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Home / Opinion / Columns /  Turning inflows of money into productive capital formation

Last week, I had written that India’s challenge will be one of managing and sustaining high growth, rather than of dealing with slower growth. This flies in the face of conventional wisdom and the arguments of those worried about hysteresis. In my view, corporate deleveraging in India and the scope for copious capital inflows (already evident) from around the world offer room for optimism. Recent monetary policy meetings in America and in Europe only reinforce this prospect.

In this regard, I would like to cite an industrialist friend of mine. At the beginning of the covid pandemic, he thought that consolidation would take place in his textiles industry and others, and that unviable factories would exit. He wrote to me on Sunday that what he was seeing, instead, was a recovery much better than anticipated. Sick textile companies that had been referred to the National Company Law Tribunal (NCLT) were getting fresh leases of life. Thiruppur knitwear firms are seeing a big revival in export orders, despite two months lost to the lockdown (‘Exports from Thiruppur surge to record levels’, Times of India, 17 December 2020).

Further, he was once sceptical of the Indian textile and clothing industry weaning away orders from China, but he is now seeing it happen. There was an inquiry for a fabric from North America, for example, because the buyer wanted to stop working with China. He had also heard of other businesses whose US customers sought self-declarations that their products had no Chinese inputs. Anti-China action by buyers is on the rise. (Incidentally, we need to examine the scale of the worker-unrest incident that took place in Wistron’s Karnataka factory.)

In the coming decade, India will have big opportunities and face big risks. The global economy will be a source of both. But, geopolitics will mostly be a source of the latter. We need to be alive to these threats. There needs to be a dedicated unit within the government for paranoid thinking and scenario formulation.

So, what should India do to effectively deploy the abundance of capital flows that India is going to receive this decade? Philosophically, governments—Union, state and local—have to choose between two options. One is ‘letting go’ and the other is ‘leashing in’. Put differently, governments cannot minimize both Type I and Type II errors. In choosing taxation and other regulatory policies, governments must opt for the benefits of facilitating economic activity rather than letting this be secondary to the goal of controlling activity and collecting taxes. Simply put, getting out of the way has to be the motto.

With that spirit in mind, here are some suggestions: (i) Simplify the goods and services tax (GST), reduce rates, and bet on transaction volumes instead; A ‘neutral rate’ (to maintain pre-GST revenues) need not be a line in the sand. (ii) Direct taxes are still a maze; in fact, last year’s budget re-introduces too many slabs; the angel tax is still riddled with too many conditions. Simplify them. If a small fraction of ineligible startups take advantage of the provisions, so be it. The riders attached to claiming exemption from angel tax are indicative of a mindset that, in the context of a world that is going to evolve, needs to change. (iii) In August, a blog post narrating the travails of a young aspiring entrepreneur in Maharashtra did the rounds. His story is available still here (https://tinyurl.com/yc6k58lg). All states must replicate this exercise: identify bottlenecks, set up a time-bound programme to look at these afresh, and remove unwanted procedures, requirements and compliances. This would be the single biggest reform needed for India to absorb copious capital inflows and put them into productive capital formation. (iv) The government has introduced new criteria for the categorization of enterprises into micro, small and medium slots, based on both investment and sales turnover. However, it diluted the usefulness of it by stipulating that enterprises which exceed either one of the two would graduate to the next group. That defeats the purpose. Micro businesses should be helped in shedding their fear of growth. Therefore, micro enterprises should be given ‘small’ status only if they cross both turnover and investment thresholds. Further, they should be allowed to enjoy all non-tax concessions at least for two more years after they eventually graduate to the ‘small’ category. (v) The government should cease being India’s biggest litigant; evolve parameters for litigation.

A few things about the five ideas above need to be highlighted. They are not just in the Union government’s domain. They apply to businesses and households and not just the corporate sector. Importantly, they provide the flavour of an underlying philosophy. Economic development historically was not a planned occurrence. Such an idea emerged only after World War II, especially with post-Depression Keynesian activism generalized for normal times.

In the Indian context, ‘getting out of the way’ is still the most useful form of policy activism.

Wishing you all a happy and healthy 2021! Hope to meet you again in the New Year.

These are the author’s personal views.

V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister.

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