On the day Nirmala Sitharaman took charge as the Finance Minister of Modi 2.0, there were two discouraging pieces of data. GDP came in lower at 5.8% annualized for the fourth quarter and 6.8% for the full year. At the same time, unemployment at 6.1% was at a 45 year high. How can the new finance minister deal with the twin challenges?
Tax reforms a must
Indian consumers are one of the most taxed and at multiple levels. In the last few years there has been limited improvement in tax collections or in tax compliance. The reason lies in the steep rates of taxes. Simplify tax for business and for individuals. Keep rates low so there is limited incentive to not pay tax. Corporate taxes must be cut if net profit margins have to really improve. But the big challenge is simplification of taxes and the on-boarding process. Merely simplifying will substantially increase the tax traction and also promote growth.
Focus on monetary macros
The immediate focus will have to be on two things. A sharp cut in interest rates supported by a proper mechanism to ensure that the rate cuts transmit fast to the borrower. Second, is the issue of liquidity! The tight liquidity conditions have taken its toll in the third and fourth quarter and that has hit the GDP growth in a big way. OMOs and dollar swaps may have a big role to play.
Give exports a thrust
If India needs to sustain the growth advantage over China of 100 to 150 basis points, then it cannot happen without a major thrust on exports. The point is that today we really do not have an export story to tell the world. At one point we had products like textiles, gems & jewelry, pharma and IT. In the last 10 years, we have hardly created any worthwhile big export story that can give a boost to the total exports. If you take examples of countries across East and South East Asia, the growth has been predominantly driven by exports. India is turning from a net exporter of steel to being a net importer, which only worsens the trade deficit. India’s oil dependence is another big area of concern for the FM and needs to be addressed on top priority.
Don’t waste the crisis
Ironically, some of the most potent reforms came about in the midst of a crisis. Be it 1991, 1997 or 2000; India has pushed through significant reforms in the midst of a crisis. That is why the mandate for the Finance Minister is not to waste the crisis. Chart out the big picture. Should India focus on creating capacity on the lines of China or purely give a big thrust to services? Should India open up its markets in a big way and also make the INR freely convertible? These are tough debates but this is the time to bite the bullet! ©