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On The Brink Of A Transformative Era

It is anticipated that India will outpace Germany by 2027 and Japan by 2029 in GDP rankings. Yet, reaching this milestone is merely the beginning  

Published a month ago on Jun 01, 2024 5 minutes Read
B.R. Ambedkar presents the final draft of the Constitution to President Rajendra Prasad. Photo: Wikipedia

In June 2024, a new government will be formed at the Centre. Despite several surveys indicating the possibility of the National Democratic Alliance (NDA) continuing in power, this will technically mark the commencement of a new government. Buoyed by a robust growth rate of 8.4% in the third quarter of 2023–24, the economy is demonstrating a resilience that bodes well for future expansion.

From 2024 to 2029, India is on the brink of a transformative era. It is anticipated that India will outpace Germany by 2027 and Japan by 2029 in GDP [gross domestic product] rankings. Yet, reaching this milestone is merely the beginning. India must now embark on a new phase of comprehensive reforms to secure a sustained and robust growth trajectory, aiming for developed nation status by 2047.

The traditional distinction between “developed” and “developing” economies is fading, with the United Nations no longer using these classifications. Instead, the World Bank categorises countries based on income levels: low, lower-middle, upper-middle and high income. For India to be considered “developed” by 2047, it would need to reach a high-income status, which currently requires a per capita income exceeding $13,205.

India’s aspirations for 2047 involve not just economic growth but also substantial improvements in the human development index (HDI), which includes life expectancy, education and per capita income, with a target HDI score above 0.800. Achieving this would necessitate comprehensive reforms and sustained growth in several sectors. 

Start With the Courts

The first one in the list is judicial reforms. The current system, plagued by delays and inefficiencies, stifles economic growth and repels foreign investment. To enhance India's business environment, reforms should prioritise the expansion of alternate dispute resolution mechanisms like arbitration and mediation, which alleviate court burdens, hasten resolutions and lower costs.

Additionally, digitalising processes, increasing judicial personnel and improving infrastructure are vital for ensuring timely justice.

Push for R&D

Second, the new government should prioritise addressing the critical challenges facing India’s innovation and research and development (R&D) ecosystem. Less than 1% of India’s higher education institutions are engaged in research, undermining the country’s research potential. 

These institutions face numerous obstacles, including lack of funding and non-conducive governmental policies. India’s R&D expenditure as a fraction of GDP has remained stagnant and lags significantly behind innovation leaders. Furthermore, fiscal discipline measures and financial reforms implemented in recent years have inadvertently stifled the R&D environment by reducing the flexibility and availability of funds.

The government should implement a comprehensive strategy to enhance the research infrastructure, increase R&D funding to at least 1% of GDP in the near term and aim for 2% in the medium term, aligning with global standards. This includes addressing the restrictive fiscal policies that limit institutional autonomy and operational efficiency, revising GST [goods and services tax] rates on scientific equipment and decentralising the approval process for global tender inquiries to speed up procurement processes.

Moreover, the government should encourage private sector investment in R&D.

Reforming Labour Laws

Third, to bolster employment, economic growth is essential; however, the relationship between growth and job creation has evolved, with employment elasticity—how employment varies with economic growth—halving compared to two decades ago. This shift underscores not jobless growth per se but a scenario where even with a 7% GDP growth, employment does not increase proportionately unless productivity matches this figure. The complexity of India’s labour laws has partly contributed to this situation.

Despite labour being a concurrent subject, reforms have varied by state, with some like Rajasthan and Tamil Nadu earlier adopting more flexible labour laws. However, the impact of these reforms is hard to quantify due to recentness, limited data and external disruptions like Covid-19.

The Union government responded by consolidating these into four labour codes in 2019 and 2020, but the implementation has been uneven across states. The new government should actively nudge state governments to expedite this process. 

Fiscal Management

Fourth, the new government should prioritise a clear and pragmatic approach to fiscal management by focusing on debt sustainability as outlined in the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 which aims for specific fiscal and debt targets.

Despite the emphasis traditionally placed on reducing the fiscal deficit, the more cumulative and comprehensive debt indicator provides a better assessment of fiscal health as it captures not just the current financial activities but also the long-term implications of past decisions. This is important because certain expenditures, like capital assets, might elevate the deficit but are not inherently inflationary or unsustainable.

Practical challenges also arise with using the fiscal deficit/GDP ratio due to fluctuations in GDP estimates throughout the fiscal year, which can lead to volatile budget allocations. Therefore, the incoming government should shift its focus from primarily monitoring fiscal deficits to managing the overall debt level more effectively.

Tax Reforms

Fifth, the new government's focus should be on streamlining and simplifying the tax system. This could involve eliminating tax exemptions and fully implementing a new direct tax code that reduces discrepancies across different types of taxpayers.

Sixth, there is also a need for reforming the GST. Key reforms should include convening regular GST Council meetings. Additionally, simplifying the GST rate structure is essential. Ideally, a shift towards a more streamlined rate system with fewer tiers, such as 6%, 12% and 18%, would ease administration and minimise classification problems and cascading tax effects.

This is just a preliminary list of reform agendas. However, comprehensive development also requires significant enhancements in the education, health and skill development sectors. These agendas, rife with complexity and opportunity, are reserved for deeper exploration, probably in another column.

Debroy is chairman and Sinha is officer on special duty, research, at Economic Advisory Council to the Prime Minister