Is India a market maker or a market maker? In financial jargon, “takers” buy or sell at the price available in the market while “decision-makers” actively buy and sell, thus shaping the market price and making it liquid. Applied to sovereigns, the United States is certainly a “market maker” like the European Union and China. Together, they represent more than half of the world’s GDP.
The United States, with its array of tech companies and increasingly private space capabilities, are the markets for technology, innovation, and digital creativity. The EU is older and heavier. But he’s taking the lead in shaping international rules – rules to control the power of global technology and stop the spread of inequality, protect privacy, a taxonomy for green investments, and a unique set of rules to incorporate the Europe, which until the 1990s was just a bunch of unruly neighbors who, just eight decades ago, regularly slaughtered each other. It is based on the rules of the depth of its markets and the robustness of its innovations.
China, for all the denigration of democratic idealists, is the undisputed market maker for cheap and efficient manufacturing and for smart and cheaper digital applications (a role that Japan once played against the West in the electronics and cars). The political stability of the Chinese Communist Party is long-standing, though uncertain, in the event of slower growth. Its political architecture is unique – short of individual freedoms but long term collective benefits. Think of it as a “one-party United States” without individual freedoms.
Unsurprisingly, India is not yet among these major issues. It is difficult to move markets if a person’s economic reach is only 3.1% of global GDP. A minimum 10% stake makes others take you seriously, unless you have a military force fueled by fossil fuels and a legacy human capital base like Russia.
The bottom line is that one cannot be a market maker without first being a market participant. Unfortunately, India lacks the economic confidence to integrate with competitive exporters. We took a step back from joining RCEP in 2019 and increased import duties thereafter (2021). Alternative free trade agreements have been slow to take hold. Our conservative trade diplomacy and export pessimism stem from the uncertain response of domestic industry, without subsidies (like the Thirteen Industry Sectors Production Incentive Program 2020), which India can hardly afford – the alternative is to preserve domestic manufacturing at a cost.
Political constraints result in subsidies, such as direct annual transfers to more than 100 million farming families or the distribution of free food through the public distribution system during the pandemic. These services are necessary for some of the beneficiaries. But the lack of targeting is draining public resources and perpetuating expectations of more donations, as a series of elections loom.
Union and State tax revenues have grown at a constant but freezing pace, rising from around 14% of GDP (2000-2004) to 16% (2005-2014) and around 17% thereafter until ‘in 2020-21. The one percentage point increase in GDP in the post-2014 period is commendable given that GDP growth declined significantly from 2017-18.
Certainly, over the past seven decades, access to political and economic power has become more porous. Affirmative action for the less privileged has helped expand the political and bureaucratic elite beyond the numerically smaller upper castes. And the liberalization of the economy has opened up opportunities in the private sector for the deserving and the brave, including as entrepreneurs. Indian “unicorns” are not founded by traditional business elites. And business leaders are sought after not for their lineage, but for their sales, engineering, or financial intelligence. There is much to be proud of in the new India. It’s good news. But that’s in the past. Far-reaching reforms aimed at strengthening social and economic equity through faster economic growth are yet to come.
Reforms aimed at bringing agricultural elites out of their comfortable cocoon of administered grain prices have come to an end in the face of staunch opposition. Similar fears of a political backlash, of crippling public sector reform (banks and industrial units), perpetuating market-distorting regulations, stifling competition, productivity, jobs and increasing subsidies.
The pandemic has pushed the combined public debt to 90% of GDP, the budget deficit to around 7% of GDP (2021-22), against the elusive 2% targeted in 2003, tax revenues are inflated by the excise tax of the Union on petroleum products – revenues 75% higher than in 2018-19 until November 2021, the inflation expectation is 5.7% (RBI Q4 2021-22). This suggests a year 2022-2023 under budgetary constraints. Containing inflation will require lower trade union excise duties on oil and / or higher interest rates. With future real growth of around 6.5% of GDP, the conundrum will be how to match broad populist agendas with the tight tax base while aligning the budget deficit with stability measures.
Municipal taxes are a neglected tax base that generates a fiscal resource of only 0.25% of GDP against a potential of at least 1% of GDP. Bengaluru was able to increase its land tax revenue 2.6 times over three years (2008-2011) thanks to an intensive study of the tax base using GIS mapping of buildings in the city. The incentive for vertical urban growth improves property values and tax revenues. Unfortunately, municipal governance remains hampered by the inherited colonial pessimism about the ability of local self-government to function and in part by the fear of politico-economic transitions induced, if the 44 urban agglomerations of India, where 61% of the population live. urban India, became autonomous from the state. government control – a reform that could trigger a significant growth boost.
A more systematic liberalization and privatization agenda, devolution of government powers and mandates, elimination of costly intergovernmental mandate overlaps (the reason for competitive populism between state and union) can preserve public resources, while reducing tax deductions on income and businesses. can push tax revenues to a sustained level of 20% of GDP.
Yesterday’s soft budget constraint and low-level equilibrium-centered development model have now reached their natural end. Public finances are strained to the breaking point and core sovereign mandates are suffering. Doing nothing over the next two years will gradually degrade measures of growth, stability and equity. Substantial change will hurt the privileged and invite high political risk, albeit with upward economic potential. It’s a choice of Hobson, made more difficult by the persistent dislocations linked to the pandemic.
The opinions expressed above are those of the author.
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