GST- Best cannot be the enemy of Good

The Government Amendment Bill for the Goods and Service Tax was introduced in Lok Sabha on 19 December, 2014. Earlier it had been considered by the Parliamentary Standing Committee which submitted its report in August 2013. This is one of the key reform initiatives which commenced during the earlier NDA Government was pursued during UPA I and UPA II. It continues to be a centre piece of our tax reforms. The Finance Minister after an introductory statement on 24 April, 2015 requested that the bill be taken up for discussion and enactment. Congress members and some regional parties objected that the Amendment introduced subsequently after taking account of earlier recommendations of the Standing Committee needed further discussion. They wanted it to be resend to the Standing Committee. This would have delayed this bill for much longer.

In essence India still remains a fragmented market. The varied rates of taxes imposed by Centre and States create cascading effect, burden the consumers, deprive government of tax revenue, add to the onerous of compliance and reduce the competitiveness of manufacturing.

The Essence of the Amendment Bill lies in subsuming various Central and State indirect taxes including central excise duty, service tax, countervailing duty, state value added tax, octroi, entry tax, luxury tax among others. The Bill aims at creating a single unified national market for goods and services sans of tax distortions. A GST Council will also be constituted. The membership of the council comprises of the Union Finance Minister, the Union Minister of State incharge of Revenue or Finance and the Minister incharge of Finance and Taxation or any other nominations by State Governments.

The functions of the council include making recommendations on taxes, surcharges and cesses to be levied, goods and services to be included or exempted and so on. The council will model laws and principles governing GST and decide upon the turnover below which GST can be exempted. It will also decide floor rates and bands of GST. It will suggest special rates to raise additional revenues during natural calamity. The Council would also design special provisions with respect to 10 states including Jammu and Kashmir, Himachal Pradesh and North Eastern States.

Implementation of GST would have some clear advantages for the economy.

First, a single comprehensive tax benefits all stakeholders.  Consumers will benefit by paying one tax in place of multiple overlapping taxes like VAT, entertainment tax etc., leading to market distortions. Revenue benefits from the broadened tax base. The suppliers benefit from the minimal burden of tax levied only on the value added by them.

Second, it creates a unified common market. The cascading effect of complex indirect taxes is mitigated. The transparency and simplification improves compliance.

Third, a comprehensive tax improves the competitiveness of manufacturing sector. In the long run, by promoting growth it improves the per capita income. The purchasing power of the growing middle income population of India is enhanced.

Fourth, a transparent and rational tax regime improves the Ease of Doing Business. It boosts investor confidence, encourages capital inflows and gives a fillip to the Make in India programme.

Multiple challenges, however, remain unresolved.

One, states are concerned that a substantial proportion of their indirect tax revenues are now subsumed in one tax. They are also worried that now the tax revenue will accrue to the destination states and not the manufacturing states. Central government’s decision to reimburse the loss in revenue will allay this fear. In the long run, higher growth would make central support unnecessary. The transitional fiscal burden on the central government will also be allayed.

Two, the rate of GST also remains undecided. Tax rates cannot be too low as it will impact Government’s revenue. On the other hand, high tax rates will affect compliance. Our tax rates, in the long run, need to be aligned with the rates in other developing economies.

Three, issues such as taxing inter-state transactions at 1 percent has caused concern. It has been decided that such a tax with an upper limit of 1 percent be collected by the Centre and can be assigned to the States for an initial couple of years. The GST Council reserves rights to make recommendations in this context. However, a higher rate of such tax can create production distortions.

Four, the exclusion of tobacco, alcohol and petroleum and the real estate sector robs major areas from a unified tax structure. Overtime and given experience, the GST Council can phase these in.

Analysts believe that GST is central to our growth strategy. While estimates vary, many believe that it can add upto 1.5 percent to India’s GDP. It benefits all stakeholders. The glitches have to be resolved overtime. The Best should not become the enemy of the Good. An early GST is now an economic necessity.

