WHAT CAN BE DONE ABOUT INDIA'S FALLING GDP

India is 6 times bigger than Thailand and has so much diversity in culture and a rich history, but it gets just one third of the number of tourists than Thailand even though India is 6 times bigger than Thailand.

Wealth created in United States just from travel and tourism is two thirds of India’s GDP.

India’s economy had already started to slow down from 2017, the pandemic worsened the condition and we all saw the contraction of 23.9% in the Q2 this financial year. Currently, India is facing its worst economic crisis in decades.

India’s GDP is likely to shrink by more than 5% in FY 2020–21, that will lower tax collection, and cap the government’s ability to spend and support growth. Thus, India can’t spend its way out of the current economic mess, made worse by the pandemic. That, however, doesn’t mean nothing can be done.

The initiatives that I believe could help India are:

Focus on key industries.

The government should focus on helping industries that have strong backward and forward linkages with multiple industries such as automobile and real estate, and not the processors of globally over-supplied commodities such as aluminum and steel. The country’s automobile industry was already struggling due to excessive regulatory rent-seeking and a rush to adopt tighter emission norms. Corona-induced disruptions will further dampen its prospects and in turn those of thousands of component suppliers.

Thus, the government could consider relaxing the implementation of BS-VI emission norms for a year in non-metropolitan areas. It will support struggling automobile manufacturers, component suppliers, and dealers employing millions of workers, without any monetary or fiscal stimulus. Moreover, automobile demand is highly elastic so cutting GST on vehicles will increase their sales without adversely impacting tax collections. So it’s worth a try, not only for vehicles but other discretionary goods and services in the top GST brackets.

Now, many people think that key to increase India’s GDP lies in manufacturing. But I think, manufacturing comes with its own challenges and India doesn’t have the infrastructure to compete with other manufacturing nations. Here’s why?

1.      India produces a large number of engineers. But how many of them select branches that are useful for manufacturing- like mechanical, chemical, production engineering? That will tell you how their is a serious deficit of skilled manpower in manufacturing sector.

2.      India hardly imports any technology from advanced countries like China. Many Chinese cities and local governments recruit people studying in European and American colleges to bring them back to the country and use their technological know-how to run companies and build competitive products that can be exported. In order to compete with China in manufacturing, India would need similar programs and then it will take several years for this investment to yield results.

Rather, if India focuses on creating a service hub for the world, it can make a huge progress in a shorter period of time. Here’s why.

1. Solution for large-scale employment of masses is not in manufacturing as with rapid technological changes factories employing large scale unskilled or semi-skilled laborers are disappearing. Modern factories employ a few highly skilled labors operating automated machines that do most of the jobs.

2. Land acquisition for industries is always a controversial issue and multiple times in history the governments had to backtrack on land acquisition bills that favor industries (primarily because India still has a large proportion of fertile land).

3. Making India a manufacturing hub will take a substantially longer time because India is a democracy and reforming century old labor policies, land acquisition laws, industrial laws will take years if not decades (the GST bill took more than a decade to get passed). Smaller countries competing with India can make these reforms in a relatively shorter period thus having a competitive advantage.

4. Countries like Germany and China which are major manufacturing hubs in the world only gain 21% and 29% of their GDP from manufacturing. Hence, even if India makes a lot of progress on above mentioned points, it can optimistically gain 25% of its GDP from manufacturing which is currently at 15%.

On the other side service-based economy is India’s core strength because of huge demand and less than adequate supply in tourism, health, education and many other industries which are also labor intensive.

Think about this- very few will object to acquisition of land for building a school or hospital compared to acquiring land for building a factory. The need of the hour for government is to create infrastructure and trained manpower for these service sectors, primarily education, health, transport and tourism, which will start yielding results in a shorter term.

Our country has a large proportion of young population and waiting for a decade to reform policies will only result in losing this demographic dividend. By creating new jobs in new sectors, we can achieve faster growth in GDP and a much higher wage rate for our labor force. But this will require huge investments and a serious intent from the government.

Reduce restriction on E-Commerce:

Remove some restrictions on e-commerce, even if a trader’s body like CAIT thinks that Amazon and Flipkart will devour its members but Big Bazaar, DMart and JioMart won’t. E-commerce will help keep the growth engine running by supporting all kinds of manufacturers and yet ensure social distancing needed to fight corona until a vaccine is discovered and distributed to the masses.

Address our huge policy distortion.

Address our huge policy distortion pile up on an urgent basis. Thus, the government should put an end to price cap in medicines and medical devices barring a small list of essential medicines. The price cap has failed to make masks and sanitizers cheaper and it hasn’t brought the overall cost of knee and cardiac surgeries down. The government should also junk the practice of imposing different import duties on different categories of fibers to ensure a fiber neutral regime. That will give a big push to the textile industry. 

Ensure a predictable business environment.

It’s high time the Modi government got serious about ensuring a predictable business environment. Unpredictable rules with respect to investment, trade, and taxes, and difficulties in enforcing contracts continue to deter existing and potential investors. Similarly, an impartial regulatory regime that doesn’t discriminate between domestic and foreign investors will be helpful at a time we’re trying to lure away top global manufacturers to India from China.

I do applaud the Modi government for improving the ease of doing Business index in the past few years, but a lot of work still needs to be done.

Logical Choice

Eight, between raising import duties and letting the rupee weaken, we should opt for the latter. Let us welcome 80 rupees to a dollar. That will check unnecessary imports, support indigenous manufacturing, and yet will encourage exports.

Written By: MR & Posted By: Rajarshi