The promise of big bang reforms looms over the Indian economy, once again. In his Independence Day speech, Prime Minister Narendra Modi promised a slew of bold reforms without clearly signposting the areas where the radical transformations would take place. The first stab at reform will begin with the rationalisation of rates under the eight-year-old goods and services tax regime. The game plan is to modify the existing eight-slab rate structure into one that is more equitable and less regressive. The Centre’s proposal seeks to abolish the general rate of 12% and raise the demerit rate for luxury and sin goods to 40% from 28%. Goods of common consumption like textiles, footwear and dairy products are thus likely to become cheaper as they shift from 12% to 5%. Some could become more expensive as they are bumped up to the 18% slab. If there is a shakedown from the 28% slab to the 18% category, air-conditioners, televisions and cement could become cheaper. The GST Council is due to meet early next month to kick-start the process. The rate rationalisation is expected to trigger a surge in consumption, especially at the bottom of the income pyramid. But there is a flip side to the indirect tax reform: states will have to brace for lower revenues amid an anticipated slump in GST collections. A cascade of forecasts is floating around suggesting a decline ranging between Rs 700 billion to Rs 1.6 trillion in tax collections. Half of that burden will automatically devolve to the states.
Reforms is a slippery word — and its definition is shaped by the ruling regime’s agenda. The bigger discussion now will centre on the other areas where Mr Modi’s government could try to ring the changes. As the tariff spat with the United States of America escalates, a clear pushback is expected to emerge as the Centre prepares to unleash a campaign to popularise a movement to buy goods produced within the country which could have dreadful consequences. In the past, Mr Modi’s government found itself badly stymied by popular unrest and parliamentary uproar when it tried to push through land, labour and agriculture reforms. Repackaged versions of earlier efforts could now surface, bolstered by arguments that these would help create jobs and aid the farm-to-industry migration of labour. A couple of other areas cry out for attention: the need to reduce dollar-denominated settlement of trade obligations with third party nations, push for a faster litigation process, especially for bankruptcy cases, and correct the paradox arising from the sharp surge in currency circulation that is completely at odds with the big leap in digital banking. The government must also overhaul processes to re-establish credibility in government statistics and restructure compliance obligations for big and small businesses.
India is urbanising rapidly. The former chief economic adviser, Arvind Subramanian, had forecast in the Economic Survey, 2016-17, that India’s urbanisation rate would rise to 40% by 2030. The megapolises are notoriously short of land. The same Survey also said that by 2050, India would be among the most land-scarce countries in the world. The plan to build 200 new cities has made patchy progress. India will need to create more urban agglomerations and also rebuild infrastructure in its villages to satisfy the growing aspirations of a country with one of the youngest population demographics in the world.
