India’s stalled rise – How the state has stifled growth – by Arvind

Subramaniam and Josh Felman

 India’s lost decade
1. NPAs - During the boom years, Indian firms invested heavily on the assumption of
continued rapid growth. So when the financial crisis brought the boom to an end
causing interest rates to soar and exchange rates to collapse, many large companies
were unable to repay their debts. As companies began to default, NPAs of banks rose
to as much as 10% of their assets.
2. Twin balance sheet problem – This problem existed between large infrastructure
companies and banks. Many experts say that it has now become a 4-balance sheet
problem spreading to NBFCs and real estate companies. While there are mechanisms
in place like Insolvency and Bankruptcy code they have largely failed. Banks took a
haircut of 61%. Moreover, more than 75% cases took more than 270 days to get
resolved.
3. Declining labor force participation (especially women) – Female labor force
participation is around 20% and is at its lowest level since independence. Capacity
utilization in manufacturing too is at unprecedentedly dismal levels around 60%. Our
labor force participation rate in general is below 40%.
4. Falling consumer confidence – In June 2021, the central bank’s consumer confidence
index fell to a record low, with 75% of those surveyed saying they believed that
economic conditions had deteriorated, the worst assessment in the history of the
survey.

5. Failure of GST (and federalism) – This is not in your syllabus but if you want a
detailed criticism of GST and Demonetization, refer to Arun Kumar who is the
leading expert on the shadow or black economy. It is however important to look at 2
claims. Government promised that states a 14% annual growth in GST as
compensation. The first GST monthly collections were 95,000 crores. A 14% annual
growth would mean 1.8 lakh crores monthly collection. However, as we know we are
still at 1.4 lakh crores monthly GST collection – a monthly shortfall of 40,000 crores.
The second claim is that government would follow Finance commission
recommendations and share 42% of their revenues with the states. How has the
progress been on this front? Dismal. Today, the figure stands at 30% - a shortfall of
30%. Moreover, this government is moving towards increasing Cess- something
which mustn’t be divided with the states.
 Improving hardware, fixing software
1. Rail and Roadways – Road construction and highway construction has improved but a
major reason for this is change in formula to fit with international norms. The formula
to measure construction has shifted from linear length to lane-km. Multimodal parks
are being created to reduce logistics cost (which in India is one of the highest in the
world) which is currently at 14% of GDP.

2. New welfarism – In many countries, social spending has traditionally focused on

intangible goods such as health and education. On these social services, India spends
6.1% of what is spent on total expenditure. However, India’s performance has been
good on providing tangible basic goods like bank accounts, cooking gas, housing and
toilet. Comparing NFHS data, we find that the performance of NDA has been better
than UPA on these 3 fronts only – toilets (sanitation), access to drinking water and
clean cooking fuel.
 3. Tax cuts – The corporate tax rate was reduced to 25% from 35%, and new
manufacturing firms were offered the possibility of securing a tax rate of just 15%.
This lost the government a revenue of 1.45 lakh crores in one year. Each year the
revenue foregone (now euphemistically referred to as Tax expenditure) is more than
the fiscal deficit.

 Aspiring outward, turning inward

1. Since the financial crisis, China has given up about 150 billion of global market share
in labor-intensive goods. Yet, India has been able to capture only 10% of the lost
share. India seems to be returning to protectionism and non-participation in regional
trade agreements (example rejection of RCEP).
2. Raising import tariffs – Since 2014, there have been some 3,200 tariff increases,
affecting about 70% of total imports. As a result, average tariff rate has increased
from 13% to 18%.
3. Trade agreements – Under Manmohan Singh, 11 trade agreements were signed.
Under Modi, none were signed.
4. Lack of labor-intensive exports – India needs to follow the Asian recipe of boosting
labor-intensive exports. Even our economic survey admits that we have failed to raise
our labor-intensive exports (despite having comparative advantage in them and
despite being a labor abundant country) unlike Bangladesh. All the major schemes
such as PLIs (production linked incentives) are aimed at increasing technology and
capital-intensive sectors.
 Stacking the deck

