Opinion: Out of the box thinking can give the economy momentum

Opinion: Out of the box thinking can give the economy momentum

Modi 3.0, with the tailwind of Haryana and Maharashtra, can recapture the economic reforms momentum through the 2025 budget. Simultaneously, honourable FM has to continue working on twin challenges – poor consumption trend translating into weak private sector investment, and providing employment to our youth – especially the unskilled/semi-skilled demographic.  Three suggestions that may help address the twin challenges.

Rethink approach to taxation:  Effective tax burden on India’s middle class has progressively increased, while “self-employed” professionals remain substantially out of the tax grid. Despite the government’s best attempts, the percentage of taxpayers remains miniscule – burdening a small number with inordinate tax liability.  There is growing angst amongst the middle class about being short-changed on government services, while “rewari” hand-outs soar.  They seek a real break not token relief.

Fortuitously, high equity prices of PSU shares and robust GST collections offer taxation-policy flex-room.

Market capitalization of PSUs and banks is in the range of 60 trillion Rupees. Even without “disinvestment”, the government can divest small chunks of PSUs through block-trades – to monetise the excellent work done on PSU turnarounds.  It may also be a monetize good time for the government to completely divest shares in non-core, non-strategic holdings like ITC and L&T.

GST collections have been robust.  GST allows true widening of coverage and the ability to differentiate impact based on “essentiality” of purchased goods and services.  Fine-tuning GST – by ring-fencing daily-use items for the lower-income and middle-class, simplifying the bureaucratic over-engineering of rates leading to absurd situations like the “pop-corn” tax, and expanding coverage to more types of transactions. Even an increase in high-end luxury goods – cars as an example, are feasible.

Both give a window to reduce direct income tax.  Today, young professionals hit the top tax slab within years of starting work. There are odd situations where a salary hike may potentially lead to a lower take-home.  This stops the young middle class from building their safety-net - invest in a home, children’s education, build up savings.  Infact, the youth demographic is worried about reaching their parents’ level of savings. The negative impact on consumption is obvious.  FM can consider making material changes to the direct tax regime.

-          Substantially increase the “gap” between minimum and maximum tax rates

-          Expanding the slabs – so that tax rate increases come after a meaningful jump in income

-          Offer young families some credit for buying the first home, first vehicle, primary education.

Today’s India is blessed with great managerial talent – but tax rates make young professionals seek greener pastures abroad.  A material reduction in direct income tax rates will not only substantially boost consumption but also incentivize our best talent to stay here.

Creating PRIVATE world class higher education institutions – A likely (under)estimation has 1.3 million Indian students studying abroad, with less than 10% returning ever.  Taking an annual fee outflow of USD 25,000 – we are remitting out more than 2.8 lakh crore Rupees each year. This is a huge drain of financial and human capital. Despite this ready “market”, few high quality “Ivy-like” institutions have come up.  The NEP is helping modernize our education curriculum and making it more flexible. NEP needs to be complemented by “selecting” five strong (“real money to invest”) conglomerates – like MDA group, Birlas, Shiv Nadar or Manipal, and tasking them with creating India’s Ivys. More than infrastructure, these promoters need to be able to bring top global talent for teaching and research. Not only will we reduce flight of financial and human capital, but these top institutions will be the vanguard for cutting edge research in AI-ML, Biotechnology, Nanotechnology, Space etc.

The Bangladesh opportunity – There was never real logic for Bangladesh to be ahead of India in textile exports. They got a free pass. Bangladesh’s present chaos gives India a chance to grab market share in this highly labour-intensive industry.  India’s textile sector remains largely SME.  We need to quickly develop export-oriented textile manufacturers with scale.  We can allow and encourage consolidation by larger players – perhaps through fast-tracking approvals and giving tax benefits.  Another thought is to bring the Cooperatives sector which has become re-energised under Amit Shah.  Large counterparts to global buying houses could be created as “cooperative selling houses”.  Much like FPOs, these could undertake delivery and logistics, quality control, invoicing and negotiations. Large international buyers will get quality on the scale they need. The garment sector also needs easier and cheaper access to material – even if imported.  Most of the “value-add” in textiles stays with the final manufacturer, so what we lose out in import duty would be made up through domestic taxes.  Finally, in order to encourage employment of human capital, labour laws need to be made more flexible – balancing the ability to manage HR with workers’ rights.

Saket Misra is an investment banker and social worker.