Friday, 28 March 2014

Grow baby, Grow

If you saw India's financial position in the previous post, you could be excused for opining that we must cut expenditure. For most other countries, that would be the answer. But not for India. For India, the mantra has to be grow baby, grow.

India is uniquely positioned. It has all the ingredients for rapid growth - a hitherto underdeveloped economy, a dynamic and large domestic market, a large and young population, an education ethic coupled with hard work (mostly), and all the institutions that can enable growth. The trouble is that it has been constrained all these years - first by socialist claptrap and second by the neta babu raj.

You can see why growth has to be the single most important mantra for the next 10 years

  • The only way to provide economic upliftment for large sections of the population is through facilitating employment. The only way to facilitate employment is through economic growth - not by giving doles under the guise of the NRGEA.
  • Economic growth will lead to explosion of tax revenues to the government - helping close the yawning gap between revenues and expenditure and enabling big rises in productive expenditure.
I submit we should target a 8% GDP growth year on year for the next 10 years. We should completely forget about equality of wealth  during that period (let a few people get rich; remember the immortal words of Deng Xiaoping when he set China on the growth trajectory). A decade later we can stimulate more equitable growth. For now, go full blast for growth. Let us have the enviable problem of the economy overheating through too much growth, a la China.

Growth can be achieved by the following strategy

  • Reform the land acquisition policy - this is the most difficult reform of all.  Set up an independent body that will adjudicate on land acquisition issues. Set fair purchase price, insist on all families selling land to be provided employment, and establish the principle of 75% acceptance means the other 25% have to compulsorily give in.  The independent body shall be a quasi judicial body and the courts should refuse to intervene. Decision making by the body must be in short frames of time - say 3 months. Establish fair and transparent process and public acceptance would come. Ruling party , in its own self interest, should not instigate trouble in opposition ruled states.
  • Single window clearance of industrial proposals by the government. Speed of clearance is essential - no more than 1 month, else clearance is deemed to have been made. No bureaucrat is to be made the subject of a CBI investigation for a decision that may later prove to be correct or incorrect - he should only be investigated if he has personally made money in the process.
  • Trawl through all the laws relating to commercial enterprises - be it in agriculture, industry or services and repeal 75% of them, taking some risks in the process. Strict laws should only be in some limited areas such as consumer and worker health and safety, pollution, etc. In other areas, the government should stop its utopian meddling. There is a precedent for such action - when the 1991 reforms happened, this is exactly what Manmohan Singh and Chidambaram did in the field of exports . Some unintended consequences may happen, but that is a price to pay for growth and can be subsequently corrected.
  • Enact the new Direct Taxes Code and the Goods and Services Tax, which has been in legislative limbo for a decade. This will make India one economic entity rather than each state erecting boundaries. If some states with opposition governments do not fall in line, they should be ignored and the rest should proceed. This will give stability in taxation.
  •  Throw open every sector to domestic, foreign or extra terrestrial investment. Frankly it doesn't matter in today's world where the capital is coming from. If it comes from outside, all  the better - government's finances will be eased.
  •  Big push to infrastructure for the next 5 years - power, ports, roads and railways. The government needs to do very little - simply allow private capital to do its job and not come in the way. Power sector reforms are essential - this is a specialist area by itself, but India has tied itself into knots. I won't get into the details of power reforms, but it just needs a strong leader to remove all the shackles, price power  economically (no freebies), buy / bully peace from the environmental lobby (no dilution of pollution standards however)  and let the problem solve by itself in 5 years.
  • Access to capital is already good for economic enterprises - both equity and debt. The government needs to do nothing different and simply maintain status quo
  • Make regulators independent, arm them and leave them alone to do their job. SEBI and RBI are two excellent examples that do this today. In every sector, simply clone this model.
  • No subsidies, tax holidays, nothing,  for industries.  The sheer economic opportunity will spur investment. No sops needed.
  • The industry and services sector do not need government intervention or help. Agriculture does. I am not an expert on policy measures required in agriculture, but entrust that task to experts like  M S Swaminathan and simply implement whatever they say.
  • Above all, glorify speed. Introduce a law that specifies time limits for every governmental or regulatory action. No sitting on files. Making a wrong decision in haste is not a crime. Making no decision at all IS a crime. 
  • Shift government's approach to economic activity to one of facilitation and not of investigation. Shamelessly court economic activity of any kind without making moral judgements on relative merits of one over the other. In that process a few (even many) rotten apples may slip through. I submit this is an acceptable price to pay for growth.
  • Create an overwhelming momentum for growth. When the momentum is overwhelming, opposition is difficult and might be restricted to a few areas. Backtrack there and let loose the rest of the push.
Growth will not be smooth - there will be some areas where things will turn out badly. Some (the 1%) will make huge money. Some will be left out. But a large and overwhelming majority will be uplifted. The example of China proves that this is indeed the case.  It is worth taking the risk, because inaction and not growing is sure to doom the majority of our brothers and sisters to perpetual poverty. That is a bigger crime.

