Since 2014, Prime Minister Narendra Modi has been consistently
exhorting the foreign investors to invest in India to take advantage of 3Ds -
Democracy, Demography and Demand; a unique strength not possessed by any other
major economy of the world.
After 5years of NDA rule under his leadership, many are now
challenging this claim.
A large section of domestic and foreign media, and many senior
political observers & commentators have raised questions over the present
health of the democracy in India. We may heavily discount their
stance as deeply prejudicial and driven by ulterior motives, but rejecting it
outright may not be totally logical.
The Union Labor Minister himself recently raised question over
the quality of human resources in the country, especially the northern states
where about two third of the youth population lives. Most business leaders,
both from manufacturing and service industries, have frequently expressed grave
concerns about the employability of the engineering and management graduates. A
host of government and private studies have shown that the level of average
students at middle school level in most populous states like UP and Bihar is
unacceptable. In many cases class 6 students failed to answer 2nd standard
questions. The government has failed miserably in formulating a nation youth
policy or even an integrated education policy. If this trend continues, the demography
could soon become a liability rather than strength of India. (Also
see)
The third dimension, i.e., demand has always been
an inarguable strength of Indian economy since early 1990s. The common refrain
was that India is so short on the supply side that you could sell virtually
everything here. I remember attending an investors' conference in late 1990s,
where The CEO of a large automobile company presented that demand is something
business manager in India do seldom care about. That was the time when a large
FMCG company had launched a 25gm pack of Multani Mitti (Fuller's earth) for
Rs40. A Google search would show that even today there are numerous listings on
various ecommerce sites for this product at crazy prices.
Earlier this week, the principal economic adviser in the union
ministry of finance Sanjeev Sanyal admitted that "The current economic
situation is unique in India. All these years, we saw a slowdown in India
because of supply-side constraints. This time, we are witnessing a genuine
demand-driven slowdown." (see
here)
The question is whether Indian Economy has lost its key strength
(3Ds) in past five years.
I would not like to make it a political debate and reduce it to
BJP vs Congress slugfest. In my view, the weakening of 3Ds is a reality and a
deeper independent research study is required to assess since when, how and why
the Indian economy lost its key strength. My gut feel is that this trend
started more than a decade back and still continues.
On a structural note, I believe that the 3Ds of economic growth
are intricately intertwined. The weakness in demand could be arrested and
reversed only if some deep rooted reforms are implemented to strengthen the
democracy and demography.
Nonetheless, the government may take some short term measures to
begin the process from somewhere.
In this context, it may be pertinent to note that the
businesses, consumers and markets, all are getting more frustrated with each
set of "support measures" being announced by the government to lift
the sagging sentiments. The measures announced by the government are
misdirected, half hearted, inadequate and in most cases just repackaging of the
already prevalent schemes and incentives. This gives a feeling that either the
government is not able to comprehend the magnitude of the problem, or it is
totally helpless.
In my view, the first thing government must earnestly focus on
is to stimulate the economic activity at the lowest level in economy.
To break the negative feedback loop, the traders, investors and
businessmen must be encouraged, nudged and coaxed into increasing their level
of activity materially. We need to increase the velocity of money. Some small
concessions having only notional fiscal impact can do the trick, in my view.
For example, consider the following examples, as suggested
earlier also:
(a) In most parts of the
country, the Ready Reckoner or Circle Rates (minimum property rates considered
for levying stamp duty) are much higher than the prevailing rates of property.
The government must consider bringing this minimum threshold to 10% below the
prevailing market rate to stimulate transactions in property market.
(b Capital gains of upto
Rs25lacs on all constructed properties may be exempted from income tax for two
years, i.e., AY21 and AY22.
(c) Capital gains on sale
of gold may be exempted, provided the entire sales proceed is invested in
buying one or more constructed property (residential or commercial).
(d) Concessional Housing
advance by companies to their employees in next 2years may not be treated as
perquisites during the term of the advance.
(e) Trading in agri
commodities may be exempted from cash transaction limits completely for 2yrs,
i.e, till March 2021. Post that restrictions may be applied in graded manners
over next 5yrs.
(f) GST input credit for
automobile purchase may be allowed for six months, i.e., October 2019 to March
2020.
(g) Upto 50% discount may
be offered on power tariffs to all green field industrial units that are
approved before March 2020 and begin commercial operation before March 2022.
(h) Long term corporate
bonds (10yrs or more original maturity) may be treated at par with equity for
capital gains taxation purposes. Periodic Interest on such bonds may be taxed
@10% without any limit.
(i) CSR spend in setting up
rural schools and health centers may be made tax deductible at 125% of the
amount spend. The operating and maintenance expenses on such schools and health
centers may also be made tax deductible.
(j) An aggressive
scrappage policy for old automobile (10-15yrs) may be implemented forthwith.
