There is also the challenge of shrinking the almost unimaginable burdens of red tape, bureaucracy and public-sector graft. From his years as Chief Minister of Gujurat, Mr Modi has an impressive pedigree in that regard. But reining in India’s bloated state apparatus brings the risk of alienating an official class capable of bringing India to a standstill…
This is a country where growth in national income has been stuck at an annual rate of around 5 per cent for most of the past two years. The economy needs to expand at nearer to 8 per cent for there to be a strong sense of social progress” Which may sound delicious by the mediocre growth standards of most of the rich developed world. But given that so many tens of millions of Indians are still trapped in grinding poverty, the economy needs to expand at nearer to 8 per cent for there to be a strong sense of social progress. And as for living standards, they are being squeezed by inflation – especially in the price of vital basic foods – which is close to 10 per cent… And although India’s balance of payments and Government deficits are not as out of control as they were, the Government’s finances are still stretched, while the country is not yet paying its way in the world. And yet India has huge structural advances – not least a huge, highly educated and ambitious workforce. The question is how to unleash the potential.
For the first couple of years of Mr Modi’s Government, expectations are directed towards a series of reforms, few of which can be pushed through speedily. They include an easing of restrictions on foreign investment in Indian businesses, in pretty much all industries of importance to the country’s future – bar one. Mr Modi is not expected to give any more freedom to expand in India to big overseas supermarket chains, because of the fierce opposition from millions of Indian shopkeepers that the likes of Tesco will drive them out of business (sound familiar?). But this may be a case of avoiding short term costs to a particular commercial group at the price of losing important long term social gains, in that the needed modernisation of Indian agriculture and the supply chain would be held back. This is a country where many still starve, agricultural practice remains inefficient and mountains of food rot and are wasted because of inadequate refrigeration in food distribution. The big western supermarket groups can help fix all that. Perhaps more encouragingly, the budget is expected to announce a commitment and possibly a timetable to introduce a streamlined national sales tax, a goods and services tax, to replace the myriad local sales taxes.
Such a simplification should cut costs significantly for businesses that operate across the borders of India’s many semi-autonomous states. And it would also reduce the pernicious incentives to smuggle goods across state borders, to take advantage of tax differentials. However there are so many of these local taxes, and states depend on them for important revenues to such an extent, that abolishing them won’t be easy… As an Indian official said to me, the politics of being seen to cut the tax bills of well-heeled multinationals at a time of national austerity would be unpleasant for even a Prime Minister as popular as Mr Modi is right now… And then there is the challenge of shrinking the almost unimaginable burdens of red tape, bureaucracy and public-sector graft. From his years as Chief Minister of Gujurat, Mr Modi has an impressive pedigree in that regard. But reining in India’s bloated state apparatus brings the risk of alienating an official class capable of bringing India to a standstill.
(Excerpts from article written by Robert Peston, Economics editor)