Last week, US president Donald Trump imposed a 25% tariff on select Indian exports, and soon escalated it to a threat of 50%, primarily over our continued import of Russian oil. This amounts to punitive sanctions reserved for enemies. Unless reversed quickly, it will deal a hard blow to a few traditional exporters to the US such as garments, leather, gems and jewellery.
The Indian political response has been a predictable mix of defiance and chauvinism, claiming to ‘safeguard the welfare of farmers, labourers, entrepreneurs, industrialists, exporters, and small businesses’. But a more revealing set of reactions came from business leaders and officials. Amitabh Kant, former head of NITI Aayog, called the tariffs a ‘once-in-a-generation’ moment—or, in Bollywood terms, an Agneepath turning point. Anand Mahindra, chairman of the Mahindra group, called it ‘global Manthan’, conjuring the churning of mythical Amrit (nectar) from the trade turmoil. Are such expectations realistic? They are not, for two reasons.
1. Serious reforms, anyone? Mr Kant is suggesting simplifying bureaucracy and tax structures (e.g., reducing goods and service tax (GST) slabs to just two) and ‘reviving’ the tourism sector. He suggests that no form should exceed half a page and no law should be longer than two pages in order to foster entrepreneurship.
Why Mr Kant, as the head of NITI Aayog, presumably with access to the government’s ears, was unable to implement his sharp ideas, is a mystery.
Mr Mahindra advocates a functional, single-window clearance for investments. He also calls for boosting tourism through faster visa processing and better infrastructure. He wanted production-linked incentive (PLI) schemes to be expanded, and import duties on manufacturing inputs to be rationalised to boost competitiveness. All sensible, all familiar. India has heard them before.
With every such suggestion, business leaders are merely highlighting long-standing structural inefficiencies which have continued under every regime and through every so-called crisis. India’s outstanding tourism potential is destroyed by filth, lack of individual safety, frequent deadly stampedes, creaking infrastructure, criminal negligence of historical monuments, rampant illegal construction, in which local politicians have vested interests, and high costs for small businesses living off tourism. None of these can be fixed, given the pervasive poor governance from panchayats to the Centre.
If leaders like Mr Mahindra have a real say in making changes on the ground, the outcome would be different. But the government does not even want to draft them to fix creaking urban transport, causing misery for the commuting millions every day.
2. False belief about crisis & reforms: Businessmen are comparing the current situation to the 1991 forex crisis that spurred India’s liberalisation. There is a widespread belief that reforms in India are only possible during a crisis. Former prime minister (PM) Dr Manmohan Singh, who spearheaded the 1991 reforms, himself used to say this. Hence, reforms are the default expectation of business leaders for every hiccup India suffers.
But there are hardly any instances of economic crises followed by reforms, to draw such a pat conclusion. Quite the opposite. Over the past 30 years, India has had a series of reforms in infrastructure, telecom, capital markets, pension, law, taxation (such as GST) and other areas without any crisis.
Indeed, the 2008 financial crisis led to no reforms, only mindless copycat pump priming that led to inflation and eventually bad loans. Most importantly, have president Trump’s unhinged tariffs created a crisis for India? Not quite.
Moody’s, the rating agency, says that the steep new US tariffs on Indian exports would only trim India’s gross domestic product (GDP) growth by around 30-80bps (basis points) in the near term. It will lead to pain for small exporters and some job losses, but it is not enough to spook investors, rattle markets, or pressure the government to ‘do something’.
The baseline of Indian reform is a series of slow and half-hearted measures, all the while ensuring that bureaucratic control and the wheels of corruption remain undisturbed. Accountability is low and so is the impact on competitiveness. But there has been one notable change. The Modi regime has been an aggressive revenue collector.
Gross tax revenue (GTR) to GDP ratio at 11.7% when GDP growth is 6.5%, is near the historic high of 11.9% of 2007-08, a gangbuster year of 9% GDP growth. You may bemoan the lack of reforms, but the government’s intent is clear; it has very adeptly pursued its own priorities: imposing and collecting tax, cess, and levies. Highway toll collection will hit Rs80,000 crore in FY25-26, an 18% compounded increase from 2018-19. The securities transaction tax (STT) is expected to rise from Rs25,085 crore in FY22-23 to Rs69,000 (budgeted) in FY25-26, a CAGR (compounded annual growth rate) of 40%. Such huge inflows buy social schemes and capital spending for the government, but have not led to increased productivity or competitiveness.
India doesn’t lack ideas that India’s business captains are so eager to proffer. It lacks intent and the will to implement them. There is no political urgency to ease the frictional cost of doing business, reduce the cost of logistics, train a vast army of factory workers and slash red-tape.
To be sure, the government can easily reel off a series of schemes for each of these areas. But the undeniable outcome is that manufacturing is stuck at 14% of GDP, India’s export competitiveness remains pathetic and businessmen are routinely complaining about lack of skilled labour and petty bribes and harassment.
And not having done any of this earlier, when it had a brute Parliamentary majority, why and how would the government leap at these fixes now, under a coalition government and a much milder economic pressure than in 1991?
(This article first appeared in Business Standard newspaper)
The BJP is in power in many states, including some of the leading industrialised states. Why can't they formulate single-window policies in their states and then use those examples for other states to follow? Even Congress-ruled states like KA and AP have an interest in economic growth, after all.
The answer is obvious: Single-window policies are a death-knell to bureaucrats and their ministerial and party overlords who see each clearance as an opportunity to collect a bribe.
I fully agree. When big corporate groups have outsourced manufacturing overseas, why would MNC's come to India as its own companies want to diversify outside India. And agriculture continues to be neglected by the government.
High input costs of manufacturing of power, oil, diesel, interest all supplied by govt. cos. and excessive indirect taxation is the bane of India. The government needs to forego its bloated revenue to create jobs in India as instead of Make in India, the reality is The world makes for India
Why Mr Kant, as the head of NITI Aayog, presumably with access to the government’s ears, was unable to implement his sharp ideas, is a mystery. No Sir, it is not a mystery. It is a fact that whether it is a BJP or INC or any other political party is at the helm, each party wants properly designed hidden loopholes to use when in need. Very sad for the nation and the economy.
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The answer is obvious: Single-window policies are a death-knell to bureaucrats and their ministerial and party overlords who see each clearance as an opportunity to collect a bribe.
Why let all that go?
High input costs of manufacturing of power, oil, diesel, interest all supplied by govt. cos. and excessive indirect taxation is the bane of India. The government needs to forego its bloated revenue to create jobs in India as instead of Make in India, the reality is The world makes for India