What of corruption ? That is such an important topic in India that it will be the subject of  a full post that shall follow.

How can this be politically sold. Again a topic that deserves a full discussion in a separate post, also considering the implications of the proposals on the expenditure side.

Simultaneous with the growth push, the government should also remove income tax exemptions for agricultural income, for house property if reinvested, for long term capital gains etc. Very few (preferably nil) exemptions must exist in the tax code and the rates should remain at the current 33%. This has been the direction of tax laws anyway since 1991 - that's why income tax collections are such a success relatively speaking.

A GDP growth of 8% plus the removal of exemptions will result in tax revenues rising by at least 10% per annum. That will mean an additional Rs 1 lakh crores of revenues each year. Coupled with sensible policies on the expenditure side, the country can actually step up productive expenditure, and bridge the deficit, at the same time in 5-10 years.

Will such an approach work ? Yes it will. There are two examples in history. India itself in 1991, did something like this. The result is plain for all to see. And then there is China from 1980 to 2000. The Chinese example has one major difference - it was all government led with most of the investments coming from the government. I am recommending the opposite of this. The growth will be private led with governments only facilitating - for the Indian government today is not financially in a position to do any better.

For those interested internationally, this strategy can work only for India, and partly for Nigeria and Indonesia. It will not work for any other country. For those interested, happy to debate offline !

In the next post, we shall turn our attention to the expenditure side.

What do you think ?


Gaurav Jain said...

The ideas are indeed bold and pro growth. The only problem that arises is when you tell a small section of the people (BPL) to take care of themselves while the government tries to fix the economy. People are so used to free rations to free everything that when you decide to take it away, even if its for their own future good, there is going to be a huge up roar. But may be, that is what is needed currently so that when the next general elections come around, we don't end up discussing these same issues in precise.

Ramesh said...

Thanks Gaurav. You are right. There is no way these can be done and BPL segment be screwed at the same time. As you would see in my following post on expenditure, I am arguing for keeping food subsidy intact and phasing out other subsidies only gradually.

My submission is that the growth drive will significantly drive up employment and that is the only real lasting cure for the poverty line.

Sriram Khé said...

So, the material deprivation that surrounded me everywhere and anywhere during my formative years was essentially what I wanted to understand through graduate schooling, and why I never cared for engineering. It was simultaneously exciting and disappointing to find out from the academic discussions that practically every idea had already been talked about. Growth first; balanced growth; unbalanced growth; basic needs first; ending licence raj; the Hindu rate of growth; dirigisme; ...

Thus, when I read your notes here, it is all that deja vu all over again!

Your listing reminds me, yet again, that it is not a shortage of ideas that have held India's economy back. It is a sheer lack of political interest to focus on nothing but the welfare of the people. The welfare not via handouts and election promises, but via systematic long-term approaches.