National champions strategy – This implies promotion of companies that have acquired a
dominant position in particular sectors of the economy. Japan and South Korea adopted a
‘national champions’ strategy decades ago with Zaibatsu and Chaebol conglomerates. The
arguments in favor are as follows – with government assistance, favored companies can
achieve huge companies of scale, create networks, and help pursue national economic goals.
They can also strengthen a country’s position in the global market. In India the strategy has
centered around 2 large conglomerates – Gautam Adani and Mukesh Ambani. One positive
outcome of this strategy has been the rollout of a low cost 4g cell phone network by Jio
which has given hundreds of millions of Indians access to the internet for the first time.
Another positive outcome is that these 2 giants could help India meet its climate goals, since
they are both making large investments in renewables. These beneficial effects however must
be weighted against the negative interests. Even as reliance JIO was expanding, Airtel and
Vodafone crippled leading to gradual monopolization. This is also party because of the state.
To understand how one must understand the whole Aggregate gross revenue issue. The
definition of what constitutes adjusted gross revenues (AGR) — or revenues of companies on
which the government can levy a 8 per cent license fee and a 5 per cent spectrum usage fee
— was finalised in 2001. According to this, the AGR should factor in all income accruing to
a telecom service provider, including telecom and non-telecom businesses. The telecom
companies were of the view that only income from telecom services is taxable. So, in 2003,
the operators moved court. Due to these high AGRs, Airtel and Vodafone are riddled with
debt. Jio is prospering because it joined the race later and isn’t in debt. By backing the 2As at
the expense of other companies, the government is encouraging an extraordinary
concentration of economic power. Let’s contrast the case of the 2As with Zaibatsu and
Chaebol with the 2As. The economic power of Zaibatsu and Chaebol was kept in check
because they generally operated in tradable sectors where they had to demonstrate efficiency
by competing globally. But the 2As operate mostly in domestic infrastructure sectors which
are shielded from international competition and heavily shaped by government regulation.
This results in creating an oligopolistic economy.
 Stigmatized Capitalism

1. To this day, some of India’s biggest entrepreneurs are believed to have built their
empire by mastering the minutiae of India’s tariff and tax codes and manipulating
them brazenly to their advantage.
2. The infrastructure boom during which public resources - land, coal,
telecommunications spectrum - were captured by private firms favoured by
government. The current government has chosen to favour two groups through
regulatory favours and privileged access to infrastructure contracts. This is what the
author refers to as stigmatized capitalism – the 2A variant.
3. Such favouritism seems unlikely to build public support for market-based reforms. In
fact, it has already turned many Indians against them. Take the example of farm
reforms. Some of the intended beneficiaries of the reforms decided to oppose the
measure, partly because they feared that the new system would prove to be an
oligopoly dominated by the 2As, which would force down farm prices. The
government tried to convince the farmers otherwise but could not succeed.

 Defective software

1. Questions raised over data – Many experts have raised serious doubts about the
quality and integrity of India’s official data. This is partly because of suppressing of
unemployment data by government. This is also because of wide divergence between
NSS and NAS estimates of consumption. It is also partly due to divergence between
formal (which is accurately captured by data) and informal sector (which isn’t
captured by data accurately). We now only rely on CMIE which has private paid
surveys and according to Dreze and many experts is not representative enough.
Sometimes government officials rely on payroll data (such as EPFO etc.) to paint a
brighter picture of the econoomy than the one that exists. This data is highly
misleading and completely misses 90% of the economy.
2. Old VS New GDP measurement

3. Lack of continuity – For example, actions to improve farm incomes have been
undermined by decisions to ban key exports. The intention to widen tax base was set
back when in 2019 the income tax threshold was raised dramatically releasing about
75% of taxpayers from the tax net.
4. Lack of investment framework – The lack of a clear, stable investment framework is
the fundamental barrier to convincing international manufacturers leaving China to
relocate their operations to India. And this also explains why FDI has been flowing
into India’s technology sector – because this sector is lightly regulated and is not
subject to the same degree of policy uncertainty.

 A chance to reboot?
Compared with China, India’s population and workforce are young. And whereas China’s
hardware revolution – its huge investments in infra and housing – has largely run its course,
India’s is only just beginning. China is also an increasingly authoritarian country and has
begun to undermine private-sector entrepreneurship and innovation through sometimes
punitive state intervention. India by contrast is the world’s largest democracy with the
groundwork in place for an expanding private sector. National champions strategy must be
dropped and the government needs to fundamentally improve its economic management and
instil confidence in the policy making process.