Tax Code will be implemented is questionable but the government will certainly push the states to implement the Goods and Services Tax though it will be a long-drawn process.

Third, the environment for investment was vitiated during the second term of the UPA government. The new government intends to restore confidence among the domestic and international community by adopting reforms to enhance the ease of doing business. Foreign direct investment will not only be permitted, except in retail, but actually encouraged. However, foreign investment in retail already made in any state should not be revoked. That would send the wrong signal.

Fourth, the government will promote labour-intensive industries, including tourism, to generate employment. That alone is not enough. Industries opt for capital-intensive technology because labour has become a fixed cost. The Rajasthan government has taken the initiative to change outdated labour laws. Similar changes in labour legislation should be adopted by other states, even without intervention by the centre.

Fifth, the country severely lacks trade infrastructure. Foreign trade (imports and exports) is nearly 40 percent of GDP. In China, it is 50 percent. Exports have been a driver of growth in most countries and it is vital that it is facilitated to gain an edge in a brutally competitive international market.

The Modi government’s agenda is long and will take time to implement. But it appears to be determined and decisive. Therefore, growth may be resumed even before inflation is controlled.

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