The government has promised subsidies for so many things, but it does not have the revenues to fund them, says Shikha Dalmia, a senior policy analyst at Reason Foundation, a Los Angeles-based think tank.
Dalmia says unless the poor get richer, the domestic market is going to be considerably stalled. India should be achieving 10 per cent growth rate as a matter of routine, she tells Faisal Kidwai in a phone interview.
Here are the excerpts:
Why is India's growth rate slowing down?
There were supposed to be next generation of reforms that investors, both abroad and domestically, have been waiting for a long time, but now liberalisation has stalled.
Another reason is the political paralysis. The rules to liberalise foreign investments are not great, rules to allow foreign investors in retail is still uncertain and then there are all kinds of other problems, such as diesel subsidies. The government has promised subsidies for so many things, but it does not have the revenues to fund them.
The tax system is horrendous and there does not seem to be any political party that seems to have the political clout needed to push the kinds of changes that are required. So, all of that is now catching up with the country.
You have said that liberalisation has benefitted the rich more than the poor. What went wrong?
If you look at sectors from where the reforms began - IT, telecom, airlines - these are industries basically patronised by the upper middle class or the rich. It's sort of expected as the rulers of any country come not from the lowest strata of society but upper middle or rich class. They understand problems of their own classes, so it's logical that they would push reforms in those sectors.
But liberalisation has not helped the lower strata. For instance, look at the plight of street vendors. The IT and telecom sectors were released from the shackles of the Licence Raj but street vendors, daily wage earners and rickshawalas still live under it. They are required to get all kinds of permits and since these permits are expensive these people are open to abuse and harassment, which prevents them from accumulating the kind of capital and savings they require to expand and improve their lot.
This is not to say that they have not benefitted from reforms at all. If the country grows at the top, there is going to be some trickle down of wealth and income because people on the lower end are going to get more business from the people on the upper end. But the lower end has not been empowered to improve its lot. They are still very much dependent on business from top. They cannot set up businesses, cannot accumulate the kind of capital that would acquire them to start a small business. The expansion of entrepreneurship is not possible for them.
That's another reason why economic growth has stopped. Because unless these people get richer the domestic market in India is going to be considerably stalled.
So, should the government focus on the domestic market?
No, it's not either or. India very much needs to build its export sector but it's struggling. That's the other way the poor are hurt. The labour laws need urgent reforms. Since it's hard for business owners to fire workers, they don't hire. In a country with so much surplus labour, there are so many capital intensive industries.
Agriculture is a different story all together. If you need to build your export sector you need labour to be employed in that sector. So you have to liberalise labour laws and that has not yet happened. So you need to do all these things simultaneously for there to be equitable growth. We don't even know what kind of liberalisation will take shape down the road.
You have also said that India's populist, special-interest politics bodes ill for future liberalisation. Could you tell us what you mean by this?
Problem is that you need to get rid of populist measures that are protective of the status quo. For instance, foreign direct investment is widely discussed in India. We know it will greatly help a lot of farmers because it will make it much easier for them to get their produce to the cities, give them better distribution channels and it will give them a better deal.
That it's taking such a long time to implement such common-sense policy is because of regional populous politicians, such as West Bengal Chief Minister Mamata Banerjee, whose position depends on being able to court mom-and-pop stores. The rise of these regional parties and the weakening of the central parties have made it difficult to enact these kinds of reforms.
I'm not opposed to regional parties or politicians, but the problem is that they have a short-term focus, they are not very economically smart and they are not interested in the long-term measures that would bring long-term and sustainable prosperity to their areas. There's a need for better quality regional politicians.
What is needed to return the country to double-digit growth?
Raghuram Rajan, Chief Economic Adviser to the Government of India, he has said that given India's potential, 9-10 per cent growth should be a no brainer. India has a very entrepreneurial class, great natural resources, young energetic population and a huge domestic market.
So, theoretically, India should be achieving 10 per cent growth as a matter of routine. But that's not going to happen as long as the government is imposing the kind of drag it is on the economy. There's a need to reform the general sales tax regime and allow states to trade among each other. The movement of goods and services is so restricted in the country.
The government needs to implement the GST tax reforms, reform labour laws, invite more foreign investment and control spending by cutting back on subsidies.