The coronavirus pandemic is hurting economies in an unprecedented manner. Expectations from governments are running high to deliver booster dosages. But in the Indian context, issues are structural and require a structural response.
Indian GDP growth made a high of 13.2 percent in Q4FY10 and since then has continuously fallen. The Index of Industrial Production (IIP) hit a peak growth of 15 percent in FY08, exports growth and electricity generation YoY have fallen since the peak of FY12.
Credit growth has fallen to 5 percent from the peak of 30 percent during 2004-07. Though we had a mini-boom during 2014-17, it was primarily in the consumption-related segments as our per capita income went above $1,500 in 2013. But as investment, manufacturing, and trade continued to slow even during those years, the structural impact is being felt now.
Indian GDP is fifth highest in the world. As a country, India makes fifth highest income among all the nations of the world but if we take the income of an average Indian, it ranks a poor 139th in the world. Also, we have 63 million firms in India while a much larger economy the US has only 22 million enterprises. These are paradoxes of the Indian economy. Attempts to formalise the economy need to be seen in this context and while measures will take time to show results, the near-term implications have been difficult.
Important factors needed for competitiveness in an economy are availability and competitive costs of lands, labour, capital, infrastructure, policy incentives, taxes and ease of doing business. Let’s check the status of these factors.
Land acquisition was a big issue till 2015-16 but now with industrial cities developed along the freight corridors, the issue is largely addressed. In terms of labour, wages in India are lower than those in Bangladesh and Vietnam. Capital, particularly in terms of interest cost, had been high but now it has been lowered. And with continuous improvements over the last 20 years, our industrial infrastructure is decent.
In terms of policy push, the production-linked Incentive scheme has shown results. Electronics manufacturing in India has grown at a rate of 27 percent over the last five years. Also, our corporate tax rates post reductions in 2019 are at par with other major competing nations.
So what are the remaining bottlenecks? Indirect tax remains a concern. Both marginal rates and numbers of slabs for the goods and services tax (GST) are way higher than in China, Indonesia and Bangladesh. But the biggest problems facing Indian Inc is very high compliances and regulatory burdens. There are 58,726 compliances under 1,074 different acts that Indian businesses have to comply with. And even worse is the frequent changes in these compliances and filings required to be followed by Indian businesses.
The ease of doing business is what is hurting us badly. We need way fewer regulations/compliances and filings. More importantly, we require stability in the policy landscape. Reforms targeted to replace ad hoc, paper-based, people-dependent compliances with predictable, digital and process-based governance are the major reform triggers needed for the Indian economy and the markets.
(Shailendra Kumar is the Chief Investment Officer at Narnolia Financial Advisors Ltd.)
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