The year 2015 was a bad year for the Indian economy, though Prime Minister Narendra Modi and his finance minister, Arun Jaitley, have been crowing from the rooftops about India being the fastest growing major economy in the world. But the facts suggest otherwise. In the Budget for 2015-16, Mr Jaitley set a nominal GDP growth target of 11.5 per cent. The nominal GDP growth now is just 5.2 per cent, or 6.3 per cent below target. This is a big miss. The GDP growth of 7.4 per cent that he is crowing about is the real GDP growth after factoring in the deflation of 2.2 per cent. Comparing apples with oranges can only fool some people for some of the time, and not all the people for all the time.
As they say the proof of the pudding is in the eating. The economy grows on money deployed for gain. The off-take of credit from the banks is probably the most reliable indicator of economic activity. The prognosis was not very good in 2015 for six critical sectors. The credit offtake growth for manufacturing has fallen from 21 per cent to 7.1 per cent; construction from 27.4 per cent to 4.1 per cent; mining from 17.1 per cent to a negative 8.2 per cent; industries from 9.6 per cent to 5.2 per cent. Only electricity credit offtake has just about held course by dropping from 13.7 per cent to 12.7 per cent.
Corporate profit as a percentage of GDP in 2015-16 may drop to 3.9 per cent, the lowest since 2003-04. Thus, the aggregate profit of Indian firms is likely to be stagnant at around '4 lakh crore. The savings to GDP ratio has been stagnant at about 28 per cent, having fallen from a peak of 38.1 per cent 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 are the eternal beg, borrow or steal. A good government does all three.
The Modi government came to power on the promise of building a brave new India with a hundred new cities and a network of high speed railways bringing the country closer together. It came to power on the promise of retrieving lost wealth sitting abroad, cutting down undeserved subsidies, and by vastly expanding the tax paying economy by incorporating into the official economy a major part of the “black economy”, estimated by the National Institute of Public Finance and Policy (NIPFP), a ministry of finance think-tank, to be nearly three-quarters the reported GDP. The tax foregone due to the escape of income and revenues into the black economy can be anywhere between '30-40 lakh crore or a figure in the region of $500 billion a year.
Even if a third of this were realised, India’s capital investment to GDP ratio will surge and will easily propel 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 to fetch what truly belongs to it. But it’s the lax administrative regime that lets slip the revenues, mostly quite willfully, through its fingers. So the reform of the tax collection regime must become its number one administrative priority.
This is easier said than done. But Mr Modi 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 huge across the board pay increase of nearly 24 per cent, and it must now link this with changed service conditions that links salaries and advancement with performance.
The next serious source of investment is Foreign Direct Investment (FDI) to build businesses and invest in India’s future. There is an important lesson the government needs to grasp here. Most of the FDI in India, as it is in China, is from own nationals. More than half of India’s FDI comes from havens like Mauritius, Singapore and the UAE. This is less by multi-nationals investing in India and mostly by Indians with money abroad investing in India. The challenge for Mr Modi then is more to make India look a good place for investment more to our fellow Indians and less to Mark Zuckerberg and Satya Nadella. Indians today are the biggest source of foreign capital in many countries. According to Global Financial Integrity, a Washington DC based think-tank, the illicit flows from India is now estimated to be over $50 billion a year. Three quarters of this is by trade mis-invoicing. It will be quite easy to correlate prices of goods and services in global markets to actual realisations, yet the ministries of finance and commerce have been unable to co-ordinate their efforts.
But the important question here is why do Indians prefer to salt away money abroad The answer mostly is simple because it can be more easily put to work for benefit. Can India do better This is again easier said than done. India is now 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. But major foreign investors might mostly see that a more of a bother than a help as it enables small shareholders to block the notions of 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 Modi government must come good on its promises here too.
India’s debt to GDP ratio of about 65 per cent is among the lowest for a major economy. India’s external debt to GDP ratio is a healthy 23.8 per cent. Clearly 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 upper-most 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 (NHAI) 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. But 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.
The writer, a policy analyst studying economic and security issues, held senior positions in government and industry. He also specialises in the Chinese economy.
