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Transformation of India? It's much more than numbers

By A K Bhattacharya
April 27, 2016 11:49 IST

A labourer ties cloth around his head before unloading coir rolls at a wholesale market in Kolkata. Photograph: Rupak De Chowdhuri/Reuters

With regard to the goal of eliminating poverty by 2032, the government is yet to explain the premise on which it hopes to claim to bring the country’s population below the poverty line to zero, notes A K Bhattacharya.

With the Narendra Modi government unveiling its agenda for action to transform India, the focus is naturally on the big numbers that have been put out as targets to be achieved in the next 16 years.

The Indian economy, according to the grand vision, should grow by 10 per cent annually till 2032 and the size of the Indian economy would by then be $10 trillion.

An estimated 175 million new jobs would be created in this period and poverty would be eliminated.

Are these goals achievable?

This question can be properly answered only when the government provides clarity on some of the assumptions behind these numbers, which is missing at present and a legitimate cause for concern raising doubts about the robustness of the process followed before arriving at these targets.

For instance, it is important to know if the 10 per cent annual growth rate for these years is assumed in real or nominal terms.

If the government has assumed a nominal growth rate (i.e. including inflation), then the target of hitting the $10-trillion figure by 2032 does not look too unreasonable. In the last 16 years -- from 2000 to 2016, the Indian economy grew at a compounded annual growth rate of 10.31 per cent -- up from $476 billion in 2000 to $2.2 trillion now.

The CAGR needed for taking the economy to $10 trillion would be 9.65 per cent.

Indeed, the International Monetary Fund estimates that the Indian economy can potentially grow at a CAGR of 9.84 per cent from 2016 to 2021 ending that year with a gross domestic product or of $3.6 trillion.

The only doubt is that achieving annual double-digit growth rates on a relatively low base is easier than clocking even 9.65 per cent growth annually for 16 long years on a starting base of $2.2 trillion.

But the problem is that the government seems to have projected a real growth rate target of 10 per cent annually for the coming 16 years.

Transforming India, the document released by the personnel ministry, indicates that the gap between the target of 10 per cent annual growth rate and the Reserve Bank of India’s projection for 2016-17 at 7.4 per cent is only 2.6 percentage points.

In other words, the government is hoping that the Indian economy should grow by 10 per cent annually for the next 16 years in real terms.

After taking inflation into account, the nominal growth rate would, therefore, be a little higher than 10 per cent.

And if the government does manage to achieve 10 per cent real growth rate every year, the Indian economy is likely to cross the $10-trillion mark earlier than 2032.

So, why has the government put out a GDP figure of $10 trillion after 16 years?

The confusion over whether the growth rate projected is in real or nominal terms has influenced the other targets as well.

There is no clarity yet on how an estimated 10.9 million new jobs would be created every year with such growth assumptions.

The annual growth in jobs in the organised sector has been much lower than what has been projected.

So the government would do well to bring out the assumptions based on which it has arrived at the precise number of adding 175 million new jobs in the next 16 years.

Even with regard to the goal of eliminating poverty by 2032, the government is yet to explain the premise on which it hopes to claim to bring the country’s population below the poverty line to zero.

But more than these numbers, the government’s agenda for transforming India should be debated for the changes proposed in the administration of the fiscal policy.

There is a proposal that all industries that create jobs would be allowed tax deduction of 30 per cent.

The tax incentive seems to be quite attractive as this would be available once a company increases its workforce by two per cent.

Does such a tax incentive work? And what does this do to the finance ministry’s larger goal of phasing out all exemptions to bring down the overall tax rate for companies?

After all, the same document also talks about the need for bringing down the tax rate for Indian companies closer to the global average of 23.6 per cent, compared to the current rate of 30 per cent. Is the government then talking at cross purposes?

The idea of advancing the presentation of the Union Budget by more than two months is likely to find many takers in different departments in the government, if not within the finance ministry.

The absorptive capacity of most central ministries as far as allocation of budgetary funds is concerned is poor.

It is true that the ministries themselves are inefficient in speeding up the utilisation of funds allocated to them.

But there is also some merit in the argument that almost one quarter of the year is gone by the time the Budget is passed and the expenditure department in the finance ministry is actually ready to disburse the funds to the respective central ministries.

This also contributes to poor utilisation of funds before the year ends, helping the finance ministry to reclaim some of the unspent funds to meet the fiscal deficit target.

There is also a suggestion that a greater role should be assigned to NITI Aayog and administrative ministries, who along with the finance ministry could then be part of a collaborative process to fix the macro-economic goals.

This is aimed at creating a new paradigm for setting long-term and medium-term macro-economic goals, where the finance ministry may lose its pre-eminent status on such issues.

Finance ministry bureaucrats will not be thrilled by this suggestion for obvious reasons, but if such suggestions are implemented, they would usher in a new order in the government.

Image: A labourer ties cloth around his head before unloading coir rolls at a wholesale market in Kolkata. Photograph: Rupak De Chowdhuri/Reuters

A K Bhattacharya
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