Narendra Modi's first challenge to take India towards a path of development will begin in earnest when he will have to deal with the huge economic mess the outgoing UPA has left India in. Over the last five years, constructive economic policy has given way to populist doles. Worse still, UPA had made no measures to create funds for these grants! This has left India in an economic shamble. A sky rocketing food inflation, slowing GDP growth, reducing labor productivity, sluggish industrial growth, depreciating rupee, huge fiscal and current account deficits, low capital formation,reducing tax base, policy paralysis, escalating unemployment levels, declining foreign investment etc. are all symptoms of the chronic economic illness that ails India. Narendra Modi’s job will be to tackle these problems. This is easier said than done.
So what are the policies that Modi can take to bring India out of this economic muck?
First, he needs to ensure faster job creation. 10 million new jobs are needed EVERY YEAR to keep up with India's booming labor force. Money draining welfare programs such as the much hyped MNREGA -which were meant to create wide spread employment - have failed miserably, Modi needs to shut these programs as soon as possible and use those funds for other more efficient programs. Employment opportunities are at galore in the Manufacturing and Tourism sectors. In fact, Manufacturing and Tourism are two pet projects of Modi and one should expect some game changing decisions as far as these two sectors are concerned. These reforms could pave way for massive employment opportunities.
Second, he needs to urgently deal with the problem of rampant inflation, especially food inflation. The RBI governor has ably tried to rein in inflation by raising discount rates but Modi should realize that inflation cannot be reined alone by monetary policy. Fiscal policy too is extremely important. As far as food inflation is concerned, priority must be given to improving storage facilities. Also, strict action must be taken against hoarders. About fiscal policies relating to inflation in general, India urgently needs ‘supply side economics’.How else are we to tackle the twin problems of high unemployment and low GDP growth? Investment tax credits, faster Environmental clearances, simpler labor laws, simpler tax laws etc. will give a long way to stimulate aggregate supply.
Third, India has to improve its economic productivity. Increasing productivity is the only sure shot way of ensuring long term, consistent economic growth. Productivity consists of four facets - Human Capital, Physical Capital, Natural Resources and Technological Knowledge. To simulate Human Capital, importance must be given to Skill development and Education. However, since Human Capital takes a long time to accumulate, it will not help the Indian economy expediently. However, increasing physical capital will give returns much faster. It is important to note, that the superb 8% + growth we saw post 2004 must be credited in part to the massive amounts of capital investment done by the NDA government from 1999- 2004. Building better roads, ensuring efficient energy generation, building trade enhancing waterways, constructing trans-city, super-fast train routes etc. will all go a long way in ensuring a sustained period of economic growth. As far as Natural resources are concerned, increased importance must be given to domestic oil drilling. India is overly dependent on foreign oil imports. In fact, HUGE oil subsidies are the major cause for India's deficits. An oil well discovery on Indian shores will go a long way in ensuring a consistent, long lasting and cheap supply of fuel. And lastly, technology can be used to do miracles for India. Modi, being a techno savvy man himself, should ensure that technology is used to its fullest across all sectors.
Fourth, corruption must be controlled urgently. And no, I'm not talking about passing the Lok Pal bill. We need to realise that bills alone cannot curb corruption. What we need instead are innovative executive measures. Take for example "Online Trackers" that Modi has initiated in Gujarat. As far as environmental clearances are concerned, all papers are immediately put online, once there're received by the ministry. The company can then track the journey of the clearance at a click of a button. This has reduced human intervention greatly and has reduced avenues for bribing greatly. Many such measures are the need of the hour. A corruption free, red tape free, bureaucracy will go a long way in simulating foreign investment.
Fifth, India needs to urgently reform its archaic tax system. The current tax system is too complex and has too many loopholes. The income tax base is extremely narrow (only 3% of Indians pay taxes). To counter this shortage, the government has had to retort to higher indirect tax rates, atrocious retrospective tax laws, super rich tax slabs etc.These have just proven to be measures that ‘beat around the bush’. Modi will need to introduce more decisive measures that widen the income tax base. It is the only sustainable way of ensuring long term consistent tax revenues. The second, sure step to tax reforms would be to introduce the GST (Goods and Services Tax) - an umbrella tax that would replace all indirect taxes. The GST by some estimates can improve GDP by 2 percentage points. Additionally it will boost revenue whilst reducing business transaction costs.
Will Modi be able to take these decisions? One certainly should hope so. He has been given a decisive mandate and will not need to negotiate with cranky regional alliances on important economic decisions.
