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Developed country ambitions need deep structural reforms

Jun 13, 2024 09:23 PM IST

The most important reform is to reduce the borrowing costs of businesses by reducing public borrowing

India’s impressive growth performance has raised hopes of it becoming a developed country in the not-too-distant future. The Prime Minister has set 2047, the centenary year of Independence, as the aspirational target year. However, leapfrogging from being a low middle-income economy to becoming a developed country in the next 25 years requires raising the country’s per capita income by more than five times, from $2,600 to $10,205. This effectively translates into a per capita income growth at 7.5% per year and an aggregate Gross Domestic Product (GDP) growth at 9%.

To achieve developed country status, India’s GDP has to grow by an average of ~9% annually over the next 25 years PREMIUM
To achieve developed country status, India’s GDP has to grow by an average of ~9% annually over the next 25 years

Accelerated growth is not enough; the growth has to be inclusive. Creating jobs for four million persons entering the workforce annually in the next 25 years when it is expected to peak and moving 44% of the workforce languishing in agriculture and another 42% in small enterprises with low productivity and incomes to jobs with higher productivity and income, will be a formidable challenge. Given almost two-thirds of those in the 20-33 age-group have less than higher secondary qualifications, enough well-paying jobs cannot be created in the services sector enterprises. The focus thus must be on labour-intensive manufacturing. This requires greater flexibility in capital and labour markets, besides upgrading education and skill levels.

India has made considerable progress in ensuring macroeconomic stability, an efficient financial sector, and cutting-edge digital infrastructure. In recent years, it has also increased public spending on infrastructure. These are important, but more needs to be done to push the economy on a 9% growth path. The most important reform is to reduce the borrowing costs of businesses by reducing public borrowing. The finance minister has promised to reduce the fiscal deficit at the Union level to 4.5% of the GDP by 2025-26. The Reserve Bank of India (RBI)’s record transfer of 2.1 lakh crore will help compress the deficit in the current fiscal. Sustained efforts to contain the deficit and debt while maintaining high levels of spending on infrastructure, education and skill development will have to continue. This calls for enhancing the revenue productivity of the tax system and reprioritising expenditures.

Fortunately, the tax system has seen significantly higher buoyancy in recent years. The record Goods and Services Tax (GST) collection of 2.1 lakh crore in April bolsters prospects of revenues continuing to be buoyant. However, maintaining high revenue productivity and reducing distortions require reforms. The time is ripe for the GST Council to undertake second-generation reforms to broaden the base and rationalise the rate slab. In personal income tax, the option of tax exemptions and preferences should be removed, and the number of rates in the new system should be reduced to three from the prevailing five.

Structural reforms are imperative to impart flexibility to factor and product markets to ensure efficient functioning. The government can focus on some key structural reforms.

One, productive jobs must be created in both manufacturing and service sectors. Small-scale enterprises which employ over 75% of the manufacturing workforce cannot compete in global markets. It is necessary to encourage them to evolve into medium- and large-scale industries with higher productivity and wages. The most important deterrent is the labour laws. To that end, the four labour codes can help. However, more needs to be done to impart flexibility and effective implementation and the states have an important role in this.

Two, there has to be a greater thrust on exports and avoiding protectionism. International experience shows that exports must be a strong engine for the growth for the economy to record high growth rates over a sustained period. India accounts for just 2.5% of global exports. Tariffs have been steadily increasing since 2017, and the share of exports in the GDP has been declining. It is also important to avoid bias against producers in policies on the trade of agricultural commodities. A 9% growth cannot be achieved unless the trend is reversed. In this connection, India’s withdrawal from joining the Regional Comprehensive Economic Partnership (RCEP) was disappointing. The recent signing of Free Trade Agreements (FTAs) with Australia and the United Arab Emirates is important, and increasing the pace of negotiations with the United Kingdom and the European Union should help.

Three, while the Insolvency and Bankruptcy Code (IBC) is a landmark reform, it is important to ensure that the insolvency resolution process is timely, effective, and reasonable.

The three farm legislations to provide flexibility to the farmers to sell their products anywhere, which were later withdrawn in the face of protests by the farmers, exemplify much required but failed reforms. Unfortunately, failed reforms are difficult to revive. The Centre, perhaps, could collaborate with the state governments to generate acceptability for such reforms — after all, in the case of the farm reforms, agriculture being a state subject, the latter’s collaboration becomes vital.

M Govinda Rao is councillor, Takshashila Institution. He is a former director, NIPFP, and was a member of the 14th Finance Commission. The views expressed are personal

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