Road to Recovery of Indian Economy

The Indian economy is passing through a very challenging phase.

16 December, 2019 Special Reports, Economy
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The Indian economy is passing through a very challenging phase. GDP growth has dropped substantially, unemployment is high, the financial sector remains stressed as a result pace of investments has slowed down. The public discourse has largely been focused on highlighting these problems. Is it all gloom and doom or is there a way out?

Negativity prevails over hope due to narratives being spun by a section of ‘NRI’ economists taking pot-shots from foreign shores. The same set of economists, whose contributions to the present slowdown are well documented have now come out with the so-called 10-point plan to fix the economy. The prescription includes land reform, labour reform, reforms in power, telecom and agriculture sectors, boosting investments, disinvestments etc. These are generic, oft-quoted and homilies with hardly any concrete plan.

India Economic Forum, organised by SKOCH in November-end 2019 in the national capital, focused on the solutions instead of harping on the problems. This was the first-of-its-kind dialogue where the entire focus was on exploring sector-wise solution for the problems plaguing the Indian economy.

Around 500 delegates, including top economists, policymakers and industry leaders came together at the Forum to explore and decide on workable solutions to the challenges. It was agreed that the challenge is complicated. So, one monetary step or a few fiscal measures are not going to solve the problem. This requires action on multiple fronts. Certain actions have to come from the policymakers at the centre, a lot have to come from the states, regulators, especially the RBI need to act swiftly and corporate India need to do its bit.

The Indian Economic Forum was structured in such a way that so as to come out with practical solutions for different problems plaguing the economy. Delegates were selected from across the country to have a comprehensive understanding of the problems at the grassroots level and work out solutions. It saw participation from 27 states and Union Territories. Given the huge diversity, issues and challenges in different parts of India are not the same. Accordingly, the solutions also have to be different. The Forum saw a balanced representation from the northern, southern, western, eastern and north-eastern region.

Nearly 70-workable solutions have emerged from the Forum that would pave the way to recovery of the Indian economy. As mentioned earlier the Indian economy is complex and it needs solutions that could be implemented on the ground. Theoretical solutions borrowed from overseas won’t work.

One of the big takeaways from the Forum was that the road to recovery of the Indian economy and prosperity could come through vibrant Micro, Small and Medium Enterprises (MSMEs). Small businesses are facing humongous challenges. From infrastructural bottlenecks, access to credit and risk capital to policy and institutional interventions.

1 Agartala 22 Firozpur 43 Kota 64 Ranchi
2 Ahmedabad 23 Gandhinagar 44 Kottivakkam 65 Roorkee
3 Aizawl 24 Gangtok 45 Kurnool 66 Shillong
4 Ajmer 25 Ghaziabad 46 Lalitpur 67 Singur
5 Ampati 26 Ghazipur 47 Lucknow 68 Siwan
6 Ananthapuramu 27 Goalpara 48 Madurai 69 Solan
7 Badarpur 28 Guntur rural 49 Mangalore 70 Sonipat
8 Bengaluru 29 Gurugram 50 Manipal 71 Srikakulam
9 Bharuch 30 Guwahati 51 Mohali 72 Thane West
10 Bhilai 31 Hazaribag 52 Mumbai 73 Thrissur
11 Bhopal 32 Hosur 53 Naharlagun 74 Tirunelveli
12 Bhubaneswar 33 Hyderabad 54 Nangal 75 Tirupur
13 Bikaner 34 Imphal 55 Nirmand 76 Trivandrum
14 Bongaigaon 35 Indore 56 Noida 77 Ujjain
15 Chandigarh 36 Itanagar 57 Nongpoh 78 Vadodara
16 Chennai 37 Jabalpur 58 Palwal 79 Varanasi
17 Chittoor 38 Kakdwip 59 Panchkula 80 Vijayawada
18 Dehradun 39 Kanpur 60 Pithoragarh 81 Visakhapatnam
19 Delhi 40 Karnal 61 Pune 82 Vizianagaram
20 Devbhumi 41 Kolhapur 62 Raipur 83 Wani
21 Faridabad 42 Kolkata 63 Rajkot 84 Warangal
Delegates participated from following cities:
1 Andhra Pradesh 15 Maharashtra
2 Arunachal Pradesh 16 Manipur
3 Assam 17 Meghalaya
4 Bihar 18 Mizoram
5 Chandigarh 19 Odisha
6 Chhattisgarh 20 Punjab
7 Delhi 21 Rajasthan
8 Gujarat 22 Sikkim
9 Haryana 23 Tamil Nadu
10 Himachal Pradesh 24 Telangana
11 Jharkhand 25 Tripura
12 Karnataka 26 Uttar Pradesh
13 Kerala 27 Uttarakhand
14 Madhya Pradesh 28 West Bengal
Delegates participated from following states:

Bill discounting and e-Invoicing system would also help eliminate tax evasion. It will make easier for the tax authorities to access details of business transactions. The e-Invoicing system could pre-fill the GST return forms. It will make the GST return filing much easier, addressing a key pain point of the small businesses.