However, before Modi sets out to clear out the UPA mess, he needs to sort out the disarray in his own party. He needs to have a strong head and formulate a competent cabinet to his own liking. He must resist the temptation of giving away posts to old leaders just because of their stature in the BJP.
A decisive, capable and competent cabinet is the pre-requisite for a pro-reforms government that Modi has promised.
- Tejas Mehta
So what are the policies that Modi can take to bring India out of this economic muck?
First, he needs to ensure faster job creation. 10 million new jobs are needed EVERY YEAR to keep up with India's booming labor force. Money draining welfare programs such as the much hyped MNREGA -which were meant to create wide spread employment - have failed miserably, Modi needs to shut these programs as soon as possible and use those funds for other more efficient programs. Employment opportunities are at galore in the Manufacturing and Tourism sectors. In fact, Manufacturing and Tourism are two pet projects of Modi and one should expect some game changing decisions as far as these two sectors are concerned. These reforms could pave way for massive employment opportunities.
Second, he needs to urgently deal with the problem of rampant inflation, especially food inflation. The RBI governor has ably tried to rein in inflation by raising discount rates but Modi should realize that inflation cannot be reined alone by monetary policy. Fiscal policy too is extremely important. As far as food inflation is concerned, priority must be given to improving storage facilities. Also, strict action must be taken against hoarders. About fiscal policies relating to inflation in general, India urgently needs ‘supply side economics’.How else are we to tackle the twin problems of high unemployment and low GDP growth? Investment tax credits, faster Environmental clearances, simpler labor laws, simpler tax laws etc. will give a long way to stimulate aggregate supply.
Third, India has to improve its economic productivity. Increasing productivity is the only sure shot way of ensuring long term, consistent economic growth. Productivity consists of four facets - Human Capital, Physical Capital, Natural Resources and Technological Knowledge. To simulate Human Capital, importance must be given to Skill development and Education. However, since Human Capital takes a long time to accumulate, it will not help the Indian economy expediently. However, increasing physical capital will give returns much faster. It is important to note, that the superb 8% + growth we saw post 2004 must be credited in part to the massive amounts of capital investment done by the NDA government from 1999- 2004. Building better roads, ensuring efficient energy generation, building trade enhancing waterways, constructing trans-city, super-fast train routes etc. will all go a long way in ensuring a sustained period of economic growth. As far as Natural resources are concerned, increased importance must be given to domestic oil drilling. India is overly dependent on foreign oil imports. In fact, HUGE oil subsidies are the major cause for India's deficits. An oil well discovery on Indian shores will go a long way in ensuring a consistent, long lasting and cheap supply of fuel. And lastly, technology can be used to do miracles for India. Modi, being a techno savvy man himself, should ensure that technology is used to its fullest across all sectors.
Fourth, corruption must be controlled urgently. And no, I'm not talking about passing the Lok Pal bill. We need to realise that bills alone cannot curb corruption. What we need instead are innovative executive measures. Take for example "Online Trackers" that Modi has initiated in Gujarat. As far as environmental clearances are concerned, all papers are immediately put online, once there're received by the ministry. The company can then track the journey of the clearance at a click of a button. This has reduced human intervention greatly and has reduced avenues for bribing greatly. Many such measures are the need of the hour. A corruption free, red tape free, bureaucracy will go a long way in simulating foreign investment.
Fifth, India needs to urgently reform its archaic tax system. The current tax system is too complex and has too many loopholes. The income tax base is extremely narrow (only 3% of Indians pay taxes). To counter this shortage, the government has had to retort to higher indirect tax rates, atrocious retrospective tax laws, super rich tax slabs etc.These have just proven to be measures that ‘beat around the bush’. Modi will need to introduce more decisive measures that widen the income tax base. It is the only sustainable way of ensuring long term consistent tax revenues. The second, sure step to tax reforms would be to introduce the GST (Goods and Services Tax) - an umbrella tax that would replace all indirect taxes. The GST by some estimates can improve GDP by 2 percentage points. Additionally it will boost revenue whilst reducing business transaction costs.
Will Modi be able to take these decisions? One certainly should hope so. He has been given a decisive mandate and will not need to negotiate with cranky regional alliances on important economic decisions.
However, before Modi sets out to clear out the UPA mess, he needs to sort out the disarray in his own party. He needs to have a strong head and formulate a competent cabinet to his own liking. He must resist the temptation of giving away posts to old leaders just because of their stature in the BJP.
A decisive, capable and competent cabinet is the pre-requisite for a pro-reforms government that Modi has promised.
- Tejas Mehta