Weekly Column: Thinking Beyond
By Anoop Swarup
In an earlier column I had presented a case for ‘achey din’ for the Prime Minister in view of the anticipated bonanza to the developing world, particularly India as a spin off to the global crude oil windfall. Now with the Budget Session due next month, the Direct Tax Code and the budgetary exercises being in full swing with the North Block mandarins I would make a case for lowering of the tax regime. This indeed is imperative to kick start the growth engines in the economy and for bringing about a favourable investment climate. For the Prime Minister this also unravels an opportunity to do away with the poorly planned government schemes and the half hearted and shoddy austerity measures of the years bygone. In no less a measure this should not turn out to be another exercise in vain for jacking up of government investments in ill conceived development schemes of the past that have miserably failed the masses over the post independence years.
In fact the danger looming before the world at large is because of uncertain markets and the poor export demand internationally. Let us briefly review the global scene and the response from other economies. The question indeed is whether we follow the traditional Keynesian economics of lowering the taxation rates to boost household savings for improving the investment climate or for annual deficit budgets that bank on burrowed funds leading to fiscal deficits, for public subsidies and investments in poorly conceived socio-economic programmes that India is used to. I draw a simile to Narendra Modi with John F Kennedy who became the President of the United States in 1961 and brought Keynesian ideas to national thinking to expand national income. One of his key policy measures was to drastically reduce taxes and the outcome was phenomenal with a five fold rise in real GDP and fall in unemployment rates.
Incidentally with a growth forecast of 7.3 percent during 2015 the Chinese government is on an overdrive to boost its investments in order to maintain its growth forecasts like many other economies whereas the United States is currently struggling to get inflation to reflect manufacturing and construction take off. It is worth understanding that Quantitative Easing is an unconventional technique first used by the Bank of Japan more than a decade ago and now by many administrations such as with the European Central Bank and the US Federal Reserve. Most economies including India focus on buying covered bonds, a form of corporate debt, thus the US federal reserve holdings equal almost 20 percent of US GDP whereas European Central Banks assets were worth 30 percent of its GDP. We know that almost 60 percent of the US corporate cash reserve are outside the US and bringing it back would imply raising the taxation rates which will not be politically or economically the right approach for the Obamanomics think tank. It is also an equally interesting observation that invariably huge public investments as during the great depression or government austerity measures as in the past to kick start the economy may not yield as good a result as boosting of the cash reserves with the consumers and the households. Further the stock markets ostensibly are driven more by the confidence of the consumers and in India the highly volatile stock market conditions need such an adrenaline push in no less a measure. It is also an irony that barely 1 percent of the population in India perhaps the service class pays its taxes and bears the burden of welfare schemes as also the plan and non-plan expenditure for the government. In the developed world and more so in countries such as the US historical study reveals that low interest rates and reduced indirect taxation rates do spook up investments. In a country like India where individual enterprise and entrepreneurship have been traditionally valued as an asset, lowering of tax rates thereby making goods and services cheap would help not only in boosting household savings but also in improving the investment climate as a whole. Considering the inefficiencies, the state run institutions and projects as we have seen in years bygone post-Independence, it is better imperative to have private participation along with the public particularly in infrastructure development. In the West as I observed the economic growth is fueled through major infrastructure development even which may in itself be a mirage as real economic growth may still elude these economies.
We in India would do well to understand that for a country of our size and diversity the best investment by the government would be in education and health that would deliver great outcomes over the long run in terms of enterprise, innovation and creativity that will be the cornerstone for future growth in an era of technology and information whereas the private sector may do well when it comes to better decision making and to ensure returns on investment. As spin off, better efficiencies and improved employment opportunities in a globally competitive world would be a definitive outcome. It would be a strategic approach and a tactical measure to attract foreign direct investment particularly in greenfield projects as well, with lower tax rates in India vis-a-vis the developed world. The developed world, including the US, is well aware that it could remain an attractive destinations for overseas investors considering the huge availability of an amount of USD 2 trillion from their international cash reserves. Reduced taxes would imply a growth push and increasing the interest rates by the central banks have been resorted to by most central banks to control money supply and inflation in as much as regulating liquidity and ensuring export competitiveness through currency depreciation. From a historical perspective it would be seen that most countries are vary of the fact that in a globalised world transnational corporations may easily shift their base for cost effective and better and cheaper manufacturing. No wonder that the developed economies with little or no politico-bureaucratic indulgence perform much better and corruption is kept at bay. In view of the foregoing it is fervently hoped that the Modinomics would take a cue from Obamanomics and would find a strategic path to usher in tactical solutions as discussed above by not only making Indian economy more liberalised and by eradicating the archaic jungle of bureaucratic rules and regulations ranging from the labour laws to the much needed reforms in goods and service taxes regime and the excise and income taxes that have eluded the Indian electorate in the past. India will no doubt emerge as an attractive investment destination and provide the much needed relief to both the honest tax payers and the foreign investors through the much needed reforms and liberalisation and by reduction of the taxation rates so as to usher in the ‘achey din’ that the country awaits.