Radical reforms, such as re-designing the tax system and shedding the excess flab of an over-sized bureaucracy, are needed if the Indian economy has to turn a corner. But a beleaguered UPA regime cannot deliver them

Soon after President Pranab Mukherjee lamented that multi-national companies are not investing in India to ‘dodge’ taxes, Union Minister for Finance P Chidambaram reduced tax rates on Government and corporate bond income of foreigners from a whopping 20 per cent to five per cent. This in itself explains why multi-nationals are not investing in India — a fact that is further elucidated by the United Nations Economic and Social Commission for Asia and the Pacific, commonly known as ESCAP, in its annual survey of this region.

According to the report, lower growth rates have become the ‘new normal’ in the Asia-Pacific, including in India where the Government is to be blamed for allowing betting on commodity prices, critical infrastructure shortages and rising unemployment. Moreover, the Government has also increased taxes of all sorts and hiked fares, charges and prices across the board to sustain its bureaucracy — couched in the omnibus term of fiscal deficit.

ESCAP expresses stern reservations against this approach as it hinders growth and reduces the citizens’ purchasing capacity. It also makes clear that prices are rising “due to upward adjustment of administered prices or removal of subsidies”. In fact, even as the UPA regime takes credit for reducing inflation to about 5.96 per cent, ESCAP rightly points out that this is due to a fall in demand following a drop in economic growth rate — a trend seen across the Asia-Pacific.

Another problem that plagues the region is high unemployment, and India is no exception. Job vulnerability has increased with the rise in the number of ‘informal jobs’ that offer no basic protection or access to basic rights. In fact, India tops the list with 80 per cent of all workers outside agriculture engaged in informal employment. Nepal and Pakistan follow, along with Indonesia and Vietnam.

Though ESCAP gives credit to the Government for the changes in monetary policy introduced in the past year, it castigates New Delhi for its inability to reduce charges and protect the country from supply shocks. Unfortunately, Governments across the region have failed to contain supply-related shortages.

ESCAP also rejects the argument that the shortages are due to inadequate production. In reality, there has been enough production of commodities, including food grains. Instead, it blames the increasing ‘financialisation’ of commodity markets and particularly the futures trading of food grains for the shortages.

Commodity assets managed by financial investors have increased from less than $10 billion in 2002 to $404 billion in June 2012. The presence of financial investors, betting on an increase in fundamental prices, has aggravated price increases. It means that Governments have allowed betting on essential commodities and this has led vested groups to cause immense misery. Both producers and consumers are being hit due to the resultant volatility in the food market.

The policy of the US and Europe regarding bio-fuels is another reason for the shortage of food grains. Since the amount of food crops available to produce bio-fuels in the European Union is limited, there is an increased concern about food production in other regions. In effect, the Asia-Pacific is suffering for Europe’s sins.

Indian efforts to attract more foreign investment may not succeed as the developed world is once again setting expansionary monetary policies. This is causing problems for macro-economic management in the Asia-Pacific.

Also, India’s financial sector is in crisis-mode. Still, the Reserve Bank of India is finding it difficult to counter the onslaught of the West. Mere policy formulations may not get India the investment it needs.

The country requires a better investment climate that will involve scaling back the bureaucracy and the tax-related and welcome domestic investment alongside foreign funds. The Government has to stop looking at its citizens, its business community and its investors with suspicion. Taxes have to be moderated and personal income tax should be abolished.

New policies have to be formulated keeping in mind the fact that foreign investment has declined by 10 per cent the region. All countries in the Asia-Pacific are competing for investments even though it is China, Hong Kong, Singapore and Australia that are cornering most of the FDI.

In conclusion, if India has to sustain its economy, it has to look beyond the clichés. The prescriptions must include significant reduction of the non-productive bureaucracy and the perks it enjoys, radical changes in tax laws and the ushering in of liberalisation in the real sense of the word. However, given that the Congress-led UPA regime is on its last legs, these changes will probably not come through right away. The country will possibly have to wait for the next Government to take charge before new policies can be formulated.