Finance

Finances & Past: Chew the robust reform ball

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Growth can only be triggered by biting the tough reform ball.

From Amitabh Kant

To truly transform India, there is no way out but sustainable growth. We have seen this transformation in the case of South Korea, Taiwan and, more recently, China. South Korea grew by an average of 9.6% in the three decades between 1960 and 1990. China grew 10% between 1980 and 2010. While India has seen significant change since the 1990s, our average growth rate over the past 30 years has been 6.5%. Our service sector and capital-intensive manufacturing gained momentum. However, it became increasingly clear that the Indian economy was advancing at two different speeds. The formal and organized sector marched forward. The informal and disorganized sector was catching up.

Growth can only be triggered by biting the tough reform ball. Fiscal 22 budget has boosted growth as the engine of India's transformation. The expansion of investment reaffirms the government's commitment to promoting investment-driven growth. This commitment was demonstrated by a 34.5% increase in capital expenditures, with states and autonomous bodies providing an additional Rs.2 billion in capital expenditures. By announcing the privatization of two banks and an insurance company, the government has sent a strong signal that it is ready to make tough decisions in the greater interests of the country. With the announcement of the Asset Monetization Program (AMP), innovative financial tools were used to increase revenue without messing around with direct tax rates. With the creation of the Asset Monetization Pipeline and the Dashboard, an important impetus has now been given for increasing non-tax revenues. The move to allow 74% foreign direct investment in insurance will further strengthen foreign direct investment inflows. It is also important to recognize that the budget announcements are a continuation of a series of structural reforms that have been implemented in recent years.

At the same time, the introduction of the Pradhan Mantri Atmanirbhar Swasth Bharat Yojana at a cost of 64.180 billion rupees over a period of six years has placed an appropriate focus on human capital in order to develop capacities in primary, secondary and tertiary health systems. Investments in waste management, air pollution reduction and the supply of drinking water have also increased. The implementation of the University Commission and the National Research Foundation will ensure the strengthening of the Indian ecosystem for higher education and research. Fifteen thousand schools will be strengthened to include all components of national education policy.

Reforms can take two forms: They can be “soft” reforms that are easier to adopt if at best they meet with slight resistance. The other type are “hard” reforms that require dismantling old systems and are often highly controversial. However, it is these tough reforms that are structurally transforming an economy and therefore, given the long-term effects on the economy, are often referred to as structural reforms. More importantly, these structural reforms will boost growth across the economy and increase the size of the business pie.

Reluctance to carry out these “hard” reforms led to this two-tier growth in India. This reluctance meant that our labor laws remained archaic and encouraged informal rather than formal employment. Coal remained a national monopoly. Agricultural marketing was not on the reform agenda. Direct taxes continued to be uncompetitive in world markets. Indirect taxes cascaded and varied between states.

The effect was that despite a more open trading environment in domestic and international markets, Indian manufacturing was unable to gain a foothold, as evidenced by the fact that the manufacturing share of GDP and employment has stagnated over the past three decades. This meant India was unable to create large jobs in labor intensive manufacturing, which would have increased our per capita income even further. While the raj license was dismantled, government processes did little to facilitate business dealings. Much of the economy remained in the informal and disorganized sector with lower productivity.

With the introduction of the Goods and Services Tax (GST) in 2017, we saw the largest tax reform in independent India. In 2019, corporate taxes were reduced to 22% for all businesses and 15% for new manufacturing companies, making Indian corporate taxes competitive against comparable nations. We finally had a modern bankruptcy law with the bankruptcy and bankruptcy law. This went hand in hand with a concerted effort to improve the business environment, as evidenced by our improvement to position 79 on the World Bank's Ease of Doing Business Index over the past five years.

In 2020, the reform agenda continued to gain momentum and ambition. The latest in the series of structural reforms was the introduction of PLI (Production Linked Incentives) systems. For a long time, the standard was the binding obstacle to increasing the competitiveness of Indian manufacturing. These PLI systems do not provide incentives for production, but provide incentives for production. The total budget for these programs is 1.96 lakh crores, or $ 26 billion. Assuming a 5% incentive for output value, that translates into potential output of $ 520 billion across a range of sectors, which goes a long way in making India a global manufacturing hub.

We have also seen reforms in agricultural marketing that have been discussed with state governments for almost 20 years. The aim of these reforms was to provide farmers with multiple ways to sell their products, encourage integration into the food and export industries through backward links and investments in the cold chain. After 50 years, coal mining was demonopolized and the mining sector exposed to competition from the private sector. The definition of MSMEs has been raised. 29 key labor laws have been streamlined and codified into four codes. The PLI systems, the revision of the MSME standard, and the rationalization of labor law have the potential to drive labor-intensive manufacturing in India.

The budget announcements have built a strong foundation laid by structural reforms in the past and the Atmanirbhar Bharat Initiative. Combined with moves in the past, these announcements will undoubtedly improve India's long-term growth prospects. Importantly, this budget has ensured that this surge in growth potential is shared across India by focusing on investment and employment. Rather than using short-term antidotes to stimulate part of the economy, as in the past, this budget reaffirmed the government's stance of taking a long-term, broad-based view of growth. What is important is that the budget has sent all the right signals and reiterated the fact that the government is ready to bite the tough reform ball in the greater good of the nation.

The author is CEO, Niti Aayog. Views are personal

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