Will end this with a couple of points:
1. The Economist notes in the latest issue that Mexico's export industry has gotten pretty efficient and innovative because it has to keep up with the global competition. But, its domestic sector, which is where most employment is, continues to be inefficient thanks to the politics and the bizarre regulations. That might be equally applicable to India too. Your proposal to get rid of the awful policy nightmare that tightly circumscribe economic activities (and, thus, also encourage corruption)) is similar.
2. Yes, you are a big fan of China and its get-rich-first mania. We have disagreed with that at various posts here and at my blog. But, given the context of an election manifesto, which applies only to Indian citizens, I will let you have your way ;)

Ramesh said...

@Sriram - Oh yes - nothing is new. Neither is it unknown to any of the policy makers. As you observed, its just that a serious long term approach has been missing and the leadership to do that sorely lacking.

The Mexican example is quite correct indeed as a similar case.

Yes, I know you don't buy my admiration of the Chinese economic model, and we have debated this before. With the experience of the model, we can make two big alterations to that experience for India

- Private led rather than government led investment
- No lax pollution and environmental standards
- We are "only targeting 8% GDP growth - lower than the 10% numbers China aimed for.

You should debate and not let me get easily away, for , you are very informed, have a critical analytical point of view, you are an Indian in the broader sense of the word and above all, you are a skilled and personable debater. So don't let me off the hook !

Sriram Khé said...

Ok, set aside the differences re. China's economic model.

What I find sorely lacking in India is a sense of equality of opportunity. Addressing this will, I am convinced, automatically lead to economic advancement as well. But, the goal is not economic advancement per se. Hence, it is not a target of an 8% growth rate, or a 10%, that interests me at all.

The opportunity for most is highly constrained because of caste, religion, social mores, politics, even more than it seemed to have been back when we were growng up. The poor, without patrons in the right places, have next to nothing in opportunities. The son of the domestic help at my parents' home went on to college because a few in that complex got him a seat and paid for his education. Then, one in the same flat complex got him a data entry position at a bank. If he did not have those patrons, it would have been impossible for him to have gained the economic ground.

The complex social dynamics in India and the uber-politicizing of those dynamics, have made it impossible to even promote a facade of equal opportunity, leave alone a real equality of opportunity. Economic growth by itself will not address these at all, and all we will see is a further polarization along income and wealth lines. The inequality that you say will happen will not be any short-term issue at all, and will instead become a deep and entrenched one as is the case with most Latin American countries.

I understand you want to focus only on the economic manifesto. And that is why, for instance, you focus on the GDP growth rates. But, I would like anybody's, and any political party's, economic manifesto to provide a roadmap on how that manifesto will even the highly uneven playing field.

It is unfortunate that the world has so much latched on to the GDP number. I often quote Joseph Stiglitz who articulates in many contexts that we should not value what we can easily measure, but must set out to measure what we value.

So ... there ... ;)

J said...

I was planning to let you and Sriram duke it out but had to jump in :) I was hesitant to say anything because having lived outside India for almost 2 decades, I have a very jaded view of how things work and am completely out of touch with the ground reality. But I figured some things don't change :)

Like Sriram my initial reaction was that the growth plan looked familiar - the infrastructure projects, tax reform, land reform,... except for the all private route with quick approvals. But is there a will to do any of the things that need to happen. Will the undeserving tax breaks and subsidies ever go? Will cronyism and political interference in granting approvals to the private sector go? Also I was also expecting some push toward equal opportunity for all. I see a lot of action in the area of education in India in terms of new universities and fancy schools but is quality education truly accessible to all? For a sustainable and vibrant growth model, shouldn't everyone be able to aspire to make it big in their own lifetimes. But I am totally on board that there needs to be a conversation about it. Even if steps were taken like in the early 1990s, that would be good. I remember how exciting it all seemed it those days and the optimism that came with breaking away from the licence raj. Does there to be a crisis like then for real change?

Rahul said...