Singapore and the legacy of Lee Kuan Yew

I was in Singapore on the day of Lee Kuan Yew’s cremation. As the Founding Father of Singapore he was the longest serving Prime Minister from 1959 to 1990 in recent history. Till two years ago even at the age of 89 he was active in the policy domain. Narendra Modi has done India enormous service by participating in his funeral. We even had a national mourning on Sunday. These gestures have made an indelible imprint in the minds and hearts of Singaporeans. George Yeo the former Foreign Minister, with whom I spent some time, told me how deeply touched they were and how indebted they will remain for this symbolic act. Modi’s instinctive decision suggests the high leadership qualities. Leaders emerge not merely from experience but from leadership instincts. Choosing the right moments and the right occasion is what decisive leadership is about. Everyone knows that the relationship between Mrs. Indira Gandhi and Lee Kuan Yew was not particularly warm. India remained contemptuous that a leader of a small city state, successful no doubt, should not preach economic liberalization to a complex country like ours. We viewed his advice with scepticism. Lee Kuan Yew himself regarded India to be a disappointment for not grasping the opportunity which could transform India. He somewhat changed his views following our liberalisation in the 1990s.

In the last 20 years, the India – Singapore partnership has deepened significantly. India for them represents a large demography, unsatiated demand and a market for managerial skills and technology within a functioning democratic framework.    

It is no secret that after Singapore’s partition from Malaysia in 1965, Singapore has rapidly transited from a third world country to a developed economy. Its per capita income rose from US $ 540 in 1965 to US $ 54,040 in 2014. It has repeatedly topped the list of the Ease of Doing Business and is an example of successful Public Private Partnership. This is even though many regard Singapore as a family run concern.  Notwithstanding timely elections and a functioning Parliament it has suppressed individual liberties, curbed the media to enforce discipline and secure productivity gains. The younger segment has persistently resented these curbs. In a country with a total geographical area that does not exceed 700 square kilometers and a population of 5 million which is ageing, persistent immigration has caused social unease.

Broadly speaking, the Singapore success story has four lessons for India.

First, that it is possible to improve productivity and growth in a State run enterprise, if given autonomy, domain knowledge and best technology solutions.  Singapore Airlines, the Changi Airport and important infrastructure projects are owned by Temasek- a public sector company. Making public sector run efficiently and principles underlining their efficiency and productivity are worth replicating.

Second, Singapore stands out as the shining example of urban planning and water management systems.  Not a drop of water is wasted. All water which is consumed is recycled from sewage and effective treating of rain water.  Water conservation systems and urban planning are relevant for us as we grapple with problems of persistent water shortages and unplanned urbanisation. Singapore is the best Smart City one can think off. Chandra Babu Naidu has been quick to recognise this and ask Singapore to help in building its new capital at Amravati. We could do so for the cities and give more tangible content to SMART Cities.

Third, China is often quoted as an outstanding example of what may be called Controlled Capitalism. Fostering the private sector culture of innovation, technological upgradation, vastly superior managerial skills and combining them with public resources have created models of Public Private Partnership from which we need to learn. India is seeking to re-jig its Public Private Partnership model in terms of risk assignment, eliminating the odour of crony capitalism in exploiting natural resources and securing appropriate benefits to all stakeholders.

Fourth, the transparent administrative system in Singapore in framing its labour laws has lessons for India where reforms in Labour Laws have now rightly focused the attention of policy makers. Also, while collective bargaining power of Trade Unions in India detracts investments, the Trade Unions in Singapore instead   use the collective bargaining to improve education and other social services for its members.  

Finally, emphasis of Singapore and its overarching theme, investment in Human Resource Development, inculcation of skills, and payment of high wages to public servants to obviate temptations of corruption have significant lessons for us.   

True, Singapore is a city-state. Even more true, it neither has the demography nor the complex conflicts of language, caste and religion as in a polity like ours. Yes, small is not always beautiful but small city-states like Singapore have multiple lessons for us. The legacy of Lee Kuan Yew will be India’s constant reminder of its missed opportunities, more importantly of misplaced arrogance and decisive inability of our political leaders to readapt our economic and social strategies till compelled to do so by our economic crisis has been our decisive disadvantage. It is never too late to learn and we have successfully course corrected. In forging deeper partnership with Singapore we are drawing the right lessons from the legacy of Singapore’s Founding Father. 

End of Neo-Colonialism

The babel around the Budget and the XIV Finance Commission and subsequent comments and analyses have now ebbed. There are some States and stakeholders who are critical based on inadequacies of allocation in the social sector. But there is a consensus that the Budget represents a credible balancing act and gives a decisive momentum to the economic upturn which has already commenced. Thomas Sowell has said “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” So which lesson did the Budget pursue?

