When deliverers become dependents
Even though India and Japan are far apart in terms of geography, demography and economy, they have on thing in common. Both witnessed the rise of new charismatic leaders in recent years, promising the populace an upturn in their respective economic narratives. The Indian economy is engulfed by a continuous slide in growth and Japan has been in the midst of an unrelenting recession for past two decades. Prime Minister Narendra Modi and Prime Minister Shinzo Abe are sailing on the same boat. Given the leg up of political majority in the people’s representative houses, both vowed to bring the economy back on track. They sowed the seeds of expectation by committing radical reforms to the economy. The euphoria, however, was short lived. Modi’s big-ticket reforms seemed to have been stuck in the pipeline and Shinzo Abe has suspended the third stage of his ‘Three Arrow’ economic reforms, after Japan re-plunged into recession in the first two quarters of the current fiscal.
After the insurance bill was stuck in Rajya Sabha, there was no move by the Modi-led government to push forward any big ticket economic reform. It had announced its “Make in India” initiative to revive India’s manufacturing sector, which soon ran out of steam. It was merely a campaign and not a policy reform. Abe’ first two of ‘Three Arrow’ reforms, viz, monetary easing and fiscal reforms, had a positive impact initially. But, the rise in consumption tax reversed the initial gains and threw Abe’s reforms upside down. Once again, Japan went into deep recession.
What went wrong in both cases? Modi’s reforms buckled down to the perils of democratic process and Abe’s reforms failed to tame the Japanese consumers’ fears, who have been burdened with long years of recession and without any hope for economic revival. An aging population and plunge in age-long recession dwindled the savings ratio and stymied the Japanese consumers from spending.
Modi’s “Make in India” has failed to stir investor sentiment. According to prominent columnist Swaminathan Ankleswar Aiyer, “Why will foreign investors come to invest in India when Indians are not investing?” RBI Governor Raghuram Rajan was skeptical about Modi‘s call to “Make in India” and make the country a global manufacturing hub for export-led goods. He apprehended that the world has little appetite for imports, given its current volatility .
General consensus among economists is that ‘Abenomics’ was lackluster in its delivery, just as repeated quantitative easing failed to deliver in USA. The ‘Three Arrow’ economic reforms failed to hit the mark. Abenomics depends largely upon the weakening of value of Yen against most of the world currencies, resulting in a prop up in export opportunities, increased employment and upturn in corporate profits. However, as the world economy is currently in no shape to resuscitate an era of high growth, appetite for imports will slide. East Asia is the biggest importer of Japanese goods. More than half of Japanese exports go to East Asia. China is a guzzler of Japanese merchandise. With dwindling growth rates, China appetite for Japanese imports is slated to decline. Given the situation, Japan is unlikely to reap substantial gains in terms of its export-related growth model.
Japan’s economy needs to be bolstered based on domestic consumption growth and buoyant manufacturing activities. Quantitative easing alone will not spur domestic consumption. Given the disadvantage of an aging population, a spur in employment opportunities and a favourbale immigration policy are likely to boost growth in domestic consumption. Japanese investors need to be impelled to invest in their own country. Japanese binge for overseas investment need to be reversed into inward investment with more incentives. Incentive is the first and prime attraction to woo investors. In fact, the first two arrow of economic reforms of Abenomics seemed to have dismayed investment in Japan.
In making India a hub for global manufacturing, investors were looking for tangible changes in the government’s economic policies. Investors overwhelmingly desire ground realities that are conducive to investment. So far Modi has unveiled reforms that were related to socio-economic sector, such as easing of provident fund benefits and tinkering with factory regulations. The major investment hurdles, which require policy changes, are difficulties in land acquisition, hire and fire system and the multiple approvals required at state level.
India has to pitch for global competitiveness to woo investors. Global competitiveness depends upon three factors. They are ease of doing business, low cost structure and domestic demand. After the world economy reels under the uncertainty of growth, exports related growth are loosing sheen with a shrinking appetite for imports. Hence, India’s large domestic demand will be a better bet for investors.
Fiscal incentives are one of the major drivers of an invester-friendly sentiment. India is known for its unhealthy tax structure for local businesses. With corporate tax at 33 per cent, excise duties hovering between 10-12 per cent and 26- 28 per cent custom duty, business taxes are one of the highest in India. Despite having the advantage of high domestic demand catalyzed by a large demography, an unfriendly tax structure dampens the effective demand. Fiscal incentives are essential to negate such a high tax regime. Modi’s reforms in FDI policy and his ‘Make In India’ programme are far from any definitive fiscal measures.
Ease of doing business is an important tool to put manufacturing on the fast track. Unburdening the complex procedures of approval system to set up manufacturing units is one of the prerequisites for an active economic model. It is heartening that the Modi-led government has stated its desire to let the ease of doing business flow on progressive stream. But, since States has a bigger role in facilitating the ease of doing business congenial to investment and since BJP is still a minority in the Rajya Sabha, a political consensus needs to be built up between the Centre and states to spur local manufacturing.