When Nirmala Sitaraman, in her first budget presentation, had introduced the ambitious target of $5 trillion economy by 2024, most of the observers had trashed it as a utopian dream which can never become a reality. Most of the newspapers, journals, medias, market watchdogs, economic analysts, financial experts, opposition parties etc had expressed serious doubts on the practical aspects of achieving the $5tn dream project siting the lower economic growth rate and other worsening economic indicators of the country and the hue and cry still goes on in a very high frequency mode.
The Government had come up with financial stimulus packages in a timely manner for strengthening the banking system, proposal for merger of Public Sector Banks, relaxation on interest rates, easing the compliance measures for GST, revising the norms for declaring accounts as NPAs etc. But despite all these efforts the economy is still lacking its growth momentum and many sectors such as automobile, construction, real estate remains subdued. The lower than expected growth in economies around the world and subdued growth rate of advanced economies, spiralling external and public debts of the government etc had negatively impacted the much cherished projects such as Make in India, Skill India, Digital India etc.
$5 trillion is undoubtedly an optimistic and ambitious target and that is giving lot of excitement to the 1.3 billion people of India. But with a lowest growth rate of GDP in last six years, highest unemployment rate in last 45 years whether India can step up to desired growth rate of 8% per annum and reach the summit is also a trillion-dollar question. The critics are pointing their fingers towards various unconventional steps taken by the first NDA Government such as demonization of currency notes, hastened implementation GST etc as reasons for the downfall and many experts are criticizing the government for taking decisions without proper consultations. This article tries to compare the present situation with the pre Modi Government economic situation of India and also analyses the impact of various decisions taken by the Government in the light of the newly set target - $5 Trillion
Pre Modi Era- A quick glance.
During 2008 recession, which was triggered by subprime mortgage lending of banks in USA, when the whole world plunged into the darkness of the recession, the Indian economy left unaffected. The Indian Government, unlike other Asian Countries, had not announced even a single financial stimulus package during that time owing to its poor financial stature. Despite any proactive resuscitation measures from the Government, during 2008-09 the economic growth of the country stood at 6.7% and by June, 2009 the industrial production grew by 7.1%! In May 2009 India reported an economic growth rate of 5.8% by trashing all predictions. The Indian economy grew by 7.9% by second qtr of 2009 and then it bounced back with a growth rate of 8.8% by 3rd quarter of 2010. In contrast to the growth in GDP, the said period had witnessed the soaring increment in Non-Performing Assets (NPA) of banking institutions and there was no effective law to tackle the situation. There are several theories explaining this strange phenomenon but none of those can deny the role of the black money driven economy behind the renaissance of Indian economy during those hard times. Can we contemplate it as a blessing in disguise?
Tackling the black money & strengthening the banking system.
Though some may term the influence of black money as a blessing to economy, depending on its effect on them, in every sense it is a curse for any economy. The black money is getting generated from two kinds of activities. A major chunk of unaccounted money is being generated out of illegal activities such as smuggling, bribery, drug trading and other illegal activities. Such kind of money is illegal in every sense and is to be strictly prohibited using the strong hands of the law and order. Another source are purely legal activities but for avoidance of taxes a part of the income is being accepted in cash. The unaccounted money which is floated outside the normal channels of the economy will further fuel the illegal activities and promote corruption at all levels of system. The unaccounted money will take several round trips and circulate among political and bureaucratic strong holds. The money which is to be utilized for social welfare of the society, especially for the upliftment of the weaker section, are being stashed in the hands of few corrupted people and thereby creates two breeds of people- "Have's" and "Have nots".
The Prime Minister Jan Dhan Yogana had achieved the 100% target by opening the bank accounts for 21.02 crores households of India and brought the shying rural India to the banking system in a very effective manner. Though the demonetization was very unconventional and unheard of in recent history of India, the said steps had helped the banks to fill up their coffers with lot of money which was circulating as unaccounted money in the economy. The simultaneous introduction of Insolvency and bankruptcy code (IBC) and effective implementation of the same had made a paradigm shift in the financial structure of banks which were ailing with catastrophic level of NPA. The banks so far retrieved Rs. 70000 cr through IBC implementation and the said code had overhauled the credit market of India.
Adopting strict penal actions and sanctions on private players and professionals who are facilitating the criminal activity of money laundering may further improve the situation.
Restructuring the tax norms.
High rates of taxes may tempt the stakeholders to move their money to tax havens. India had witnessed several multi-million-dollar scams post 2014 period. Tax havens in various countries were very active up to 2015 and they had lured investors all over the World to invest in their country by promising anonymity. Tax havens collectively cost governments world over between $500 billion and $600 billion in a year as per the estimate through various means. Tax havens provided hiding places for illicit activities of many movers and shakers of the country and had resulted in huge movement of money to such places. Tax terrorism and high rates of taxes in India are the main factors which are tantalizing the people and corporations to look for tax havens. However, since 2019 there is a change in the international scene as 90 countries had voluntarily disclosed the information on 47 Million bank accounts worth Euro 4.9 trillion and the same had helped to reduce the bank deposits in tax havens by 20 to 25 percentage. The mandatory requirement for the declaration for beneficial ownership by individuals who are holding the control over corporates through various layers of entities across various countries had also touched the raw nerve of the investors in tax havens.
The recent announcement made by Mrs. Nirmala Sitaraman on reduction of Corporate tax rate to 22% and the provision for e-assessment of tax returns etc may help India to be more tax friendly and thereby expected to reduce the illegal parking of money in tax havens. The proposed direct tax code and other tax reforms will give thrust for financial activities of the nation and thereby boost the economic growth of the country. The rationalization of the indirect tax system and rolling out of technologically intelligent systems for effective implementation had paved a new path of growth across the nation and thereby leading to the concept “One India- One tax”.
The dramatic rise in the number of Income tax returns in past few year shows the new compliance mindset of the country. As per the data released by the Income tax department, over 5.65 crore income tax returns were filed by tax payers for the Assessment year 2019-20, which is a 4% increment from the previous year. This is a quantum jump when comparing to the 3.79 crore ITRs filed in FY 2013-14.
Revamping of redundant regulations.
The introduction of new labour law codes by consolidating forty odd laws, new system of minimum wages to every section of labour, amendment to consumer protection act, changes in insolvency and bankruptcy code and companies act to cope up with the changing corporate environment, rolling out and effective implementation of good and service tax act, proposed direct tax code, alignment of FDI policies in tune with market expectations etc had driven out the policy paralysis of pre Modi era and gave the corporate India a new face.
$5 Trillion- An achievable target
A powerful Government in place can change the situation to a greater extent. A careful observation of various steps taken by the Government in past few years will reveal a great plan of action which can lead India to desired level of growth. The first term of the Modi Government had adopted many unconventional steps which had altered the basic financial structure of India. The strong conviction to hold the inflation at the lowest level and introduction of insolvency law by the Government shows the long term vision of the Government. The huge spending on infrastructure of the country by developing roads, bridges, high speed railways, developing smart cities etc will project India as a great investment destination in near future. With the picking up of growth momentum in the global economies, India will be able to reach the growth target of 6.2% by fiscal 2020 and reach 8.5% by 2025.
The bold steps taken by the Government are capable enough the fuel the growth rate of India and lift the average growth rate to 8% and thereby lead the economy to $5 Trillion with ease.
Bijoy P. Pulipra. FCS,IP, RV