After the cleansing, build trust

With the announcement of elections to the 17th Lok Sabha imminent, it is only expected that political parties will focus on dissecting the achievements/non-achievements of the last five years in their quest for votes. Equally from an economy point of view, it is crucial to look ahead at the next five years, a task that will presumably be performed by the manifesto committees of all the major political parties. Hopefully, away from the glare of the campaign trail, parties will rise above partisanship and vote banks to present truly transformative ideas for India. What could be a motivating economic narrative for the next five years?

Since the future flows from the past, it would be worth gleaning a narrative of the last five years. It would not be unreasonable to say that the period between 2014 and 2019 has been one of cleansing. By 2014, the flaws of India’s post-1991 journey stood totally exposed. India’s growth had admittedly attained a new and higher trajectory but it was accompanied by some nasty side effects: Cronyism, tax evasion, corruption, inflation and a breakdown of tripartite trust among government, industry and society. The necessary conditions for sustained growth seemed to be gone.

There has been clarity in purpose in the way the Narendra Modi government has gone about the task of tackling the adverse side-effects. The goods and services tax is a complete overhaul of the indirect tax system. Demonetisation forcibly drew unaccounted money into the mainstream. Together, both will serve to increase the tax-GDP ratio from an abysmal 17 per cent of GDP upwards, towards the advanced economy average of 34 per cent. The Insolvency and Bankruptcy Code (IBC) has finally disciplined errant and thieving promoters who are beginning to lose their businesses instead of continuing to run them on life support from pliant banks. The IBC is the most important step in stamping out crony capitalism and restoring the health of the banking system. The government has also brought transparency into the way it allocates resources and has cut down avenues for corruption by making significant cuts in the all-pervasive red tape. The benami Act has come down hard on illicit money pouring into real estate. Control of a runaway fiscal deficit and a new monetary policy framework have contained the demon of inflation.

The task for the next five years is to capitalise on this clean-up and attain a sustained double-digit growth for the next two decades. For that to happen, the narrative of cleansing needs to be succeeded by a narrative of trust. 

There are multiple dimensions to this build-up of trust. The government needs to start trusting market forces. It needs to acknowledge that prices set in a competitive market by the forces of demand and supply ensure the optimal allocation of resources in an economy. That is the key to power growth. Of course, there will be sections of the population that will not be able to afford necessities at market prices. To them, the government must give targeted subsidies upfront through direct cash transfers. The distortion of prices ostensibly to favour the poor should be eschewed in favour of income support.

For the government to trust markets, it needs to be able to trust industry and entrepreneurs. The relationship between the government and the industry needs to be reinvented and become transparent. There is no option but for the government and industry to engage in a partnership because while the people of India hold the government accountable for jobs, it is only the entrepreneurs of India who can deliver on job creation. Needless to say, the people of India must also be able to trust the government-industry relationship to be an honest one. Industry must play its part by speaking up for national interest with greater frequency than it speaks for its self-interest. It must also do business with ethics. The fact that a new generation of entrepreneurs, whose growth has little to do with government support or intervention, is now finding its feet will help build trust.

The people of India have a responsibility too. The government needs to be able to trust them to do the right thing, by paying taxes for example or by not littering their surroundings. Indians have been justifiably vocal about protecting their rights but are less committed when it comes to performing their duties.

It is easy to fall into bad habits, for the government, for industry and for ordinary citizens. For once, there is an opportunity to build a truly modern, fast-growing, transparent economy in which the government, industry and people are equal and enthusiastic (as opposed to cynical) stakeholders. It will be a fitting gift for India’s 75th birthday.

The author is chief economist, Vedanta