Where is the economy headed? The answer depends on the timeline and indicator. The obvious indicator is GDP growth — that is, real GDP growth — and the immediate timeline is 2019-20 and 2020-21.
For 2018-19, there was real annual growth of 6.8%. But for the four quarters, the number was 8%, 7%, 6.6% and 5.8%, respectively, a progressive slowing. Both the Economic Survey and budget expect real GDP growth to be 7% in 2019-20. In its latest projections, the Reserve Bank of India (RBI) also expects 6.9%, with 5.8-6.6% in the first half, and 7.3-7.5% in the second.
Sundry other organisations and individuals have their own numbers. Most of these are around 7%, a few decimal points higher or lower. Implicitly, if not explicitly, there has to be some assumption about inflation, measured by the GDP deflator. There is near unanimity about this being 4%.
None of these projections are based on sophisticated modelling. That is close to impossible. Therefore, there are subjective calls to make. The critical one is about Q4 2018-19. Was that an aberration? If it was, then basing oneself on 6.8%, 7% in 2019-20 is eminently doable. After all, if one contrasts 2017-18 with 2018-19, there have been no remarkable changes in the growth components of consumption, government expenditure, investments and net exports.
However, if 5.8% was no an aberration, given the progressive slackening over several quarters, then 7% is implausible. When Q1 2019-20 figures become available at the end of the month, there will be more clarity, and we will be better informed. But as things stand now, a little less than 6% in the first half of 2019-20, and a little more than 6% in the second half of 2019-20, are not unlikely. In other words, 6% in 2019-20, not 7%.
Consumption, investment, government expenditure and net exports — which of these indicates a breaking away from a band of 6-6.5% (6% in 2019-20 and 6.5% in 2020-21)? There is a long list of desirable reforms (such as reform in factor markets) that can trigger these. But they take time to deliver, and when reforms are delivered, there are time lags before delivery manifests itself in the form of higher growth.
Meanwhile, if we take $5 trillion as an objective, 8% required growth computed by the Economic Survey becomes elusive. (In any event, required growth will be higher than 8%.) The long list of desirable reforms typically involves state governments, legislature and judiciary, and there is a political economy attached to pushing these. Therefore, options for the Union government — Union government being properly defined —are limited.
But there are options, though these too will have time lags of at least a year before they manifest as higher growth. Here are four to make the transition to 8%, and all four are Union government prerogatives.
1. Direct taxes: The task force on direct taxes has now received an extension till August 16. Thus one doesn’t know the recommendations. Essentially, exemption reduction is a red herring. For both personal income tax and corporate tax, they must be eliminated. Anything short of that is incremental tweaking, such as special treatment for this slab or that.
If all exemptions are eliminated, compliance costs decline, and tax rates can drop significantly for both corporate tax and personal income tax. Without taking a revenue hit, surcharges and corporate social responsibility (CSR) can both be removed. The world isn’t neatly divided into salaried taxpayers who pay personal income taxes and corporate business. Unincorporated enterprise is covered by personal incometax provisions. If all exemptions are removed, median tax rates for both will probably be around 20%.
2. GST: Though indirect tax rates are decided by the Goods and Services Tax (GST) Council, the Union government has a voice. Now that GST has been in the works for some time, we need three rates — something like 6%, 12% and 18%. As with direct taxes, exemptions and special treatment are antithetical to streamlining and simplification, and do not facilitate procedural easing.
3. Public expenditure: The 15th Finance Commission will submit its recommendations towards the end of the year, and they will come into effect from April 1, 2020. The present package of central sector and centrally sponsored schemes also ends on March 31, 2020.
Ostensibly, the number of such schemes has been reduced to 28. But these 28 are umbrella schemes, and the large number of existing schemes were simply gathered under one or the other of these parasols, without really reducing the number. Because of fiscal consolidation commitments, there are limits to increasing public expenditure. However, existing levels of public expenditure can be made more efficient by pruning the number of centrally sponsored schemes to not more than 10-15.
4. Privatisation of ‘central’ public sector enterprises (PSEs): This should start with an inventory of land, both because valuation of land is contentious and because such PSE land often belongs to state governments, with leases for a specific purpose.
The author is Chairman, Economic Advisory Council to the PM Tomorrow: Ashok V Desai, Former Chief Economist, Ministry of Finance, GoI.