Economic Growth, Strong Reforms: Building India 3.0
"India has shown with its world-leading digital payments system UPI that it has the innovation ecosystem to create global products," writes Minhaz Merchant
The new government needs to quickly get down to business. A full agenda awaits it. The prime minister can build on the reforms of his previous two terms. The opportunity is unique: to create a template for India 3.0
The challenge that faces the Modi-led NDA government in 2024-29 is threefold: first, turbo-charging economic growth to a sustainable eight per cent a year; second, playing a leading role in the artificial intelligence (AI) era; and third, evolving a geostrategic doctrine that leverages India’s position as a pivot between the United States and China.
Kiril Sokoloff is chairman and founder of 13D Research & Strategy, a leading global investment research firm. In an interview with The Indian Express last month, Sokoloff said: “I think India has a unique opportunity to lead the world. The West has led for hundreds of years, and their time in the sun is over. India has an opportunity to lead the Global South, specifically. About 88 per cent of the world’s population has not had access to the economic power that the 12 per cent had for hundreds of years. I think India should be nonaligned and take advantage of what China can offer, what the US can offer.”
During the Modi government’s 2024-29 term, India will overtake Japan and Germany to emerge as the world’s third largest economy. Put that in perspective. In 2013, India was the world’s 11th largest economy. In per capita income terms, however, India is one of the world’s poorest countries. At Independence in 1947, the poverty rate in India was 80 per cent. It has declined to an estimated 10 per cent today but poverty remains a challenge.
In recent weeks, an academic paper by French economist Thomas Piketty and three colleagues pointed to rising inequality of income in India. The authors recommend an inheritance tax and a wealth tax to reduce this inequality.
According to Piketty and his co-authors, India should implement a two per cent tax on net wealth above Rs 10 crore. They further suggest a 33 per cent inheritance tax. The paper says only 0.04 per cent of India’s population would be affected by these taxes. The remaining 99.96 per cent would fall below the threshold of the two taxes.
The Piketty paper argues that the twin taxes could generate additional annual tax revenue of 2.73 per cent of GDP. That’s around Rs 8.5 lakh crore a year – nearly as much as corporate tax or personal income tax. Each amounts to around Rs 10 lakh crore. Piketty’s twin taxes are meant to redistribute the extra tax revenue to areas that are today underserved: health, education and research and development (R&D).
Since most Indian wealth is placed in trust funds, a wealth tax would be impossible to implement. Both taxes are redolent of a socialist India that Piketty and his co-authors seem to want to bring back. India had an inheritance tax between 1953 and 1985. Prime Minister Rajiv Gandhi sensibly abolished it within months of taking office. It accounted for less than one per cent of India’s total tax revenue.
Wealth tax is another relic of a bygone era that Piketty wants India to re-inhabit. India imposed a wealth tax of one per cent on income above Rs 30 lakh a year in 1957. It took decades for successive governments to realise that it cost more administratively to collect wealth tax than the revenue it generated. For example, in 2013-14, wealth tax accounted for Rs 1,008 crore. Total tax revenue in 2013-14 was Rs 10.15 lakh crore. Wealth tax thus accounted for less than 0.1 per cent of total tax revenue. It was finally abolished in 2016-17.
In an op-ed in The Times of India, economist Swaminathan Anklesaria Aiyar wrote scathingly: “Piketty’s estimated revenue from soaking the super-rick has drawn much criticism. Ex-RBI governor Raghuram Rajan says, ‘Show me one country which has actually collected serious wealth taxes anywhere, and I would challenge Piketty on that.’ The Gini coefficient, which measures inequality, ranged between 40 and 46 between 1967-68 and 2013-14. It fell to 37 in 2015-16. Covid and other factors meant a sharp rise to 51 in 2020-21. But it fell to 39 in 2022-23. Abolishing wealth tax on shares and reducing income tax after 1991 actually increased the tax/GDP ratio, contrary to predictions by Piketty’s mechanical models.”
While Piketty’s suggestions are impractical and hew towards a discredited ideology, the new government must follow the only axiom that succeeds in lowering poverty levels. That axiom is growth. The larger the economic pie, the greater the trickle-down effect across the broader economy. This is the proven way to sustainably reduce inequality.
Balancing US And China
Apart from a robust new geopolitical doctrine leveraging India’s pivotal position between the US and China as the economy hits USD 4 trillion this calendar year, the government’s 2024-29 term must focus on the AI era. Private investment in the semiconductor ecosystem has been boosted by timely government incentives. India has shown with its world-leading digital payments system UPI that it has the innovation ecosystem to create global products.
In the next five years, India needs to move up the value chain from being the world’s services and R&D centre to an innovator of world-class products like Deep Mind, an AI pioneer, which was acquired by Google in 2014, and ARM, a chip designer, bought by Japanese investor Masayoshi Son in 2016.
The second half of this decade will be pivotal in India’s rise. Economic growth must be sustained at eight per cent per year. Digitalisation will enable India to leapfrog over earlier industrial and technological revolutions that bypassed a newly independent and socialist country. It is India’s time to seize the moment.
