The equity markets’ exuberance should not distract us from the sobering fact that unfortunately the economy faces several significant downside risks. These are posed by a persistent food inflation; a more generalised hike in retail inflation; the low probability of any interest rate softening; continued weakness in private investment; and the lack of fiscal space that rules out increases in public expenditure and public investment. While the Indian electorate will as always be patient, the same cannot be said about the business and investor community. And surely Narendra Modi and his team recognise this. I am sure they will want to hit the ground running. Here are some suggestions for their consideration.
First, Modi will do well to lower the enormous expectations that his campaign has aroused and which is reflected in the market hype. So Modi or his finance minister would do well to bring about some realism by outlining the challenges faced by the economy, the rather unholy mess that has been left behind in governance. But they must do so while reiterating their resolve to address these challenges and bring the economy back on track for generating the much-needed employment opportunities and sustaining rapid growth.
Second, the new government will considerably improve its credibility by bringing out a White Paper on Fiscal Deficit that provides an honest and detailed analysis of the actual fiscal deficit in 2013-14 and its likely level in 2014-15. The fear that credit rating agencies may get spooked will not be borne out if the White Paper also provides a clear time path to redress the deficit. Such a White Paper should be brought out within four weeks of the government taking office.
Third, and perhaps by far the most important is the need to restore investors’ confidence that has hit rock bottom as seen in rising capital outflows. India’s growth story and employment generation cannot be reignited without reversing the decline in the growth rate of private investment. There is an argument that the central government has minimal role in improving the business/investment environment because the onus for this is principally on state governments. This is only partially true. As far as the World Bank’s Ease of Doing Business ranking is concerned, India has slipped from 131 in 2013 to 134 in 2014, out of 189 countries. The central government can provide the lead by declaring its objective to improve India’s ranking in the World.
Bank’s Doing Business Survey by at least 10 ranks every year for the next five years and by 20 for the next five years, putting it in the first 30 countries by 2025. This goal, and concrete measures to achieve it, with a number of them replicated from the Gujarat experience, can then be discussed with chief ministers as Modi has said he wants to do, for time-bound implementation.
Fourth, there are some concrete steps that the central government can take immediately for improving investors’ confidence and which do not require legislative action. The retroactive tax imbroglio can be cleared without wasting more time. The tax officials’ high-handedness in transfer-pricing demands can be stopped. And the pernicious practice of making extraordinary tax demands from corporate houses in the last quarter of every fiscal year can also be stopped forthwith. Finally, there is more than R4.5 lakh crore in disputed tax demands snared in never-ending litigation. The CBDT, the Chief Commissioner (Appeals) should be asked and authorised to seek out-of-court settlements for bringing down the disputed amounts, currently in excess of R2.5 lakh crore, by 50% in a year’s time.
Fifth, it is well authenticated that nearly 70 clearances are needed annually to remain in business. Their biggest burden falls on MSMEs, which are prey to the inspectors in charge of compliance under these acts. Admittedly not all but a large number of these compliances are required under central government statutes. As was done in 2012, in the case of boiler inspections, all these inspections and compliances can be either outsourced to third parties or allowed to be self-certified by the entrepreneur. In one stroke, it will remove the huge rent generating and oppressive burden of Inspector Raj from the MSMEs. With this led by the central government, other state governments will follow suit. One can hardly imagine the burst of entrepreneurial energy from this one step.
May I suggest that the government be bold enough to declare that all units employing less than 200 workers will not have any visits by factory inspectors under central government laws. They can self-certify the compliances but be warned of stiffest of penalties if found in violation of these compliances or caught for wrong self-certification.