Saturday, Nov 22, 2014

Now, rewrite the script

A slew of fundamental reforms exploiting the inherent demand within India can sustain GDP growth at over 8 per cent for the next few decades despite a global slowdown. A slew of fundamental reforms exploiting the inherent demand within India can sustain GDP growth at over 8 per cent for the next few decades despite a global slowdown.
Posted: June 19, 2014 11:45 pm

By: Arvind Virmani and Charan Singh

The new government has recently assumed office. The country is waiting with hope for new policy direction to revive the economy, especially given the disastrous growth record in the last two years. To revive the sagging growth in the economy, the need is to correct the mistakes of the previous government and re-establish confidence. In addition, it is a good opportunity to undertake fundamental economic policy and institutional reforms, in the immediate future. Therefore, it is a good time to reflect on the vision for the economy and suggest an agenda for reforms that the government can consider. The government needs to sweep away the Fabian Socialist (or Nehru-Indira) model of development that ensured that the licence-permit-quota raj seeped into every nook and corner of the Indian economy. This statist model is unsuited to a young, proud, modern India that wants “equality of opportunity” and “equal treatment” from the government it elects and the bureaucracy of “public servants”, instead of humiliation, harassment and worse from a “mai-baap sarkar”. And this is possible because of the thumping majority that the BJP has won.

There is a lesson to be learnt from the experience of the 1990s. The unshackling of the Indian economy during the mid-1980s and early 1990s raised its real growth rate to 3.6 percentage points above the average growth of the world economy during 1992 to 2010. But since then, the real growth differential has collapsed to 1.2 percentage points. The drop in the growth differential can be attributed to three domestic causes: first, an overemphasis on entitlements vis-a-vis empowerment; second, deteriorating governance (including corruption allegations); and finally, the failure to introduce policy, regulatory and institutional reforms, essential for sustaining growth and employment at its full potential. The fundamental objective of any Indian government must be to close the welfare gap of the Indian people with the rest of the world and provide employment opportunities through faster economic growth.

To take advantage of the demographic dividend, generate employment, and enhance public welfare, the government has to ensure that the economy revives to grow at its long-term growth potential of 8 per cent (or 6.5 per cent per capita) per annum. To help recovery, a reversal of the governance failures and regressive tax changes during 2010-13 could help. A return to the general philosophy of modernising the tax system, by reducing the plethora of state and Central taxes to a few and simplifying these by reducing exemptions/ deductions and reducing marginal rates, is imperative. This also requires the introduction of a GST or national VAT and the approval continued…

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