No matter how much the prime minister and his finance minister crow about India being the world’s fastest-growing major economy, in truth, 2015 was a bad year for the Indian economy.
In the 2015-’16 budget, Finance Minister Arun Jaitley set a target of 11.5% for nominal gross domestic product growth. That growth now is 5.2%, or 6.3% below target. The GDP growth of 7.4% that the finance minister vaunts so much is the real GDP growth after factoring in the deflation of 2.2%. Comparing apples with oranges can fool some of the people some of the time, not all the people all the time.
As they say, the proof of the pudding is in the eating. The economy grows on money deployed for gain. If one looks at the off-take of credit from the banks – probably the most reliable indicator of economic activity – the prognosis in 2015 was not very good for six critical sectors. The credit off-take growth for manufacturing fell from 21% to 7.1%; construction from 27.4% to 4.1%; mining from 17.1% to a negative 8.2%; industries from 9.6% to 5.2%. Only electricity credit off-take just about held course by dropping from 13.7% to 12.7%.
Corporate profit as a percentage of GDP in 2015-’16 may drop to 3.9%, the lowest since 2003-’04. This means, the aggregate profit of Indian firms is likely to be stagnant at around Rs 4 lakh crores. The Savings to GDP ratio too has been stagnant at about 28%, having fallen from a peak of 38.1% in 2008.
So where is the money for investment going to come from?
This is the biggest challenge that confronts the Narendra Modi government. Much more money has to be invested to get growth up and create jobs for the one million youth who join the workforce every month. The options before it are the eternal beg, borrow or steal. A good government does all three.
Delivering on the promises
The Modi government came to power on the pledge of building a brave new India with a hundred new cities and a network of high-speed railways bringing the country closer together. It promised to retrieve lost wealth sitting abroad, to cut down undeserved subsidies, and to expand the tax-paying economy by incorporating into the official economy a major part of the “black economy” which is estimated by the think-tank National Institute of Public Finance and Policy to be nearly three-quarters of the reported GDP. The tax foregone due to the escape of income and revenues into the black economy can be anywhere between Rs 30-40 lakh crore a year, a figure in the region of $500 billion.
Even if a third of this were realised, India’s capital investment to GDP ratio would surge, propelling it to the status of the fastest growing major economy with real growth in double digits. One does need a police state to do this. The government is already armed with all the powers it needs. But it’s the lax administrative regime that lets slip the revenues, mostly willingly, through its fingers. This is why the reform of the tax collection regime must be the government’s top administrative priority in 2016.
No doubt, this is easier said than done. But Narendra Modi had promised to grasp the bull by its horns and harness it to the use of the nation. He now needs to show the political will and administrative acumen to undertake the structural changes to make the bureaucracy more accountable and responsible. The government is contemplating a steep across-the-board pay rise of nearly 24%, and this could be an opportunity to change service conditions so that salaries and advancement are linked with performance.
Another serious source of investment for the government to build businesses and invest in India’s future is Foreign Direct Investment. There is an important lesson the government needs to grasp here. Half of India’s FDI comes from havens like Mauritius, Singapore and UAE. These are not so much multi-nationals as they are Indians with money abroad investing in India. The challenge for Narendra Modi then is to present India as a good investment destination to fellow Indians. Mark Zuckerberg and Satya Nadella can come next.
Choosing to invest abroad
Indians today are the biggest source of foreign capital in many countries. According to Global Financial Integrity, a think-tank in Washington DC, the illicit flows from India is estimated to be over $50 billion a year. Three quarters of this is by trade mis-invoicing. It can be quite easy to correlate prices of goods and services in global markets to actual realisations, and yet the finance and commerce ministries have been unable to coordinate their efforts.
But the important question here is: why do Indians prefer to salt away money abroad? The answer is simple: because it can be more easily put to work for their benefit. Can India do better?
India is now ranked 130 out of 189 countries in terms of “ease of doing business”, a World Bank composite index of 11 vital parameters. This is not exactly a good place to be in, particularly when the country is hungering for more investment. The only parameter where we seem to be well-placed, at eighth place, is in protecting minority investors. However, major foreign investors might see this as more of a bother since it enables small shareholders to block the notions of the greater good determined by the main shareholders.
In terms of both the ease of starting a business and the ease of shutting down an unprofitable business, India fares poorly. India must aim to swiftly move up this ladder, and it can do so if rent collection stops are reduced. Most of the regulatory mechanisms instituted are quite unnecessary and the Narendra Modi government must come good on its promises here too.
Debt isn’t all bad
India’s Debt to GDP ratio of about 65% is among the lowest for a major economy, while its External Debt to GDP ratio is a healthy 23.8%. This clearly means that India can borrow more to finance its development, particularly in building and modernising its infrastructure. India should now aggressively seek long-term investment in its development by issuing sovereign guaranteed global bonds. Even with uppermost levels of international interest rates, this money is much cheaper than domestic capital, which comes with exorbitant interest tags. Ministries such as the railways and agencies such as the National Highways Authority of India and the various port trusts should be tasked with seeking capital for their modernisation and expansion in the global money markets.
India has traditionally been debt averse, but debt is often the cheapest and fastest source of capital. That said, debt must be used effectively and efficiently to be repaid and to raise more debt. This again calls for making government effective and efficient. Which brings us back to the main task of the Modi government – to give India a better and more effective government.
Wishing you a happy 2016, Mr Prime Minister.
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