Slow, but not down

Cur­rent slow­down of­fers an op­por­tu­nity

The Hindu Business Line - - THINK - DANIEL MOSS BLOOMBERG

In­dia is an emerg­ing mar­ket stand­out. The coun­try was one of only a hand­ful of large economies marked down in fore­casts from the In­ter­na­tional Mone­tary Fund this week. In­dia’s gross do­mes­tic prod­uct is ex­pected to rise 6.7 per­cent this year, com­pared with a pre­vi­ous pro­jec­tion of 7.2 per­cent. Next year’s es­ti­mate was also low­ered.

Mid­way through their term, Prime Min­is­ter Naren­dra Modi and his team are acutely aware of the soft patch and didn’t wait for the IMF. Modi, his min­is­ters and the rul­ing BJP’s ad­vo­cates were out in force last week. Much of the re­sponse is sub­stan­tive, some of it un­nec­es­sar­ily de­fen­sive.

Why so de­fen­sive? The BJP’s po­lit­i­cal po­si­tion, on pa­per, is ab­so­lutely dom­i­nant. It won a thump­ing ma­jor­ity in par­lia­ment in 2014, and more than half of the 26 state gov­ern­ments are in BJP hands, more than ever be­fore. The Congress party, the main op­po­si­tion, is kind of nowhere. Some pro-gov­ern­ment talk­ing points go along the lines of “Well, when Congress has been in gov­ern­ment, they had slow­downs too” Or they say In­dia is suf­fer­ing be­cause global de­mand is weak -- a highly con­testable line.

Back to those fore­casts. The peers with which In­dia is closely as­so­ci­ated — Brazil, China and Rus­sia — all got slight up­grades, ad­mit­tedly from a lower base. In the case of Brazil, a very low base. Over­all world fore­casts were raised a touch. The en­cour­ag­ing news is that in terms of im­pact, this is a pretty good year for In­dia to miss the party. The oth­ers can eas­ily make up for the lost ground. And it’s true that many coun­tries would be en­vi­ous of an ex­pan­sion north of 6 per­cent.

In­dia’s rel­a­tive slow­down is a sen­si­tive sub­ject at home. Modi leaned into the is­sue in a speech last week, and Fi­nance Min­is­ter Arun Jait­ley spent Fri­day evening an­nounc­ing cuts in tax rates on dozens of items. Taxes de­served at­ten­tion. Most ob­servers, in­clud­ing the IMF, at­tribute part of In­dia’s funk to the im­ple­men­ta­tion of a sweep­ing na­tion­wide sales tax re­form. The other fac­tor is the with­drawal of some ban­knotes from cir­cu­la­tion late last year, a rad­i­cal step re­ferred to as “de­mon­e­ti­za­tion,” aimed at curb­ing the po­ten­tial for graft.

The tax shakeup was worth­while, re­plac­ing a hodge­podge of sales tax rates that dot­ted the na­tion and dif­fered from state to state. Modi has been jus­ti­fi­ably praised for the move, one that gov­ern­ments of all stripes balked at for decades. After all, what’s a big ma­jor­ity for if you don’t use it do big, hard things?

That doesn’t mean there weren’t prob­lems with im­ple­men­ta­tion. Jait­ley’s cut tax rates on 27 items and extended the pe­riod for small busi­nesses to file re­turns. Crit­i­cally, ex­porters were al­lowed to keep pre­vi­ously ex­ist­ing ex­emp­tions un­til March next year. The gov­ern­ment has made boost­ing exports a pri­or­ity.

In a democ­racy this large, at­tempt­ing re­forms on this scale, there were al­ways go­ing to be com­pro­mises and some op­er­a­tional stick­ing points. Bet­ter to ad­dress sooner than later. That is what’s hap­pen­ing.

Bet­ter times may lie ahead. The IMF, for one, looks for­ward to a reac­cel­er­a­tion of growth after these blips re­lated to the tax re­form, say­ing it is “among sev­eral key struc­tural re­forms un­der im­ple­men­ta­tion that are ex­pected to help push growth above 8 per­cent in the medium term”

It is a vast mar­ket. It’s im­por­tant for democ­ra­cies to prove they can still do big things. Here’s to bet­ter years ahead.

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