The year 2020 promises to be critical for the Indian economy. GDP growth slowed from 5.8 per cent in the January-March 2019 quarter to 4.5 per cent in July-September 2019. Growth in October-December 2019, judging by recent data on industrial output, is likely to remain well below 5 per cent.
And yet amidst the doom and gloom, positive signs are emerging. Foreign exchange reserves are at a record high of over $450 billion. Stock markets remain buoyant with strong foreign portfolio investment (FPI) inflows. Industrialists are beginning to say cautiously that the worst could be over and economic growth will pick up next year.
Globally too sentiment has turned mildly positive in the wake of a ceasefire in the trade war between the United States and China as well as British Prime Minister Boris Johnson’s landslide election victory. An orderly Brexit and a more salubrious trade climate in Europe and beyond could revive India’s comatose exports.
The year has been dominated in India by political churn. The BJP’s victory in the 2019 Lok Sabha election emboldened it to revoke Jammu & Kashmir’s special status and legislate the Citizenship (Amendment) Act. Meanwhile, the Supreme Court’s verdict in favour of building a Ram Temple in Ayodhya set to rest one of the most combustible issues within India’s complex politico-religious framework.
As 2020 and new decade dawn, India is confronted by a raft of challenges. Prime Minister Narendra Modi, following the BJP’s electoral loss in Jharkhand, must be mindful of issues that could affect India’s economic growth trajectory, its expanding geopolitical footprint and social cohesion.
The 2020-21 Union Budget on February 1, 2020, will be crucial. The BJP-led NDA government has delivered seven consecutive Union Budgets (two in 2019 and one each from 2014 to 2018). Every one of them, without exception, has lacked imagination. Will the eighth be any different? With the fiscal deficit under pressure and tax revenue collection below par, Finance Minister Nirmala Sitharaman has limited options.
Finance Ministry officials write the Union Budget. They are among the most powerful but unaccountable policymakers in the country. They won’t be in the finance ministry a year or two down the line to see the economic wreck they often leave behind. Sitharaman must take ownership of the Union Budget from the time its planning begins this month. Bureaucrats write the fine print where the devil in the detail often lurks.
To spur weak demand, which is the key ailment in the economy, cutting personal tax is imperative, even at the cost of the fiscal deficit going up to 3.6-3.8 per cent of GDP. The Fiscal Responsibility and Budget Management (FRBM) Act provides for flexibility in the fiscal deficit of up to 0.5 per cent of GDP in special circumstances.
The Goods and Services Tax (GST) meanwhile needs an overhaul. A parallel system of fake invoicing has developed, creating a “black GST economy”, effectively limiting monthly tax revenue to around Rs. 1,00,000 crore. Raising GST rates will worsen the situation, sending more small businesses underground.
The key to boosting GST revenue is compliance. And compliance, as empirical evidence globally, has shown, increases when the average tax rate decreases. The opposite is equally true. Raising GST rates instead of lowering them could cripple India’s GST experiment.
The Narendra Modi government has used political instruments to further its social agenda. That agenda is nationalistic which is good as long as the nationalism is defined correctly: inclusive and non-discriminatory. The moment it ceases to be both, it will become divisive and harm India’s long-term interests. Divide and rule work in the short term, never in the long term. The collapse of the British Empire, which ruled by dividing people in the countries it colonised, is an example no national leader should ignore.
Geopolitically, the Modi government has proved more nimble than it has in its stewardship of the economy. India has strengthened its relationships in a wide global arc from the United States in the west to China in the east. And yet, in 2020 the China question will hover overhead as a dark geopolitical cloud. Fortunately, Beijing has woken up to the dangers of Islamist terror groups operating at its doorstep.
As Khaled Ahmed, consulting editor of Newsweek Pakistan wrote recently: “On October 26, columnist Irfan Husain asked in Dawn. ‘So why the deafening silence across the Islamic world when around 1.5 million Muslims in China’s Xinjiang province have been forced into a vast a re-education centre? It is indeed unforgivable that the world should abandon the Uighur Muslims. The tragic fact is that the Uighur, a small Muslim community in China, have responded to the stimulus of al Qaeda in the region and come to Pakistan in gangs to attack the country’s ‘deviation’ from true Islam.
‘China’s largest oil company has won the rights to exploit the first oil field to be tendered in northwestern Afghanistan. This could bring the Chinese into a confrontation with the Uighur in Afghanistan. China knows what is in store for its Belt and Road project in the region. With the Americans gone, the Taliban will oust India from Kabul, penetrate a vulnerable Pakistan and look to conquering the Xinjiang region to ‘raise the Uighur from slavery’. Pakistan is not too clear about what will happen next. It is fencing its western border but is not capable of pushing back the religious radicalism of its middle-class and the army. That China is worried is clear from the FATF decisions under its presidency. China is using strong-arm methods to control the Uighur on its territory and forcibly change their minds – something that has not worked historically. Pakistan is scared too and has succumbed to China’s persuasion inside FATF to control its own homegrown terrorists who are used as non-state actors in its proxy war with India.’”
This emerging commonality of interests between Beijing and New Delhi in confronting radical Islam is a positive sign. The Modi government should ensure that its social and political agenda over Jammu & Kashmir, the Ram Temple in Ayodhya and the Citizenship (Amendment) Act does not divert its attention from competent economic governance. 2020 could be the tipping year for the Indian economy – for better or for worse.