In retrospect, there were some overarching policy options to leverage that the Finance Minister had.

One, the classic choice: growth versus inflation. How much of fiscal flexibility was acceptable to enhance public outlays in infrastructure – railways and highways? The budget has adhered to the path of fiscal rectitude by meeting the fiscal deficit target of 4.1% this year.  It has postponed the terminal fiscal deficit target of 3% by an additional year with somewhat higher intermediate targets. The rating agencies prefer a closer adherence to the fiscal roadmap.  Of course the new time path must be adhered. I have for long argued that parliamentary approvals must be ex-ante than ex-post. The recommendation for a Fiscal Council contained in the Finance Commission’s recommendations is sensible.  This along with the new Monetary Policy Framework Agreement between the Finance Ministry and the Reserve Bank of India would act in congruent ways. It will ensure harmony between monetary and fiscal policy and thus Mint Street and North Block.

Two, subsidy rationalisation. There are significant gains in rationalising petroleum and fertilizer subsidies by de-regulating petrol and diesel and moving over to the Aadhar based LPG subsidy.  Further action is needed on fertilizers, particularly Urea. There must be pari-passu progress as JAM (Jan Dhan-Aadhar-Mobile) gathers momentum.

Three, congenial external environment to be harnessed. Oil prices have dramatically declined from $82 to $59 with soft commodity prices. The current account deficit is acceptable even though in the long run sluggish export behavior needs innovative action beyond conducive exchange rates.  We could have used this opportunity to create greater fiscal space for the future. Public debt could have been retired or a Consolidated Sinking Fund for amortisation of debt created. The Finance Commission suggests this can “tide over, roll over risks and the weak cash management practices.”. A middle path has been preferred. Substantial benefit has been passed to the consumers enhancing their purchasing power, allowing oil companies to recoup some losses and raise revenues to meet fiscal targets. Given the opportunity, this must be pursued.

Four, the XIV Finance Commission’s recommendations. There is overwhelming precedence that on devolutions they have been treated as awards than recommendatory. Consequently, total devolution to the States is now 62% of which 42% is from common divisible pool of taxes. The rise in tax devolution to States and the Non Plan grants to local bodies together represent a sharp cut of ’206292 crore from the Centre’s resource block. In the shrunken resources for the Central government the funding pattern of schemes has under gone a structural shift.  The Budget at a Glance again highlights the middle path. It classifies public outlays in three categories – schemes to be supported by the Union,  schemes to be continued with change in sharing pattern and those fully de-linked from Central support. The major flagship programmes of the government remain in the Union list like the Sarva Shikaha Abhiyan, MGNREGA, Pradhan Mantri Gram Sadak Yojna. There are others which would be financed with a changed sharing pattern. Schemes de-linked from Central support, leaving it for the States to decide are rather small. The most contentious being the Backward Region Grant Fund to Bihar, KBK and Bundelkhand.

There has been misplaced criticism that social sector outlays have been drastically pruned.  In making such comparisons a methodological error has crept in.  Analysts have compared the Budget Estimates of 2014-15 with the Budget Estimates for the current year. Those familiar with public finance know that normally the comparison is between the RE (Revised Estimates) with BE (Budget Estimates). Such comparison would suggest that allocations have been kept more or less intact. In the case of Integrated Child Development Scheme (ICDS) the reduction is sharp, but the pattern of funding is yet to be decided.

Thus the Budget and the Finance Commission are two sides of the same coin. It emanates from the design and conception of a new financial architecture of Centre-State relations. It is a giant step in promoting federalism where much larger untied resources become available to the States for selecting, designing and implementing programmes best suited to their needs. The Government had little option given the shrunken envelope after accepting the Finance Commission’s recommendations.  After all you cannot have the cake and also eat it. States cannot have both the cake of large untied resources and eat the Centrally Sponsored Schemes as originally conceived.  One can argue of whether this was the best approach or could the recalibration have been somewhat different? 

Will this new model of Fiscal Federalism work? There are inherent risks but also existing opportunities for Team India. The risks are well known if the State Governments act irresponsibly or promote fiscal profligacy. But in the end, the Government at the Centre and the States are judged by the improvement and development of life quality by the Electorate whose periodic mandate they seek.

