India's economic dilemma
India’s economy has always been afflicted by an unfortunate mishmash of misuse of public funds, knee jerk reactions and political agendas, writes Raj Liberhan
India's economy is a singularly complex phenomenon. In most of these post-independence years and, even before, it has prospered despite the Government and not because of it. Our people coveted the capitalist model led exemplified by the United States while our political class paid lip service to the socialist models led by Communist Russia and Eastern Europe, all uniformly poor and struggling to feed their population, till recently. This divergence in thought threw up a controlled fiscal regimen and led to corrupt and black money practices getting embedded in the business and regulatory environment of the country. Naturally, the people of our country learned to game the system and became rich by staying outside the legal boundaries or riding on the edge. Yes, even the organised sector, the corporate world of business, trade and industry and enterprise, circumvented and evaded the laws of the land and many times found ways to avoid them altogether. The laws were ill-conceived, poorly enforced making the government poor in every way, while the rich few became richer but always in a 'benaami' mode, which meant notionally poor but in reality wealthy. The façade of duality has not yet lifted from our economy till this day.
Post-1991, the year of our liberation — celebrated amongst the faithful as economic liberalisation or second independence — legitimised a relaxation of regulation regarding private enterprise and unshackled some government controls and licensing regimes at the macro-level of policy. Again, in the implementation at the cutting edge level, our famous 'inspector raj' found ways to thrive. Indeed, the regulatory protocols gave more muscle to the extortion industry. Nevertheless, prosperity did happen because the cost of doing business was affordable, meaning the 'inspector-raj' could be 'manageably added to the cost of production. Meanwhile, at the state level, the integrity of the public expenditure continued to deteriorate and public funds were badly managed through politico-business-bureaucracy nexus. The outcome per every rupee spent has been woefully less than its potential economic value. Hence, the public assets were poor in quality, over expensive and delayed hugely to render unsound economic costs and returns.
The government is quick on the draw at the first sight of getting extra revenue or installing a regulator for a performing sector merely because it adds to the parking slots for the retiring bureaucrats. The existing regulators have caught the bug of expanding their jurisdictions to cover all aspects of human activity until they can successfully kill competition. The morality and ethics of governmental action is the least and last concern of our bureaucracy.
To begin with, we create all policies with enough ifs and buts to negate the original intent. If something intelligible still survives in that policy, the sub provisos and footnotes will erase the residue. In 2007, Vodafone was served a tax demand of Rs 22,000 crore inclusive of penalties. The then government decided to retrospectively amend the tax laws after our Supreme Court had declared the demand of tax as not sustainable. That single act of our government destroyed the entire credibility of India as a progressive economy willing to do business with the world on fair terms. The matter is in arbitration and that is not much in itself. The resultant effect is that we have not got the revenue but more importantly, also lost many potential investors.
Our revenue machinery constantly drools at every prospect of adding tax through the most stringent application of the laws and often without regard to the legitimacy of the charge or ethics of taxation. Over and above is our penalty system which again gets to crush the defaulter rather than leave room for him to redeem his livelihood. Fines and penalties need to be levied in proportion to the crime.
In these times of grave economic crisis following extensive lockdowns the world over, we are also suffering total economic paralysis. A great deal of discussion is happening on what we need to do to revive the economy. We have many ideas on the kind of policy response that is needed to resuscitate the economy. All governments are suffering as they are getting barely thirty per cent of budgeted revenue. There is some manner of self-congratulatory joy being expressed at the global suspicions of China being blamed for the spread of COVID-19. Sure, global supply chains will need to be diversified but it is in the long term. China has the resources to rebuild the supply chains and is already doing so. To make surmises of how foreign investors will queue up at our doorstep to be allowed to invest in our land is too optimistic just because China is still very much in the race. We must have a policy in place that assures fiscal certainty, land availability and a simple but friendly regulatory system. All of this combined should be easily navigable.
We have engaged in facile changes for securing an upgrade in ease of doing business without looking at the ground realities. A hugely discretionary revenue system, poor land management and utilisation policy, slow and arduous judicial processes and a mercurial fiscal regime gets changed through domestic provocation, like the change in e-commerce regime And highly forgettable is the graceless public statement: a billion-dollar investment is no favour to us. Unnecessary!
Economics has no other religion except money. True, politics will colour economics to secure protection of the domestic producer but it must be through a settled regime and not through sudden twists and turns. There has to be a free economic environment at a basic level. Eat, drink and wear what you like but with one caveat: obey the laws. We have to make up our mind to keep our economics focused on the prosperity of our country and not on specific individuals. That is the only way to make our gods happy.
Views expressed are strictly personal