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The task for the new government: An economists perspective

By Charan Singh

The largest democracy of the world has delivered its decision after months of churning and gruelling election festival of nearly five weeks. The verdict is loud and clear that young demographic India roots for action. And time tested Prime Minister Modi can deliver the much-needed action given his massive mandate in the second term larger than 2014. BJP being the single largest party with a clear majority can afford to take strong measures without the compulsions of coalition politics. In fact, given the resounding mandate, the next five years should be used to consolidate reforms in various sectors of the economy with renewed vigor and confidence.

Fiscal Policy

As an economist, to push growth to higher levels, the available resources of labor, land and capital must be optimally utilized. As corruption distorts priorities and misallocates resources, therefore, relentless crusade against corruption should continue.

Probably, in global history, India would be unique in which GST was introduced and despite severe teething troubles, the same political party has been voted back to power with thumping majority. The pulse of the people beats for clean and honest administration. Therefore, efforts to rationalize GST regime and optimize GST rates should continue. The experience gained by truly federal structure of GST Council should be replicated in taking decisions on other fiscal issues. Logically, given the success of GST Council, the Government could consider establishing a permanent fiscal body, subsuming the council.

Interestingly, rejection of a bad idea by the population of providing Rs.72,000 annually simply demonstrates that India rejects fiscal profligacy and prefers fiscal responsibility. The aim of the Government should be to establish a golden rule of recording surplus on revenue account through better tax collection, widening the tax base, instituting minimum alternate tax regime for firms in the unorganized sector, and enhancing capital expenditure. This will help in reducing government debt which preempts nearly 25 percent of government tax revenue in interest payments itself. To ensure that the composition of debt and pattern of deficit financing gets appropriate attention, separating debt from monetary management could also be considered.

It is nearly three decades since the Constitutional Amendments of strengthening local bodies but the situation has not changed. In fact, unlike the transparently prepared and available budgets of the Central and state Governments, budgets of local bodies, individually or consolidated state-wise, are not available. The standardization of budgets of state governments and that of local bodies is also required for appropriate policy initiatives. To ensure a better understanding of revenue and expenditure pattern in the country, of total tax collection and subsidies provided, the Government could consider initiating measures to compute public sector borrowing requirements, encapsulating public sector enterprises in the consolidated government sector finances.

The fiscal instruments of taxation, expenditure and deficits have implications for the availability of labor in the market. There is a need for rationalization of direct takes in the country keeping the success of collections in the GST. The Government could consider lowering rates of direct taxes which would encourage the availability of more labor hours for work as well as consider higher tax incentives to female force participation, and start-ups.

Reducing Cost due to Financial Sector

The national exchequer has been repeatedly been burdened by the need to regularly recapitalize public sector banks. Therefore, to reduce this fiscal drainage, there is the need for reexamining the necessity of having so many public sector banks, especially when all nationalized banks are clones of each other and generally do not have any distinct niche area. Hence, to reduce cost to the fisc and eliminate competition amongst twins, more strategies than simply consolidation, should also be carefully examined. While mergers reduce the number of competing branches, illustratively, not only in each street, but even nationally, it is also advantageous in terms of providing economies of scale but certainly not in immediate future. So, being a public sector bank, financial support from Central Government would continue as the merger of loss-making banks cannot immediately catapulate a merged entity into a profit-making institution. In contrast, an alternative strategy like privatization, could lead to immediate reduction in need for recapitalization and financial support from the budget. But then, privatization has its cost, and could be time consuming finding a suitable buyer. The moot question is that how can a government-owned bank, be privatized. The easiest way, probably, is to sell a public sector bank to private sector bank as disinvestment is practiced in public sector enterprises. Still another conceivable strategy could be sale of branches or business segments of public sector banks to private sector.

There has been fiscal implications of inefficiencies in the financial sector and regular reforms are essential as banks and financial institutions are primarily responsible to provide capital to productive activities in an emerging country like India. Apart from simply focusing on banks, there is need to examine the complete eco-system of flow of credit and lending in the economy including non-banks finance companies, micro finance institution (MFIs) and self-help groups. Interestingly, there is still no regulator for the MFI sector. Therefore, the new Government could consider instituting a Banking Commission to study various aspects of evolving financial markets, including linkages in different segments like banks and NBFCs, and make implementable recommendations to the Government to ensure ease of flow of credit to industry.

Finally, the Government could consider institutionalizing a mechanism to compensate public sector banks for fulfilling social obligations which would lead to strengthening business revenue and hopefully reduce the amount required for recapitalization.

Creating Employment Opportunities

To enhance productivity of labor, expenditure on education and health needs to be increased. However, the challenge would be to provide employment in industry, which given advances in AI and robotics, does not seem promising. Hence, the big push would be required for start-ups and incubation centers. Further, to create self-employment, small and micro enterprises (SMEs) hold a promise. Therefore, there is need to train youth and trainers in getting absorbed in SMEs. As agriculture Universities in each state has helped India to gain food-independence, similarly, SME Universities can be set-up in different states, imparting knowledge in local languages and helping innovate in local products, to generate employment opportunities. The Government would need to spend resources for MSME Universities, probably carving out space and utilizing the vast campuses of Agricultural universities.

Electoral Reforms

Corruption has immediate effect in reducing tax collection and inefficiency in expenditure. To contain corruption, Government efforts to stem unaccounted money should continue unabated, given the mandate after demonetization, GST and benami properties. Globally, electoral reforms and transparent financing of elections led to cleansing the system of corruption. Therefore, In India, mechanism of financing elections should be made more transparent, after having experimented with electoral bonds.

The financial and economic cost of conducting elections should also be considered, as eventually fisc gets impacted. In last five years, given extensive reach of print and electronic media, political discourses in state elections involving local issues have impacted focused attention on reforms at the national level. Further, the markets, financial, commodities and goods markets have suffered a roller coaster ride mainly because of constantly politically charged state of election in the last five years. The timing of general elections, in first quarter of financial year, just before the monsoons, also could negatively impact growth of the economy. The Government could consider conducting simultaneous elections of all states and Center, together, every five years, preferably synchronized with the festival months of October and November.

Conclusion

The focus should be on creating a conducive environment in India for business to flourish. To enhance growth, there is need to create mutual trust and faith between public and private sector, to join hands in providing employment to teeming millions of youth. The demographic dividend can lead us into growth of more than 10 percent while demographic disaster can push India into social challenges of unemployment and unrest. The massive mandate with proper planning in next five years can help democratic India scale new heights to become a super power in the region.

(The author is a CEO of Noida-based think tank EGROW Foundation.)