The new fiscal architecture eliminates the form of neo-colonialism like what Rudyard Kipling described as the White Man’s Burden  viz. the Centre knows what was good for the States. A new social compact between the Union and the states has been ushered.

Thus, the adoption of the XIV Finance Commission’s recommendations and the Budget reflect that the Government has accepted both, the first lesson of economics and the first lesson of politics. A credible balancing act is what the budget is all about.

बड़े आर्थिक बदलाव का मौका

Money-wise: A budget is as good as our implementation capabilities

It is said that no success is final, nor failure fatal — it is the courage to continue that counts.

The Delhi electoral outcome has rekindled a fresh debate on the preferred model of development. Apart from other factors some analysts argue that the economic policies of the government have a pro-rich bias and alienated a large voter base among migrants, slum-dwellers and, generally, the very poor. The forthcoming budget, they argue, must course correct. This reasoning is truly farfetched. The focus of the election campaign by AAP related to issues of corruption, safety of women, availability of drinking water and inadequacy of basic infrastructure. Critics overlook that the amendment to the Land Acquisition Act pertains to the ponderousness of the process and does not dilute the generous compensation. Similarly, with respect to the MGNREGA based on CAG report the emphasis rightly has been placed on capital-creating assets. The approach also overlooks the more basic fact that the excessively entitlement-driven policies of UPA 1 and UPA 2 weakened macro fundamentals, reduced investable surpluses and smothered investor confidence. These entitlement-driven rights embedded in several legislations were a major draft on shrinking resources. Coupled with weak delivery systems with inherent leakages they eluded improved life quality to intended beneficiaries. Any economic strategy must be designed to create more jobs, improve outcomes of social spending, quality of infrastructure and improve competitive viability to attract private investments.

All principles of distributive justice are predicated on enlarging the size of the cake. The reverse is a vicious quagmire of a low-level equilibrium trap.

For too long budget expectations remain misaligned with contemporary realities. Broadly speaking, in a comparatively closed economy prior to 1991, the budget was predominantly an accounting statement of projected revenues and intended expenditures. Post 1991, the budget increasingly becomes an occasion to go beyond accounting and articulate the broader economic and social agenda of the government. This approach in the earlier reform period of 1991 to 1994 was fostered by multilateral institutions as a pre-condition for access to their resources.

Speculation, uncertainty and excessive secrecy contribute to the mystique of the budget process. It is not adequately recognised that all over the world economic policy-making is a continuous process. The budget is hardly a panacea for either all economic malaise or response to multiple economic challenges. In an increasingly inter-dependent world we need to adopt the best international practice in the budgetary process. The OECD Best Practices for Budget Transparency report has suggested an ex-ante engagement than ex-post outcomes. It argues that ‘a pre-budget report serves to encourage debate on the budget aggregates and how they interact with the economy. As such, it also serves to create appropriate expectations for the budget itself.’ British economist John Maynard Keynes suggests “Successful investing is anticipating the anticipations of others.”

So what should we anticipate for the forthcoming budget?

First, continue the focus on growth, investments and employment creation. Distractions and plea for populist programmes must be subsumed as part of the broader priority agenda of the government, which focuses on externalities, public goods, enhancing our competitive viability and total factor productivity of the economy.

Second, both savings and the investment rates and investment gearing ratio need to substantially increase for transiting to a higher growth trajectory.

Third, reiterating the commitment to fiscal rectitude and the path of fiscal consolidation. Mechanical fixation of fiscal deficit should be replaced by cyclically adjusted fiscal deficit with latitude to reach end targets with flexibility during the intervening period. The concept of cyclically adjusted fiscal deficits now has wide acceptance. As Glenn Hubbard, dean of the Columbia University Graduate School of Business, reminds us, “Gradual fiscal consolidation may also be stimulative in the short run.”

Fourth, improved expenditure management, reduction in the number of centrally-sponsored schemes and given reported generous award of the finance commission coupled with subsidy rationalisation, particularly direct benefit transfer, benefit macro management.

Fifth, a reiteration of abstinence for future retrospective changes and acceptance of judicial or quasi judicial or arbitration outcomes improves investor confidence.

