Competition and entrepreneurship guide the economy to its most productive route. Reforms that nurture such an environment are needed, writes SUDIP BHATTACHARYYA
With growth stagnating at 4.4 per cent and inflation hovering at nine per cent, savings and investment dropping, the economy is crying for reforms. On Budget day, here is a list that the Government can start with.
Capital spending is needed as it will boost growth and the economy's potential. Gross domestic savings and gross fixed investment have dipped but are still at about 30 per cent of GDP. However, almost half of all savings are now directed into physical assets (such as gold) that bypass the financial system. The quality of capital investment has also fallen. While China devotes 2.7 per cent of its gross domestic product on health care via Government spending, India allots 1.2 per cent. The most productive kind of capital investment — made by private firms that build factories and buy machinery — has dropped from 14 per cent of GDP in 2008 to below 10 per cent today.
Another important reform measure is the expansion of the tax net (only three per cent of Indians pay tax) and it may also be necessary to tax the rich at a higher rate. The top marginal tax rate in Denmark was at 60 per cent in 2013. The US, with its pro-rich taxation policy, set its top rate at 40 per cent. In India, it is only 30 per cent.
The introduction of the Goods and Services Tax must also be expedited. This will make India a single market, and facilitate trade and commerce. Also, the rate of GST can be appropriately raised to combat inflation. In this regard, financial regulations must be strictly enforced to counter the tendency of unusual asset price increase.
The Government must also take steps to make India a hub for labour-intensive manufacturing. The time is just right for this as labour cost is rising in China, investors are wary of the Asian giant and looking for better prospects. At the same time, India’s weaker rupee makes it competitive while its demographical advantages also come in handy.
Focus on small and medium enterprises in the domestic markets will go a long way in creating new jobs while and focus on large firms is needed for higher exports.
The Government should also seek to increase intra-regional trade by interfacing more with neighbours in South and South-East Asia.
Leading domestic brands should be encouraged so that they can become global brands with the state-of-the-art quality standards, technological excellence, scale, size and diversification. Eventually, they will set the standard for smaller companies to emulate. Sony and Toyota did this in Japan, and Samsung and Hyundai in South Korea.
Similarly, large family businesses must be encouraged to transform into professionally-run multinationals. They should put in place excellent corporate governance structured. Samsung, Lenovo and India’s own Sun Pharmaceuticals are good examples.
With growth in consumerism, research and development must be promoted especially in the field of eco-friendly products. Even today Mahindra's expenditure on this count is less than three per cent of that of Volkswagen.
The public sector needs to be overhauled since it is afflicted by graft, inefficiency and incompetence. Specific problems that need to be addressed in this regard relate to price policies of public sector undertakings, under-utilisation of capacity, planning and construction of projects, labour and personnel management, and lack of autonomy. Disinvestment is one possible solution which can also substantially increase the Government's investable fund.
Ultimately, it is competition and entrepreneurship that guides the economy to its most productive route. These two factors were the prime accelerators of growth for the American economy as well, wherein a system of creative destruction has sustained nimble global firms and encouraged startups. India needs relevant policy reform to nurture such a facilitating environment in the country.
(The author is a retired banker)