Commentary

Crossing the Rubicon: The Indian Economy & its Challenges

By Sauro Dasgupta

On 10th January 2018, the World Bank released its report on India titled, ‘India: Systematic Country Diagnostic ‘in Washington D.C. It projected the country’s growth rate to 7.3 percent in 2018 and 7.5 percent for the next two years. The World Bank’s report forecasted that India would continue to remain the fastest-growing major economy in the world in 2018-19. In comparison, China was expected to register a much lower growth rate of 6.3 percent in 2018-19.

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In comparison with India, some experts said that China’s economic growth was even projected to slow down to 6.2 percent in 2019 and 2020, and 6 percent in 2021. In 2018-19, China’s Gross Domestic Product (GDP) is expected to grow at 6.5 percent.

Illustration: Global GDP per Country

In 2017, China grew by 6.9 percent while India’s Gross Domestic Product (GDP) growth was 6.7 percent. India’s growth outlook was still quite robust and India was still the fastest-growing major economy in the world.

The World Bank believed that India was going to be registering a higher growth rate than other major emerging market economies in the next decade. So, they felt that despite the tumultuous nature of major changes like Demonetisation and Goods and Services Tax, India would not much be affected. The World Bank report elucidated that in India, the recent introduction of the Goods and Services Tax and the prudent steps toward demonetisation was expected to encourage a shift from the informal to the formal sector and it would integrate many informal businesses into the Indian economic system, which was going to be I-T enabled. Economic growth would continue and the report felt that this would be a result of increased consumption on the part of the population and investment in the country by the government, private sector, and Multinational Corporations (MNCs). Besides, the economy would regain significantly after a temporary slowdown due to demonetisation and the implementation of Goods and Services Tax. The big picture seemed that India, in an age of absolute economic uncertainty, had enormous potentialIndeed, the World Bank Chief had said that India was the only bright spot in this world of economic uncertainty, with economies like those of Greece and Pakistan failing and with them repeatedly asking to be bailed out by the International monetary system.

Reducing youth unemployment would be critical, and pushing for private investment, where problems were already well known like bank assets quality mattered a lot. If these were done, India could reach its potential easily and succeed.

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Cover Image Credit: Times of India

India’s growth potential would be around seven percent for the next ten years. ‘Domestic demand was a key driver of growth in the region, and a pickup in exports should add additional support to economic growth’, said the report. Growth in India was projected to advance to 7.3 percent in the Fiscal Year 2018-19 (April 1, 2018-March 31, 2019) and 7.5 percent in FY 2019-20, reflecting robust private consumption and strengthening investment in the economy.

At the same time, India has its challenges. The World Bank report underscored that the government was very much aware of the challenges to the economic might of India and the government was clearly showing that it was doing its best in terms of dealing with any set of challenges in the path of India’s economic development.

The Indian economy might experience a slowdown, especially in trade, due to rising interest rates and currency volatility, given the declining value of the Indian Rupee against the US Dollar. Despite this uncertainty in the future, one of the main driving factors of the economic growth of India was since the country’s economic activity continued to recover with strong domestic demand. Buoyed by a series of incidents such as the Uri attack, the Surgical Strikes against the same by the Indian Army, and a string of movies and web series by several production companies promoting the use of various products, in addition to the rise of Reliance Jio, promoted by Mukesh Ambani, Chairman and Managing Director of Reliance Industries Limited, who introduced cheapest mobile data and internet in the world, along with free Wi-Fi, hotspot, three free sim cards, and a free Jio Phone, along with the government asking for fifty days to solve the distress of the people in the aftermath of demonetisation and with railways, airports, highways, ports, banks, post offices, petrol pumps, under the government, being open 24/7, enabling the people to exchange their old notes with new ones, the people were filled with inspiration and enthusiasm.

They were also willing to undergo any suffering because of the perception that the move of demonetisation was a tool to end the accumulation of large currencies of black money in the country and abroad. Some people felt that this aligned with the government’s promise of bringing back all black money stashed by Indians in tax havens like Monaco, St. Kitts, and Newis, Andorra, Moldova, Antigua, and Barbara, Switzerland, etc. “While investment continued to strengthen amidst the GST harmonisation and a rebound of credit growth, consumption remained the major contributor to growth,” the World Bank report said.

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India could make a swift comeback once things were normalized and with more Goods and Services Tax collection, India could eventually reduce tax rates. It would have to be done ultimately and the country was crying for reform. Meanwhile, luxuries and products like Rolls Royce cars, Private jets, Private helicopters, cigarettes, alcohol, yacht, laptops, could be taxed more in the future to compensate for any loss to the government and the economy. While prices of essential commodities were high in India and inflation was rampant, at least the government was taking steps to curb them. “Inflation has been increasing and is above target in India. In many countries, budget deficits have widened this year, reflecting weaker-than-expected revenues and expansionary policies, such as in Bangladesh or Nepal”, the World Bank report said.

The way Goods and Services Tax was being collected and implemented; the collection would grow phenomenally every year. Ultimately, the assumption was that eventually India would move away from Income Tax and implement Indirect and transactional taxes. What was worrisome is that despite the pleas of many industrialists, the government had been unwilling to reduce the personal/corporate tax rate at that time. But the government’s measures like Direct Benefit Transfer wherein the money was directly deposited in the bank accounts of the beneficiaries was being praised worldwide, much like the Unified Payments Interface (UPI), the new digital payments platform established by the National Payments Corporation of India (NPCI), a Mini Ratna Company under Government of India, set up to give a booster to online payments, especially after demonetisation.

