Sanjeev Ahluwalia | Shoring up India’s flagging growth: Key govt challenge
To be fair, Prime Minister Modi’s government has harnessed tax revenue well
The main challenge before the Narendra Modi government is how to balance the onerous investment and institutional demands of high growth, without risking a political blowback. The story thus far, is of a generous government, like a “river of wealth” available for its subjects with a consistent, if shallow, growth strategy, based on allocating existing resources rather than unearthing new fiscal resources.
Going forward, non-tax revenue must expand significantly -- including via privatisation of government companies, sale of government assets and the flab in government’s welfare schemes cut to size, at the risk of annoying key voter bases. Consider that US President Donald Trump can unleash the ravages of DOGE to streamline government expenditure and finances because he has just a four-year term. This is a difficult option for any government which hopes to remain in power over decades.
To be fair, Prime Minister Modi’s government has harnessed tax revenue well. But it is also super-efficient at handing out doles. A 2022 paper by Bhalla, Bhasin and Virmani credits them with reducing extreme poverty to a marginal level of one per cent of the population at a poverty line of PPP $1.90 per day per person. The World Bank estimates, that based on a $2.15 per day poverty line, 12.9 per cent were poor in 2021. There is no official count of the poor in India, after 2012, because the 2018 census was unacceptable to the government.
Doles reduce poverty significantly: The primary mechanism behind this sharp drop in poverty is providing free food to 800 million people, or more than half the population. Other measures include special cash transfers for women, farmers and the aged. Alongside, the public health system works free or at rock-bottom charges, a bare bones free health insurance scheme is also available, enabling access to the burgeoning private health facilities across the value chain from clinics to small hospitals to multi-speciality wellness centres and hospitals. Add to this, free or cheap electricity and water supply for small customers and farmers and the glass of freebies is over full.
Efficient welfare delivery creates fiscal room for investment: Updating poverty estimates is critical for streamlining the efficiency with which doles are conceived and transferred. Forensic auditing of welfare schemes can determine which schemes are necessary to keep the bottom 10 per cent by income, above the poverty line, and devise a progressive implementation strategy to weed out beneficiaries as they become better off. Second, a backstop strategy for the next 20 per cent who have graduated from poverty is necessary to stop them from being sucked back again. Families relapse into poverty quite often. The sudden loss of a job (India has no unemployment benefits), or the wage earner falling seriously ill or his/her demise, or poor leadership, within the family, results in inability to keep kids in school, fruitfully engaged in learning, well fed and socialised. Specific public support systems range from direct cash grants, which kick in when a red flag is raised, to community support schemes mixing local leadership with public financial support to ensure protection for families when natural, medical or personal disasters strike.
Decentralised welfare and management: A pertinent issue is who should be the prime mover for overseeing the broad spectrum of social welfare. It is an aberration of the Indian institutional system that the Union government plays a large a role in these sectors. The Constitution envisages that the states, and not the Union government, are responsible for social welfare measures. Since the Union government is fiscally dominant in India, it has traditionally gone well beyond its core sovereign mandate -- defence, diplomacy, fiscal management, internal security, regulating network services, setting environmental policy and national standards and management of major minerals.
It is also true that state governments, in general, have not been efficient at tax collection or in managing capital allocation efficiently. Examples abound of their inefficiency. Property tax collections are one-fifth of global comparators even if property prices have soared. They have not made agriculture -- a state subject -- globally competitive nor do they tax income from agriculture. Most states are unable to get their electricity distribution and water supply utilities to meet their expenses by charging normative cost-based charges. Some states have been fiscally irresponsible by reverting, in 2022, to the fiscally ruinous “defined benefit” pension schemes, rather than continuing with the fiscally sustainable “defined contribution” pension schemes implemented in 2004. The former benefits employees but imposes higher costs on the government budget.
GDP growth higher than comparators: GDP growth in real terms during the third quarter (October-December) of this fiscal, at 6.2 per cent, is higher than the average of the first two quarters. The IMF (January 2025 update) estimates annual growth in India this fiscal at 6.5 per cent. This implies a required growth rate of about 7.7 per cent during the final quarter, on the back of high growth of 7.3 per cent in the fourth year of the previous fiscal. But that was before Trumpian global disruptions, major downturns in global stock markets, including in India, and uncertain expectations for global inflation.
On a relative basis, an annual real GDP growth of 6.25 to 6.5 per cent is a positive outcome, given that the IMF anticipates global growth at 3.3 per cent and growth in emerging and developing Asia -- the fastest growing segment -- at 5.2 per cent. The dissatisfaction, if any, is versus India’s own medium term growth expectations.
Increasing global uncertainties will have to be managed in real time. The only way the government can be prepared is to remain fiscally prudent. Reducing the fiscal deficit below the 4.5 per cent targeted for 2025-26 and below the four percent of GDP assured by 2026-2027 would reaffirm fiscal responsibility.
Keep resources in reserve to manage uncertainty: Shun the temptation to leverage public resources via borrowing. Favour conservative budgeting, as expected from state governments, to deal with implementation inefficiencies, identified by digital monitoring. Bravado, like assuming that inflation is under control today, is a foundational misstep. Foreign portfolio investors (FPIs) have withdrawn about Rs 3 trillion from the Indian stock markets valued at about Rs 384 trillion, or 110 per cent of GDP, over the past six months, spooked by the strengthening dollar and inflation impact of global uncertainty on India. Prime Minister Modi’s signature commitment in 2014 was that his would be a “report card” based government. To score higher grades and avoid “undershooting” build high margins into targets. We are not there yet.
The writer is a former IAS officer, and a governance and economic regulation expert