Sixth, lowering tax rates to improve opportunity cost of investment and enlarging the base with a commitment to align our taxation rates with Asean rates will be an important investor fillip. Adopting best international practice in respect of treaty shopping, seeking tax arbitrage, base erosion and profit sharing and application of GAAR can be part of the same process.

Seventh, clearly-identified programmes that are popular but not populist and contribute to inclusive growth, like Jan Dhan, Swachh Bharat, Clean Ganga, the Digital India and Make in India campaigns should receive tax incentives to invigorate green shoots of investments and back-end infrastructure. Improving the ease of business, particularly enforcements of contracts and permissions in the construction sector as high priority, can make a difference.

Eighth, enhancing agricultural productivity, particularly supply side response, in consonance with changing consumer preference along with orderly non-agricultural job creation is important.

Improved social infrastructure, particularly health and education need an innovative approach. In education, the key issue of guaranteed access must be replaced by improved outcome, through teacher training, and undoing the debilitating feature of the RTE, which has smothered private initiative, is critical. This would be congruous to the new skill inculcation initiatives both in respect of rejuvenating existing institutions and creating new ones.

In the end, any budget is as good as our implementation capabilities. John Keats was right when he said “Nothing ever becomes real till it is experienced”.

India: The Economy of Future

The last ten days have been packed with events. Just prior to the visit of Obama the World Economic Forum in Davos concluded its 45^th annual conference of the broad theme entitled ‘The New Global Context’.

This was my 17^th year in the Alpine Ski Resort in Switzerland. Davos is much more than mere animated discussions ranging from the economy to politics to medicines to arts and sciences. It manages to get each successive year to engage key policy makers and game changers. The slogan is ‘Come to Davos and meet the world of Game Changers’. At the heart of it, Davos is less about meeting but more about making friends, to nexus, to connect and to leverage contacts. You need a ‘Davos Frame of Mind’ to make the best of Davos. 

Are there multiplier benefits to friendship and contacts even in an interdependent world today? Yes it is, because with face to face contacts, even brief conversation is a quick learning experience about changes, perceptions and pointers to future.

The Davos conference this year had a mixed milieu. The European delegation seemed concerned about the future of Europe and given the uncertainties in Greece and vulnerabilities of some other countries. The future of euro zone remains a question mark. Russia was struggling to keep its head above water since ruble has collapsed; oil revenues were half with rising fiscal deficit, a credit down grade with persistent foreign capital outflows. So between the uncertainties of Euro Zone and Russia, Europe remains in doldrums, if not in turmoil.

The US recovery is robust with employment figures looking optimistic even though there is uncertainty on how quickly interest rates would rise and quantitative easing wound down. In Latin America there were patches of good and bad - Brazil remains sluggish. In Asia, the Chinese economy has slowed down, partly a result of a conscious policy to ease overheating and move economic activity towards low fossil fuel use. The return of Abe and relentless pursuit of Abenomics by way of quantitative easing has yet to reverse the slowdown. In Africa, the South African economy remains sluggish and the falling commodity prices has upset many African economies. India remains in notable exception and indeed as the eminent economist Laura Tyson said in Davos, India is a high point in the short run but now importantly the economy of the future.

India in Davos has always passed through oscillations. Prior to 1991, when Davos was much smaller, India was viewed as a closed economy which discouraged foreign investment and was viewed merely as a potential market for exports of plant and technology. The reforms of 1991 brought about a major shift when the opening up of the Indian economy enthused the world as new opportunities opened. This continued for several years. However, it was during the NDA government under the leadership of Atal Vihari Vyajpayee, the opening up of the telecom sector and massive highway building programmes had Davos excited about the New India opportunity. The acceleration of the growth rate, particularly in 2007-08 continued the India fever. However, the five years of the UPA-II government dashed their expectations. India slipped from global investor radar. The sluggish growth rates of sub 5 percent over the past few years with controversial retrospective tax changes enhanced perception of governance paralysis, lack of transparency, financial malfeasance and crony capitalism; people felt it was a country which had gone back in time. 

All this has changed quickly in the last seven months.