While there have been proposals to abolish the direct tax, it goes without saying that no government will seek to abolish direct taxes, for if they do so, they have to raise the indirect taxes which may lead to a severe backlash from the people in the absence of finances and employment as seen in the 1970s. No government would want that unrest, for that would negatively affect the productivity of the economy. Slowing external demand, rising borrowing costs, and persistent policy uncertainties were expected to weigh on the outlook for emerging markets and developing economies like India. India, while bringing incremental changes to aviation and railways through privatization, must ensure that there are no job losses. After all, India was a welfare state and had a duty to generate as much employment as possible.

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“An increase in policy uncertainty or deterioration of the security environment could dampen confidence and slow growth. India has experienced an increased incidence of natural disasters in recent years, many of them associated with climate change, and further occurrences could disrupt economic activity”, said the World Bank report.

The World Bank Report argues that GDP per capita in India will reach two-thirds that of China in the 2070s. It can be argued that growth in both China and India is bound to decelerate as they both become richer. A simulation incorporating this deceleration shows that it has little effect on the time when India’s economy becomes as big as that of the European Union and the United States.

The Report and subsequent ones are international testimonials to the success of India. It lucidly presented the rise of India and its potential to become the strongest economy in the world. It contributes to our understanding of the Indian economy, though many of its findings have been proven wrong with the onset of COVID, with incomes and savings falling in India due to a huge lockdown for almost ten months. Besides, we have witnessed the folly of demonetization and the inanity of the Goods and Services Tax (GST), both of which have unfortunately accelerated the tailspin of the economy by leaving people with hardly any savings and wiping off 80% of the Indian currency. As a result, even the Budget was not a populist one with the government deciding to focus on mega projects like railways, highways, ports, shipping, etc.

Today, India leads the world in the supply pool of youth, i.e., percentage of the young in the age group of 15 to 35 years (about 65 percent), and this lead is expected to last for another forty years. This young generation, with growing access to quality education, Internet use, and mobile connectivity, is not only empowered to demand positive change but is the most fertile milieu for promoting knowledge, innovation, and research, which will ensure accentuated, sustainable economic growth in GDP at 10 percent per year. It is this prime workforce that also encourages saving for the future, thus providing the corpus for pension-funding for the retired and the old. We should, therefore, not squander this ‘natural vital resource’, termed Demographic Dividend, which will shrink as development proceeds and as the quality of life further improves in the future.

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India is at the inflection point or cusp in the curve of transformational growth to global power status. India has now regained its position as the fastest-growing economy in the world, but a 7 percent GDP growth rate is not good enough anymore. Economic growth must accelerate over the next two decades to meet the rising aspirations of our young consumer population. India thus needs to achieve and sustain a GDP growth rate of over 10 percent per year for the next two decades (2020–40). This sustained GDP growth will be accompanied by an increase in per capita income growth from $1,500 to over $7,000 per year at 2019 prices, and thus make the third angle of the global triangle of India, China, and the US.

For this, India must adopt a three-pronged strategy that can create capabilities for growth and new solutions, which will, in turn, build shared prosperity for its 1.25 billion citizens. Firstly, development must become a mass movement, in which every Indian recognizes and experiences tangible benefits accruing immediately, even as long-gestation reforms continue to be implemented.

Secondly, our development strategy must help achieve broad-based economic growth to ensure development across all regions and states, and across all sectors, ranging from education, agriculture, and healthcare to manufacturing, urbanization, and retail/trade. This needs the fostering of innovations and the upskilling of labour, modernization of agriculture, water resource management, finding new fuel sources (such as thorium), and strong research and development (R&D), and physical infrastructure. These path-breaking innovations have to be backed by robust financial architecture and human resource development.

Finally, our growth strategy must minimize the gap between public- and private-sector performance. This calls for efficient, transparent, and accountable state governance, which will require developing rational risk-taking and merit rewarding governance. This will ensure that India not only achieves its ambitious goals for 2040, of overtaking China but also challenges the pre-eminence of the US, to go on to become scientifically one of the two largest economies in the world by 2050. Thus, as we would then celebrate the centenary of our republic established in 1950 and such a national development effort will enable us to challenge the hegemony of the US, in innovation-driven growth and global order.

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Today, India stands at the cusp of a major transformation caused by unprecedented economic development through out-of-the-box thinking, using everything from primitive tools to electronic software, and from entrepreneurship to hard work and self-confidence. This has given a significant and substantial boost to the quality of life for its more than 1.25 billion citizens. There is now, since Independence, a realistic hope for India to regain its ancient glory, to become the most advanced nation. Its GDP has risen to more than $2 trillion and, in current prices, it is already the third-largest nation in terms of real GDP (in Purchasing Power Parity [PPP] prices). This rapid growth has created an emerging middle class with rising aspirations and the ability to discover, invent and adapt modern scientific innovations for national development. The World Bank’s praise of India will motivate our policymakers and leaders to enthuse us to progress and grow in the years to come.

(The views and opinions expressed are those of the author)

Author’s Profile

Sauro Dasgupta is pursuing his Bachelor’s degree in Political Science with a specialization in International Relations at Jadavpur University, Kolkata, India. He is interested in reading, writing, public speaking and his writings have been published in many important magazines, journals and newspapers. He can be contacted at dasgupta_sauro@yahoo.co.in

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