Ramesh as usual I have been following through your blog. I think with this series you have invoked great debate and forced me to break my silence.
Ultimately development is about improving the quality of people’s life. GDP growth is often used as proxy to represent “Development”. To me GDP growth could be perhaps one of the means rather than end in itself. I have my own doubts about GDP growth being even a strong means to the end. We have had a range of growth from heady 8-9% to sub 5% in last decade. However what we have seen is only overall decline in the quality of life for Indians in general- our cities have become congested, polluted and continues to get worse with respect to basics like sanitation. Our villages continues to be deprived of basics such as electricity. Child mortality for India as we all know continues to be worse than many relatively lower growth countries including Bangladesh. So there are more things to development than just economic growth.
Having said there is no hiding from addressing basics of economics such as deficit. We need one time impetus to shift the gear on Infrastructure development. I think we should open up all possible gates- amnesty schemes to pull out all that black money, direct investments in all areas- but all with the condition that the money from all these collections will directly go towards Infrastructure development. People need to learn to pay for good infrastructure in terms of toll etc. This should not only pay for maintenance of infrastructure but should also be one of the sources of revenue (yes even if Infrastructure is developed by Private the cut should go to the Government). I would also not venture into cutting the subsidy however there should be annual target to improve the efficiency of subsidy every year.

Ramesh said...

@Sriram - Hey thanks for debating vigorously.

Yes, equality of opportunity is a highly desirable objective - but I humbly submit that you are making a stab for utopia. Nowhere in the world this exists and from where we are in India, it will be a long time before we reach even acceptable levels of equality of opportunity.

But I am dismayed at the undervaluing of GDP growth. Sure, there are lots of other things that are also important in a nation but the number one priority has to be GDP growth - that is the only way we will lift people out of poverty. If there is any better way, I would love to hear that and will readily jump ship.

On the equality of opportunity, you may be interested that even now we have a different India. Walk into any IT or BPO company. You would be amazed at the number of people who come from incredibly humble backgrounds - when I was working and used to hold a parents day at the office, I had tears in my eyes on the sort of people who came and their pride at where their children had reached which they could not even dream about. Our recruitment policy did not even ask where people came from. On sheer merit they got their jobs. That is what creating economic growth does - it opens up job opportunities for everybody.

The lady who used to help in our house had three daughters - she was illiterate herself. With just her wages and an occasional advance from the houses she worked with, she educated all her three daughters. I have a lump in my throat when I say that one works for Infosys, one for Wipro and one for TCS - nobody's influence was needed. This is not an isolated incident. This is the dividend that economic growth since 1991 has given us. It is still nowhere near enough - hence the passionate plea for more, more more growth.

Ramesh said...

@J - Delighted to have you join the debate. Yes, nothing of what I have said is new. But your question of "Is there a will" - I believe a strong Yes. I suspect many of these elements is what the front runner has in mind - my disappointment is that he is not articulating it under the belief that doing so will hurt his poll chances. In varying degrees all political parties bar the Communists have some elements of this plan.

Ramesh said...

@Rahul - Hey Rahul - wonderful to have you here . Oh I fully agree that GDP growth is only a means to an end - The end is lifting people out of poverty - even that is only one of the goals and not the only goal as other commenters have pointed out. In this series, I am addressing only this goal - other matters such as urban development, etc are all very important too. Just that I am not addressing them here.

As for subsidies, I am not for total abolishment either. Some have to go; some should be retained. Addressing this in the next post on expenditure.

Sriram Khé said...

We will simply have to agree to disagree at some point ;)

Back in grad school, a professor often asked us "what are you trying to maximize?" You and I have very different views on what we want to maximize. Your idea to maximize the GDP will never be my goal. And, of course, to a large extent, the attempt to maximize welfare via GDP maximization is nothing but the much criticized trickle-down economics.
Even if one grants that the approach worked for China (you know all my reservations against applauding China's approach) the socio-political structure there is nothing like the conditions in India. Thus, very few, if any, lessons to be learned from the neighbor.

An economic manifesto is not, therefore, value-neutral by any means, and it is up to the people to figure out which values they prefer. Hence, I granted you way up front that you can have it your way because it is a political preference for a country of your citizenship, which is exactly how it ought to be anyway.

Ramesh said...

@Sriram - Yeah - we have to simply agree to disagree, for we have strong opposing views. But thanks you for airing them and debating - for I can see your point of view, and the debate influences my future thinking on the subject. Hopefully I have contributed likewise to you.

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