The panel discussions in which Arun Jaitely participated and some in which Piyush Goyal did, were the most sought after meetings in Davos. Arun Jaitely’s CII breakfast meeting under the aegis of Boston Consulting Group had a packed and enthusiastic crowding. Equally Mr. Jaitely’s one on one conversation with a correspondent of New York Times had an enthusiastic response with informed questions from the audience. His televised debate on the BRICS agenda was moderated by Silio Boccanera in which participants included Carlos Ghosn(Chairman, CEO Renault Nissan),  Justin Lin(Professor at Peking University, China) and Nhlanhla Musa Nene (Finance Minister of South Africa. Similarly, the well attended NDTV debate on the Future of India had Chanda Kochar, Nouriel Roubini, Vikram Chadra with Arun Jaitely.

My broad conclusions on India at Davos would include the following four points.

1. India is back on the global radar of investors. They are back in their reckoning and in the plans and programs of their corporates and associates. 
2. The expectations of a 5.7 percent growth this year, over 6 percent in the following year, climbing on to 7 percent and higher subsequently, with moderate inflation, acceptable current account deficit, significant opening up of foreign investments in railways and defense, the prospects of reviving manufacturing, the Make in India Campaign, the Swachh Bharat, Digital India and Clean Ganga offer enormous opportunities for technology, capital and entrepreneurial skills. 
3. Investors would watch carefully the implementation of many promised steps. They appreciated that instead of endless wait, the key ordinances on coal mining, land acquisition and insurance was a commitment to adopt the unconventional route than sacrifice growth. They would hope these are converted into legislations sooner than later. They will also watch other measures on labour laws, implementation of projects with stranded assets, clearing up of balance sheets of banks and injection of financial resources through increasingly market based instruments. 
4. The speed of government action has taken the world and indeed investors at Davos by surprise.

Davos 2015 marks the rekindling of global hope and expectation about the India story. The world hopes this would not be yet another false dawn. We hope so too.

Grasping ‘Pravasiye’ Opportunities

The 13th meeting of Pravasi Bhartiya Divas was concluded last week in Ahmedabad. This congregation of Indians every year presents the diversity of Indians living and working abroad.

There are basically two categories of the Indian Diaspora - Non Resident Indian ((NRI) i.e. “a citizen of India who holds an Indian passport and has temporarily emigrated to another country for six months or more for employment, residence, education or any other purposes”) and Person of Indian Origin ((POI)  i.e. “ a person who was born in India or whose ancestors were born in India or other states who have Indian ancestry but is not a citizen of India and is the citizen of another country.”)

Indian has the second largest Diaspora in the world, spread across 200 countries. The Gulf Cooperative Council (GCC) accounts for the largest share of Indian Diaspora accounting for over 6 million Indians followed by Europe. United Kingdom, alone is a home to close to 2 millions of Indian Diaspora Population. The United States has 1.5 millions of Indian Diaspora population.

The geographical spread of Indian Diaspora across the globe and the reasons contributing to migration of people from India have evolved overtime. Historically, Indians left the country as indentured labourers to the destination countries of Caribbean, Fiji and Mauritius. In contrast, the current migratory flows from India comprise of students and qualified professionals and intellectual personnel to developed countries, particularly, UK, USA, New Zealand, Canada and Australia. The movement of skilled personnel has accelerated particularly from 1990s following the rapid development of Information-Technology. There is an outflow of semi-skilled and unskilled workers too, which remains biased towards the Gulf.

The NRI community traditionally had a nostalgia and attachment to their homeland but felt alienated and ignored by the government. They often felt that the Indian embassies paid scant attention. Sieglinde Lekme has said “Sometimes diaspora art expresses a longing for home, and frequently it tries to construct a collective identity out of its mostly heterogeneous reality.”. So how can we convert these longings into tangible investment opportunities?

Overtime the Diaspora Community has also metamorphosed itself. They have reached second and third generations. Also they have integrated themselves well with their destination countries. In United States they have acquired advantaged positions and entered the political arena of the country. The US Administration has more than 50 Indians in it including Mr. Rajiv Shah who has acquired the highest position in US Aid as the admin of the US Aid. In United Kingdom also the status of the Indian Diaspora has changed. There are 18 Indians in the House of Lords and 6 British Indians in the House of Commons. This part of Indian Diaspora has showcased significant influence in policy changes. Integration of Indians abroad with the destination countries’ top layer of entrepreneurs and politicians has helped India in increasing its political reach and strategic influence globally.