SKOCH has been pushing for GST based invoice discounting for the last several months. It is heartening to note that the GST council has agreed to introduce the e-Invoicing system, albeit in phases beginning with the big businesses. Electronic invoicing will become mandatory from 1 April 2020 for businesses having turnover of over Rs 100 crore. Businesses with turnover of Rs 500 crore or more can start doing this voluntarily from 1 January 2020 and for businesses having Rs 100 crore or more turnover the voluntary services start from 1 February. For smaller companies voluntary service will start from 1 April.

The need is to make e-Invoicing mandatory for all the companies. While it is good for all the companies, bill discounting and e-Invoicing system are particularly important for small companies, who have hardly any access to formal bank credit.

Digital Tax Wallet

A large amount of cash of small businesses get stuck with tax authorities. Different stakeholders at the Forum suggested that the government should create an online digital tax wallet. This wallet could be used for payment of taxes and other government dues as well as refund of taxes. This will prevent funds from getting locked up. For instance, even as GST refunds are awaited, income tax has to be paid. The digital wallet would make the work of the regulator much easier. So this would be a win-win situation for both – the taxpayers as well as the government.

Taxing Digital MNCs

Slow economic growth puts huge strain on the exchequer. This curtails the fiscal space available to the government to spend more in order to revive the growth. There are several untapped areas that could help generate substantial revenue. Big multinational companies involved in digital and e-Commerce business hardly pay any tax. They avoid taxes using the regulatory loopholes. Digital MNCs mostly generate bills from tax haven countries leading to billions of dollars in losses to the exchequer. They must be made to pay tax on all the revenue generated from India.

Another big tax evasion is from the e-Commerce firms. Their revenues and valuations are in billions of dollars, registering high growth rate year-on-year. But they mostly show losses in their books and hardly pay any taxes. There is need to have a strict monitoring mechanism. Cash burns by e-Commerce firms should be treated as capital expenditure and taxed accordingly.

Direct Tax Code

The government seems to be going slow on the Direct Tax Code given the problems arising from the GST. However, the Direct Tax Code is a much needed reform and it must be pushed forward. At least the structural part of the DTC should be announced in the current budget. The government should learn from the mistakes of GST. The new system must be simpler with fewer tax slabs, preferably three, reduced rates and fewer exemptions. In fact, the exemptions should be phased out gradually.

Centre-State Relations

While the major blame and focus remains on the Centre, state governments also play an equally important role in growth and development. As part of the India Economic Forum, a dedicated session was held on ‘strengthening federalism’. It was agreed that there is a need to holistically re-visit the Centre-State relations. It is desirable to constitute a High Powered Commission consisting of eminent lawyers, jurists and policymakers with administrative experience to examine the entries of List I and List II and List III of the 7th Schedule of the Constitution. While social welfare like public health and sanitation, education, water and agriculture fall largely in the purview of state governments, the central government has been playing a greater role in these areas over the years. People’s aspirations and expectations from the governments have undergone huge change over the years, accordingly the centre-state relations need to be re-visited.

The Inter-State Council should not be treated as a central government body and its federal character should be maintained. The Council should be suitably empowered, through a constitutional amendment. Experts at the forum also advised on the need to bring symmetry in the functioning of the GST Council and the Finance Commission. Consultative mechanism between the Centre and states need to be made more transparent and robust.

There has been a lot of talk about data. Timely and reliable data is the prerequisite for good policymaking. What is good data? Essentially it should reflect the ground realities. But historically in India there has been a disconnect between the policymaking and the ground realities. Policymaking in India has historically been executive decision making on input targets. Evidence is then collected on achievements through assessments designed to support the policy decision taken. Outcomes and process changes are nowhere in the picture. While these practices used to make the decision look good on paper, they have clear disconnect from the ground reality. This approach of decision making won’t work for New India. The government seems to be moving towards an outcome measuring system. This is critically important.

While at the India Economic Forum there were good deliberations on public policy and the issues surrounding the small businesses, SKOCH has decided to organise dedicated forums on Public Policy and MSMEs given their importance and criticality. This also comes in line with its principles of maintaining continuity in the issues that it undertakes to ensure that the workable recommendations come out and are acted upon.

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