Subramanian Swamy’s book unravels the myth and reality of India’s current economic situation and offers valuable solutions to map the road ahead.
An Alternative Ideological Thrust
The present possibility of an economic crash should galvanize the government to honestly review the way we have governed in the past five years, and then rise to new heights with an appropriate change in economic policy, to achieve a higher annual growth rate of 10+ per cent in GDP, with structural changes, which means reforms in agriculture, industry and service sectors. Nothing short of 10 per cent per year GDP growth rate can dent the backlog that is growing annually in unemployment. The Ministry of Finance is merely recycling ad hoc microeconomic targets announced by Prime Minister Modi, for example, achieving a $5 trillion in GDP by 2024, or doubling farmers’ income in four years without basic calculations. An analysis of the targets means GDP will have to grow at 15 per cent, since the 26 May 2019 GDP level was $2 trillion and the finance minister’s absurd claim of $2.7 trillion on 5 July 2019, the day of the Budget speech. Similarly, doubling farmers’ income in four years, i.e. by 2022, means the farm income must grow annually at 18 per cent per year. The government has failed to state how to do so, especially the objectives, priorities, strategies and resource mobilization needed for achieving the targets. As of now, without divine intervention, these are impossible-to-achieve targets, a bluff.
The Union government also needs to give an alternative ideological thrust to economic policy rather than try to improve on the failed economic policies of the UPA, as is currently being done with GST, foisting high interest rates, and high tax rates and tax terrorism.
My solutions to fashion an ideological turnaround in the economy and go on the path of a 10+ per cent growth rates are as follows:
i) The individual has to be persuaded by the government through incentives—for example, by abolishing the income tax—and not by coercion, such as harsh levies and taxes. Of course, the state should make no promise to the people without specifying the sacrifice required to be made by them in order to make income tax abolition happen. For example, no consumption binge, savings in term deposits in banks, etc.
ii) To raise the GDP growth rate to more than 10 per cent, the rate of investment, (including FDI) has to rise to 38 per cent of GDP from the present 29 per cent. Of this, household savings are the bulk of India’s national savings at 80 per cent of the total. But since 2016, household savings have dropped from a high of 34 per cent of GDP in 2014 to 28 per cent of GDP in 2018, mainly due to the poorly implemented demonetization. The decline in investment and the level of household savings thus cause a decline in the GDP growth rate, a concern that has not been addressed seriously in the budgets of 2016–19.
iii) Households have to be incentivized with the methods mentioned above, viz., personal income tax abolition to raise savings back to 34 per cent of the GDP. We are witnessing today how much unhappiness there is due to income tax terrorism.
iv) Non-household savings today are about 5 per cent of the GDP. For fixed deposits in banks, the rate of interest should not be less than 9 per cent. This will boost institutional and household savings in fixed deposits.
v) Since the growth rate in GDP is calculated as equal to the rate of total investment (as a ratio of GDP) divided by the productivity of capital (measured by capital-output ratio presently at an inefficient high of 4.0), in order to achieve 10+ per cent growth rate in GDP, a household savings rate of 34 per cent of GDP, a non-household saving rate of 5 per cent of GDP and a capital output ratio of less than 3.9 of GDP is necessary. That is, if the rate of investment is 39 per cent and productivity (capital-output) ratio is 3.9, then GDP growth rate is 39 divided by 3.9, which equals 10 per cent. Thus, the higher the productivity in the use of capital (i.e., lower is the capital-output ratio), the higher is the GDP growth rate for the same level of investment. The efficiency in the use of capital is attained more easily by innovations that are introduced by the production technique, and less so by reducing waste and inefficiency.
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In addition to dramatic incentives for the household expectation and sentiment to save, and lowering the cost of capital via reducing the prime lending interest rates of banks to 9 per cent, the government also needs to implement a new strategy based on a menu of measures, including:
i) Shifting to a fixed exchange rate regime of Rs 50 per dollar for the FY 2019 and then gradually lowering the exchange rate for subsequent years. How that can be done is a huge macroeconomic exercise that space in this book limits me from elaborating.
ii) Abolishing participatory notes (commonly known as a P-note or PN) while invoking the UN Resolution of 2005 to bring back black money of about $1 trillion from abroad held illegally, and
iii) Printing rupee notes to fully finance basic infrastructure and public works projects while keeping especially to pay wages of labourers, and setting aside concerns about fiscal deficit ratio in the cold storage for the time being.
India can make rapid economic progress to become a developed country only through a globally competitive economy, which requires assured access to the markets and technological innovations of the US and some of its allies, such as Israel. This has concomitant political obligations which must be accepted as essential.
We will also have to accelerate growth in the manufacturing, services and exports sectors to wean labour away from agriculture. This will result in higher productivity and income for farmers.
Corporate India expects the government to provide economic stimuli, while the Union Budget seems strapped and starved of funds, facing tax revenue rigidity and debt trap on past loans. What needs fixing as a priority is therefore steps to:
i) Easing liquidity and tightness
ii) Reducing rural indebtedness
iii) Kick-starting investments in infrastructure projects to promote employment of semi-skilled workers
iv) Enabling increased MSME investment at much lower interest rates.
Extracted with permission.