How can this Diaspora be most effectively harnessed for India’s development?

The Overseas Indian Community contributes to country’s GDP by the way of remittances. India is one of topper recipients of remittances. It received a total of $70 billion as remittances in 2013, two thirds of which came from the Gulf Countries and North America. The remaining one-third is significantly accounted for by the European Countries of UK and Canada. The shares of major source countries in the total remittances flowing to India have remained more or less the same for almost a decade now.

These remittances play a crucial role in creating consumption demand domestically by directly lending purchasing power to the migrants’ families. Besides, the inflow of remittances provides a cushion against the current account deficit and thus helps in managing country’s Balance of Payment (BoP) Account. Of late, there has been a gradual increase in the inflow of remittances as savings in the bank accounts facilitated by the moderated cost of transferring remittances and deregulated interest rates on bank deposits by NRIs in the Non Residential Ordinary Accounts and Non Residential External Accounts.

Albeit increased remittance and investment inflows, yet the Diaspora involvement in country’s development matrix remains below its potential. How can the Indian Diaspora be enabled to contribute to the development of their motherland?

First, though the use of remittances for purposes other than consumption has somewhat increased but there is ample scope for better channelisation of this monetary contribution of the Diaspora. Increased inflow of remittances to the directed to savings accounts in the banks can be leveraged for increasing the liquidity in the economy. Alternatively, these funds can be loaned out towards funding investments in the economy. This would inturn create new employment opportunities, infuse new income followed by new consumption and investment in the economy through remittance multiplier effect.

Second, electronic transfers are the most preferred and easy mode to transfer remittances for Indians living abroad. Thus, improved basic technological know-how at the home country to receive electronic transfers can enhance the inflow of remittances through formal channels.

Third, the Indians living abroad can also take part in country’s development by making direct investments and also by making available their intellectual and entrepreneurial expertise for the country. Countries like China have been successful in attracting its trained and qualified Diaspora in the developed countries to return and play a role in Chinese think tanks and universities.  Similar arrangements can be made in India wherein the Indian personnel abroad can come and undertake some specialized activities like major surgeries; teach for a semester or for sometime if resettlement in India is not feasible and collaborate with the research departments of Indian academic institutions. They can help in finding innovative solutions to improve the outcome through public outlays.

Finally, while the 13th Pravasi Bhartiya Divas in Ahmedabad had a very robust presence given the attraction of the new government and Prime Minister Modi’s appeal to Non Resident Indians, this cannot be said of many other states in India. Gujarat is a shining example but other parts of the country need to emulate the story. Innovative ways to integrate the Diaspora and making them partners in development are required.

Indians abroad are now players in influencing the political and economic discussion making in US, UK and Australia. It is a challenge on to harness and leverage their new found political and economic power to India’s advantage to garner greater investments, inward capital flows, technology cooperation and counteract the growing influence of some other competing countries.

As India matures, so does the Indian Diaspora. We need to build virtual circles on their new strengths. The challenge is of grasping these new opportunities.

India in 2015: Challenges Ahead

This is my first column for 2015. Let me begin by wishing my readers a very happy 2015. Sarah Ban Breathnach has said, “New Year's Day. A fresh start. A new chapter in life waiting to be written. New questions to be asked, embraced, and loved. Only dreams give birth to change.” and yet Winston Churchil has cautioned us that, “It is always wise to look ahead, but difficult to look further than you can see.”.

The year that went by contributed to some important turnarounds.

First, we have a strong, stable and credible government with a decisive leader. The era of fractured coalition politics is hopefully behind us for some time. The parliamentary majority in the Lok Sabha is decisive for the ruling party. In the Rajya Sabha the ruling party does not have a majority and forging bipartisan support will remain a challenge. It will test the skills of the ruling party in the months ahead. Even while the spectacular victories in Maharashtra and Haryana following the general election of 2014 was a reiteration of the pro-Modi sentiment, the recent victory in Jharkhand and decisive improvement in Jammu & Kashmir mark a continuation of the same trend albeit according to some in muted form. The changed composition of the Electoral College will improve BJP’s strength in upper house in 2016 with continuing improvements.

