Checkmating slowdown

Bharat Jhunjhunwala

Nirmala Sitaraman A“recession” is defined as negative growth rate in two consecutive quarters in economics terminology. Our growth rate has been positive around five per cent in the last two quarters though it has been declining. Hence Finance Minister Nirmala Sitaraman is correct in asserting that there is no recession.
However, the reduction in growth rate from seven per cent to less than five per cent means slower growth in businesses and jobs hence we are in a “recession” as understood by a layman. The steps being taken by the Government such as reduction in fiscal deficit and reduction in corporate tax rates have proved ineffective. The economic policy of the Government is in the right direction but the Achilles’ heel lies in the social policy.
The mantra of reduction in fiscal deficit was predicated on the assumption that it will lead to less inflation, attract foreign investment, will find it attractive to invest in India. However, that fortuitous result has not materialized. Our fiscal deficit has reduced from 3.9 per cent in 2015-16 to 3.4 per cent in 2018-19 and the GDP growth rate, instead of increasing, has declined in tandem from 8.1 per cent to 4.5 per cent presently.

This has happened because the reduction of fiscal deficit has come along with a destabilization of the social fabric which has led to less confidence of domestic and foreign investors on the Indian economy and a decline in investment.

It must be noted that the Government has done exceptionally well in increasing the share of capital expenditures despite lowering of the fiscal deficit. Lower fiscal deficit means less total expenditures by the Government which, usually, leads to less capital expenditures.

However, the NDA has bucked this tendency and increased capital expenditures while containing revenue- and total expenditures. The Government’s capital expenditures have increased from 11.3 per cent of total expenditures in 2013-14 to 14.0 per cent in 2017-18. This increase in capital expenditures has led to a visible improvement in highways and airports that we can see with our bare eyes.

The Government must be congratulated on this effort. Yet, private investment has declined from about Rs 45,000 crores in year ending December 2014 to about Rs 40,000 in year ending December 2018. Anecdotal reports indicate that large numbers of High Net-worth Individuals (HNIs) have been leaving India along with their wealth and taking citizenship of foreign countries. The lowering of corporate tax rate has not helped either.This outflow of national capital appears to be the root cause of the “recession” that we are facing today.

Mohandas Pai T V Mohandas Pai, Chairman of Manipal Global Education, says: “Tax terrorism is the foremost cause of millionaire exodus. Most of those who have left were from Mumbai and Delhi.” The millionaires, he said, say that “tax harassment had peaked; so much so that it had created a fear psychosis among them.”
The efforts of the Government to clean up the system at the top is welcome. We need to ponder why Indian businesspersons would like to migrate to a country like the UK where the tax rates are comparable to those prevailing in India and the compliance system is perhaps stricter? It appears that Government officials are “harassing” the relatively-honest taxpayer as well. The relatively-honest are seen as cheats in India while they get respect in the UK.

The other grouse is the deteriorating quality of life in India. The HNIs say that air quality, traffic condition and other parameters of good living have gone from bad to worse over years. The Bullet Train is leading to cutting of large numbers of mangroves; the National Waterway project on the Ganga is leading to killing of dolphins and turtles; forests in the Aravallis are being cut for housing projects; and the standards for poisonous emissions from thermal plants have been diluted. The list goes on and on.

A friend of mine was living in Delhi. His wife’s weight came down from 45 kilo to 22 kilo. Then he migrated to Dehradun. Her weight came back without requiring any medications. The same with HNIs.The result of these “developmental” activities is that the quality of life has deteriorated and HNIs are migrating. The quest for attaining economic growth by destroying environment has led to the opposite result of less investment and lower economic growth.

The third reason for migration of HNIs is that the social fabric of the country is under pressure. Instances of cow vigilantism, opposition to “love jihad” and other actions on part of the Hindus are seen as anti-Muslim orientation. The businesspersons do not want to be caught in the middle of a crossfire between Hindus and Muslims. Thus they are leaving.

The Finance Minister, however, rightly said that the HNIs must contribute more to the building of the economy. The question is how? I have three suggestions to make. First, the Finance Minister must tax luxury consumption—especially that which adds to pollution and deterioration of quality of life. For example, we could have a “progressive” pricing of petrol. Those buying more than 5 liters could be charged a higher price.

The electricity charges could be made much more progressive. The electricity price in UP, for example, is Rs 4.90 per unit for first 150 units while above 500 units the rates are Rs 6.50 per unit. The upper rates could be raised to, say, Rs 15 per unit. L u x u r y c o n s u m p t i o n goods like chocolates and sodas could be taxed heavily.

The Government should institute an external evaluation system to track and dismiss corrupt Government Employees at the lower level. The problems of deteriorating quality of life are also essentially governance issues. It must be ensured that the policeman imposed fine on a large truck emitting funnels of smoke and does not harass a person who has missed getting his pollution check renewed by a few months. That will encourage HNIs to stay in India and help attain higher growth rates.

P o l l u t i n g goods like plastic bags could also be taxed heavily. The HNIs would barely notice these taxes but the Finance Minister would get revenues and the reduced consumptions of the polluting goods would make it more attractive for HNIs to remain in India.

The second step is to honour simplicity and charity. To earn is good. To indulge in ostentatious consumption is not. The display of wealth builds anger among the poor. On the other hand, the income earned by HNIs will have a socially smoothening effect if used in charity.

The Finance Minister could institute national- and state-level awards along the lines of Padma Awards for HNIs living a simple life and for those giving in charity. That would smoothen the social tensions act as an incentive for HNIs to remain in India. They will feel respected and wanted rather than disrespected and haunted.
The third step is to improve governance—in particular, the accountability of government officials. The “tax terrorism” in not an invention of the Finance Minister, it is an invention of the lower tax officials. The Government has taken commendable steps to retire a number of corrupt officials.
However, this is not percolating to the bottom. On the contrary, the lower officials are seeking higher bribes saying that there is more strictness at the top. The need is to control corruption at the bottom along with at the top.

The Government should institute an external evaluation system to track and dismiss corrupt Government Employees at the lower level. The problems of deteriorating quality of life are also essentially governance issues.

It must be ensured that the policeman imposed fine on a large truck emitting funnels of smoke and does not harass a person who has missed getting his pollution check renewed by a few months. That will encourage HNIs to stay in India and help attain higher growth rates.

Formerly Professor of
Economics at IIM Bengaluru