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India must sustain reforms to get growth mojo back

A typical estimate from studies is that a 10 per cent increase in a country's average income will reduce the poverty rate by 20 to 30 per cent.

By Suneeti Ahuja-Kohli (Wide Angle)

Published: Thu 26 Sep 2019, 10:12 PM

Last updated: Fri 27 Sep 2019, 12:13 AM

In April we carried an opinion piece on the anaemic economic growth rate in Europe. Our columnists Jon Van Housen and Mariella Radaelli argued that Europe is growing at a snail's pace, but there is no concern about the way the economy is faring there. The region offers a good life to people, provides them with social benefits, so it shouldn't matter much if there are no annual pay hikes or if economies are not clocking high growth rates.
But that's Europe, and the same argument doesn't hold ground for a developing country like India where faster expansion of the economy is not just an aspirational goal but a moral imperative. India must grow at a high rate annually if it wants to create enough job opportunities for more than one million Indians reach working age every month. An OECD report notes economic growth is the most powerful instrument for reducing poverty and improving the quality of life in developing countries. A typical estimate from studies is that a 10 per cent increase in a country's average income will reduce the poverty rate by between 20 and 30 per cent. On average, a one per cent increase in per capita income reduces poverty by 1.7 per cent.
Theoretically, the inability of a large number of people to be gainfully employed could have a domino effect on the economy. Lack of employment affects private consumption levels of households, which in turn suppresses demand, and makes a dent in businesses and corporate earnings. It is a vicious cycle, and this is what India seems to be caught in at the moment.
Unemployment in the country is at a 45-year high, touching 6.1 per cent as per data from the National Sample Survey Organisation (NSSO). The problem is more pronounced in urban India where unemployment levels are higher than this national average. Unemployment among urban men is at 7.1 per cent and over 10 per cent for women, and this trend is reflected in lower demand.
It's clear that the Indian economy is slowing and the growth rate for the last five quarters has worried policymakers. The Narendra Modi-led government is on an overdrive and introducing measures every week to prop up the economy. The latest move came on September 20, when Finance Minister Nirmala Sitharaman announced a $20-billion package of corporate tax cuts. The Indian government has proposed to reduce the corporate tax rate to 22 per cent from 30 per cent, effective from the start of the current tax year in April.
The cut is likely to boost the earnings growth of companies in the MSCI India index by around six percentage points this calendar year and next, notes Goldman Sachs analysts. Among the sectors that are expected to benefit the most are raw materials, financials and industrials, which currently have the highest effective tax rates.
"The measures announced will certainly have an impact on the Indian economy in the medium-term. It makes India more competitive especially since the rate of manufacturing is now at on par with other southeast Asian countries like Vietnam, Cambodia, and others countries that have benefitted from the movement of businesses away from China," said DK Joshi, chief economist at Crisil.
The announcement of 15 per cent corporate tax for businesses starting from Oct 1, 2019, too is beneficial for ventures with short gestation periods - electronics, smartphone companies - could benefit. "The success of this announcement depends on how the corporates react to this announcement. They could reduce their prices and pass on the benefits to the consumers, or spend more on advertisement, or invest (which is unlikely right now). So yes, in the medium term it should have a positive impact on the economy," added Joshi.
In the long run, however, Modi government must accelerate reforms, remove bottlenecks, speed up changes in the financial sector, which is important to lubricate the entire economy.
Prime Minister's Kisan Nidhi Yojana has already benefitted the rural sector. "The food inflation is high, and the government's scheme of direct payout of Rs6,000 per year into bank accounts of farmers should improve their conditions," adds Joshi. Besides, India can uniquely benefit from the ongoing US-China trade war by realigning processes and make doing business in India easier.
From being part of the the Big Four at the start of the century, India is now called a 'sleeping giant'. The world realises the potential of the country that has a large pool of youth who can drive its workforce, but it can only work when the government carefully orchestrates a growth plan. India needs thoughtful reforms not knee-jerk reactions.

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