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A public policy blog from AEI
Various Indian governments have tried single-word marketing for the country — “shining,” “incredible,” and so on. At the moment, “calmer” or “more thoughtful” India would be helpful. The economic fixations of Indian decision-makers make for poor policy.
Obsession 1: Black money
There is certainly a long-standing and extensive corruption problem. The discussion of “black money” has become so absurd, however, that it has little relation to corruption.
I’ve only studied the Indian economy since 2008, so my first encounter with black money obsession was then-opposition BJP political ploys. Hundreds of billions, even trillions, of dollars that belonged to India were said to have fled overseas. The money left unstoppably and invisibly, but nonetheless it was surely a huge amount.
While such dubious claims are typical in developing countries, the recent demonetization sets India apart. Taking currency notes out of circulation in a surprise move late last year was said to target black money inside the country. Seizure of cash was justified by a huge amount of hidden funds.
Black money inside and black money outside. Loads of it. Question: how did the previous UPA government, which was properly criticized as socialist-leaning and diffident about growth, manage the generation of so much wealth? Easy answer: it didn’t. For political reasons, black money is being wildly exaggerated as an economic issue.
Obsession 2: Tax revenue
Directly related to hoping there is trillions in black money is wanting to tax those mythical trillions. All governments chase revenue but India’s pursuit seems especially misguided. First, why does a country claiming rapid growth need its national and state governments to borrow and spend so much in the first place?
The typical response is there are vast developmental needs. But this assumes a track record of Indian government successfully supporting development, when there is no such record. Budgets instead show spending aimed at subsidies (and now interest payments). Subsidies are bribes to constituents and, since poor Indians vote, the government needs a lot of revenue.
Obsession 2 is therefore understandable politically. It is nonetheless extremely harmful. For example, the unified goods and services tax (GST) could have provided a major economic boost, but fell victim to revenue lust.
A comprehensive, single-slab GST would have greatly encouraged inter-state commerce, but state governments wanted exceptions and higher rates. The multi-slab result chosen by the national government practically demands bribery from producers lobbying for their goods and services to be taxed less. There soon really will be more black money.
Obsession 3: GDP
A third item on the obsession menu is GDP growth, alternately celebrated and bemoaned and never very important. GDP does not measure personal income — you can’t spend GDP per capita. GDP is an accounting device treated as economically vital while, despite talk of inclusiveness and poverty alleviation, how much money people actually have is ignored.
The same, of course, is true for jobs. GDP can be capital- or labor-intensive, so the jobs implication of GDP growth is unclear. The 5.7% GDP growth just announced may not have been worse for jobs than 7% two quarters ago. We cannot know because, remarkably, India is only now deciding that perhaps it should measure employment better.
The strangest thing about the GDP obsession is that the quality of the figures is terrible. The data made no sense when growth was fast, nor do they make sense now.
There is likely to be a cyclical bounce in GDP growth next quarter. The government will preen and critics grumble. And it will still be the case that farmers’ incomes, bank books, the number of startups, and so on will be far more important.
Good policy enhances competition and individual economic rights for the sake of greater productivity and personal income. Being obsessed with black money, tax revenue, and GDP growth does nothing to enhance competition or individual rights and leaves ordinary Indians worse off.
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