Solution to India’s economic malaise lies in cutting taxes and regulation

Rajkamal Rao | Updated on August 20, 2019

Rather than lower the role of government, Modi has stepped up regulations and enforcement to draconian levels all to justify good governance

The BJP should learn from what is happening in America. The US economy has continued to perform extremely well, with robust GDP growth, record corporate profits, a soaring stock market, a strong dollar, and historically-low unemployment levels despite being embroiled in a huge trade war with China and struggling with tidal waves of illegal immigration.

Credit the Trump administration for aggressively cutting both personal and corporate income taxes, and simplifying tax filing; for dramatically cutting regulations on businesses with this dictate: If a government agency wants to issue a new rule, it can only do so after deleting 20 existing rules.

Trump has packed the federal courts with judges who don’t legislate from the bench. In effect, he has steadfastly implemented the famous Reagan doctrine, “Government is not the solution to our problem, government is the problem.”

Gujarat model

When Modi first ran for office in the 2014 election, his message about replicating the Gujarat model to all of India was so fresh and addictive. He had a fondness for the free-enterprise model which has always defined America. He was the CEO of a State which understood that a vibrant economy trickles down to the poorest masses, with minimal state assistance.

And when the government needed to be involved, he appeared to have mastered its role. Public-private partnerships (Kutch Railway); FDI (Ford’s Sanand plant); innovative solutions (Narmada canal solar panels) flourished in Gujarat under his executive leadership.

Robert Kaplan, writing in the 2009 April issue of The Atlantic described Modi’s appeal: “He is what he is, a new kind of hybrid politician — part CEO with prodigious management abilities, part rabble-rouser with a fierce ideological following — who is both impressive and disturbing in his own right.”

Taking a U-turn

Since becoming PM, Modi’s priorities have unfortunately made a U-turn. He’s now less of a CEO who wants to maximise shareholder returns but more of a leader who cares about historical, ethical, social, and cultural justice issues. He’s more a spiritual leader than a go-getter CEO.

Modi thrives on the bad guy vs. good guy theme of retail politics. He has increased taxes on the wealthy arguing that they should pay more to help the poor and forgotten. He says terrorism continues to be an existential threat and has used this rationale to fundamentally transform India (demonetisation, Article 370).

Contrary to what Trump is doing, Modi has stepped up regulations and enforcement to draconian levels all to justify good governance. In this view, all are deemed to be at fault until their names are cleared. Didn’t get your KYC completed for your mobile wallet within one year of providing Aadhaar information? You must be a criminal (or terrorist) — and so, we will deactivate your wallet until such time you prove us otherwise. Such aggressive harassment could well have caused the promoter of Café Coffee Day to end his life.

Bigger problems

Modi’s approach has shown that he can win elections, but we have far bigger problems on hand. The economy has been stalling for at least 18 months, the auto industry has slumped to its lowest levels in nearly 20 years, banks are making little progress in recovering non-performing assets, youth unemployment is at all-time highs, and major infrastructure projects are stuck in the mud.

Modi should use his massive mandate to make bold structural moves which lower the role of government. He should eliminate personal income taxes altogether, or replace complex corporate income taxes with a gross receipts levy which taxes cash flow. This would instantly end tax terrorism, eliminate IT corruption, spur private sector innovation and create growth.

The writer is Managing Director, Rao Advisors LLC, US

Published on August 20, 2019

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