Second, the economic decline looks to have bottomed out. We have hopefully seen an end of the prolonged period of policy paralysis, sub-5 percent growth, unsustainable Current Account Deficit, raging inflation, rising subsidy bills and little or no credible action aimed at macro-economic stability or structural reforms. This fiscal year will end with growth rate somewhere between 5.4-5.9 percent, moderation of inflation, a manageable current account, a modest revival of investor confidence. Interest rates would come down this week or by the first week of February. The recent ingredients of structural reforms includes deregulation of diesel prices, replacing cooking gas subsidy with direct transfers, reforming coal sector and allowing private sector in it, Pradhan Mantri Jan Dhan Yojna, Swachha Bharat Abhiyan and labour reforms.

Third, looking at the external factors, the world in general presents a mixed picture. Japanese economy will struggle to crawl out of recession even under the renewed leadership of Abe. The slowdown in Chinese economy will persist for a while with declining competitiveness in labour intensive manufacturing. The American economy has shown a sharp upward turn with expectations of increase in interest rates which may encourage outward capital flows with pressure on our exchange rate and current account deficit. The European economy would remain in doldrums. The growing geo political tension between Russia and the West could create multiple dynamics of its own.

Fourth, the altered global energy scenario with medium term prognosis of soft oil prices has huge implications for India. The current downward trend in petroleum and oil prices would benefit fiscal management particularly subsidy flow but make renewable energy less cost competitive. A robust recovery of our exports, given global uncertainties, could remain problematic. This could impact the current account deficit. However, on the whole, the external environment in the short term looks advantageous for us. The subdued inflation behavior should be used as an opportunity to rationalize cross subsidies and pursue many pending reforms.

So what are the challenges which we face? And what could be the most beneficial outcome?

First, combining rapid economic growth with social cohesiveness will remain problematic. Societal evolution in accepting the consequences of rapid growth at best presents a mixed picture. Preserving traditional values, cultural identity, during periods of rapid urbanization and migration poses policy choices on which there are no easy answers.

Second, rapid economic growth cannot be taken for granted. Expectations both form the Prime Minister and the Budget in altering the growth trajectory remain high, almost unrealistic. Policies and procedures when altered have a gestation period. The misalignment between expectations and ground level changes in the short run can create uncertainties. The opposition would hope for political backlash. It is important to persevere and stay on the course.

Third, creating gainful employment both in manufacturing and services will need changes in regulatory framework beyond administrative actions. Some recent measures initiated in earnest to fix time limits on grant of approvals, simplifying the number of approvals needed, resolving contractual disputes, simplifying registration procedures can make a difference on the Ease of doing business. Changes in labour laws would need to go beyond encouraging states to adopt the best practices of some states like Rajasthan and Madhya Pradesh. Legislative action sooner or later will be inevitable. Reports that large foreign investments from relocation of Japanese investment away from China are still in a wait and watch mode for India suggest need for more decisive action.

 Fourth, improving health and education outcomes has received priority focus. Nonetheless, harmonising skill inculcation programmes with emerging demands needs coordinated action between centre and states, the corporate sector and more robust forms of public private partnership.

Fifth, managing parliament, particularly the Rajya Sabha could remain problematic. Government has options by the way of ordinance, its promulgations and Joint Sessions. These are no substitutes for persevering with forging bipartisan support to enact key legislations. Given recent setback in State Elections the opposition may be subdued facilitating greater cooperation during the year.

Sixth, internal security presents a complex challenge. The recent ethnic killings in Assam, challenge of terrorism aided and abated from across the border and the specter of Maoist insurgency in several states requires a robust response. The conduct of peaceful elections in Jammu and Kashmir has many positives.

Finally, harnessing the improved external environment to India’s advantage. The investor appetite in United States Japan and Australia has been rekindled. Translating expectations and commitments into tangible actions may require re-doubling our efforts. Moving foreign policy to foreign economic policy must go beyond rhetoric. Harnessing the enthusiasm of Indian diaspora can be a decisive advantage.

The New Year comes with the renewed hopes and expectations. The prime minister was right when he recently said that the “World is ready for India but is India ready for the world?”. We must prove that we are and that there is credible action to address the key challenges.

It is well said by Joyce Meyer that “We don’t grow when things are easy; we grow when we face challenges.”