What’s in store for the Indian Economy in 2020?

What’s in store for the Indian Economy in 2020?

Vivek Kaul

2020 is almost here. The big question bothering people who are bothered by such things is, how will the Indian economy perform in 2020? Will we get back to growing at the rate of 8% and higher? Or will the current growth of less than 5% continue?

Economics, despite what many economists like to believe and say, is not a science. And given that, definitive answers are always difficult to come up with.

Nevertheless, I will try and take a shot at it.

It is worth remembering that the Indian economy is primarily a consumption-driven economy. Private consumption expenditure, or the money that you and I spend on buying goods and services, has over the years formed nearly three-fifths of the Indian economy. In the past, it was consumption growth that drove Indian economic growth.

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But consumption growth in 2019-20 has collapsed. In the first six months of this year, consumption growth has been just 7% (in nominal terms, without adjusting for inflation). It is the first time since 2004-05 that consumption growth has been in single digits.

The question is, why? Since 2011-12, a large part of consumption has been financed through increased borrowing and spending a greater proportion of the income. This has led to household financial savings coming down dramatically.  

This has primarily happened because incomes haven’t grown as fast as they had in the past. The reason for that lies in the fact that enough jobs are not being created to employ India’s demographic dividend or the one million Indians who enter the workforce every month.

Ultimately, consumption is a function of income, which is a function of job creation, which in turn is a function of increased investment in the economy. A fundamental principle to remember in economics is that economic activity feeds on economic activity.

The city of Bengaluru remains a great example of this. In a period of a little over three decades, the city has transformed from a pensioners’ paradise to a global IT hub. And this wouldn’t have happened if the initial bunch of companies hadn’t come and set up their offices in the city.

Of course, physical infrastructure hasn’t kept pace with the city’s growth and the environment has been destroyed, but one can’t deny that lots of jobs, wealth and economic growth has been created in the process.

The only way to create economic growth is to encourage economic activity. This is something that hasn’t happened enough in India, in the last decade. This is clearly reflected in the fact that the investment to gross domestic product (GDP, a measure of a country’s economic size), peaked way back in 2007-8 at 35.8%. It has been stagnant at 28-29% of the GDP for the last four years. This ratio has to be pushed up.  

How can that be done? As cliched as it may sound, the land and labour laws need to be reformed. The Goods and Services Tax (GST), which has been a major spoilsport since it was launched, needs to be majorly simplified. As Vijay Kelkar and Ajay Shah write in In Service of the Republic: “80 per cent of the countries which introduced the GST after 1995 have opted for a single rate GST.” India’s experiments with a multi-rate, complicated GST continues.

Over and above this, government spending needs to be made smartly. There is simply no point in continuing to rescue failed public sector enterprises and banks, when spending money elsewhere can give more bang for the buck. Kelkar and Shah point out in their book that it takes Rs 1 lakh crore to build a 10,000 km four-lane highway. From the economic point of view, this is a no-brainer: the government should be spending money building roads rather than rescuing public sector enterprises.

But that would involve disturbing the status quo and the Modi government, like other governments before it, doesn’t like doing that.

Also, the government is desperate to increase tax collections. Media reports suggest that diktats have been issued to the income tax department to crack down on tax evasion and go aggressive on increasing tax collections. As we have seen over the last decade, tax terrorism has become another issue that businesses have to deal with. This is likely to become more acute this year given the huge slowdown in corporate tax collections. In the first seven months of 2019-20 (April to October), the corporate tax collections stood at Rs 2,72,756 crore, an increase of just 0.9% over the same period last year. In the budget, the government assumed that corporate tax collections would grow by 15.4% in comparison to last year!

This is not going to happen simply because the government has cut corporate income tax rates. Over and above that, if the economy is growing nominally at 7%, tax collection cannot grow at over 15%.
Harassment by tax officials discourages small and medium entrepreneurs in a big way. This is something that the government needs to avoid if it wants to encourage economic activity and growth, this year and always.

Given the fact that the government has barely acknowledged that there is an economic slowdown, the chances of any economic reforms are bare minimum.

As things stand, I will be very surprised if economic growth crosses 5.5-6% during the course of the next year. And that being the case, things will continue to remain bleak and tough on the economic front. This means that the government will make more attempts to create issues which divert public attention away from the economy.

(Vivek Kaul is the author of the Easy Money trilogy) 

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