Analysis of The Indian Express Editorial – December 19, 2024

Analysis of The Indian Express Editorial 1 : An Economic Tightrope

Introduction

The year 2025 is shaping up to be a defining chapter for India’s economic journey. With the possibility of overtaking Japan to become the fourth-largest economy globally, India is on the brink of achieving a $4 trillion GDP milestone. This advancement would cement its status as a key player in the global economic landscape. However, along with this optimism comes a host of challenges—slower nominal growth rates, fiscal constraints, and global economic uncertainties. This article delves into India’s economic trajectory, exploring the opportunities and hurdles it must navigate to sustain its growth momentum.

Advantages of Being a Large Economy

1. Expanded Market Potential
A $4 trillion economy means a larger domestic market that attracts global and domestic investors.

• Investment Opportunities: With a growing middle class, businesses can capitalize on rising consumer demand.
• Private Sector Growth: Greater market size fosters entrepreneurship, innovation, and industrial expansion.

2. Government Resource Generation
Economic growth translates into higher tax revenues, which can be strategically utilized to address developmental priorities.

• Infrastructure Development: More resources mean better roads, schools, and healthcare facilities.
• Social Welfare Programs: Funds can be directed to uplift vulnerable populations and promote inclusive growth.

3. Geopolitical Clout
A robust economy strengthens India’s position on global platforms, enabling it to influence key decisions in trade, security, and climate policies.

Challenges Hindering Growth

1. Slowing Nominal Growth Rates
India faces the likelihood of nominal GDP growth slipping below 10% for two consecutive years.

• Impact on Household Incomes: Lower growth affects disposable incomes and consumer spending.
• Employment Concerns: Sluggish growth can impede job creation, especially in labor-intensive industries.
• Fiscal Stability: Slower revenue growth strains government finances, limiting public investments.

2. Global Economic Uncertainty
The global environment adds another layer of complexity.

• US Policies and Trade Volatility: Tariff threats from the US could disrupt global trade flows, creating market instability.
• Supply Chain Risks: India must navigate disruptions in key sectors like manufacturing and agriculture.

3. Fiscal Policy Constraints

• Declining Capital Expenditure: Government spending on infrastructure and development projects appears to have plateaued.
• Fiscal Deficit Target: A planned reduction from 4.9% to 4.5% of GDP restricts fiscal space for ambitious programs.

Evaluating the Production-Linked Incentive (PLI) Scheme

The PLI scheme was introduced to boost domestic manufacturing and reduce reliance on imports. However, its execution has been uneven.

Metrics	Key Insights
Funds Disbursed (2021-24)	₹11,535 crore (approx.), limited to a few sectors.
Sectoral Focus	Mobile phones received a third of total funds. Semiconductors accounted for another quarter.
Other Sectors	Disbursements for most industries were negligible.

Risks of the National Champions Strategy

• Over-reliance on a handful of large firms makes the economy vulnerable to fluctuating investment commitments.
• A broader, more inclusive base of companies is essential for job creation and industrial diversification.

Rising Fiscal Pressures and Reforms Needed

1. Committed Expenditures
India’s fiscal pressures are set to intensify with upcoming policy shifts.

• Eighth Pay Commission: Expected to increase the government’s salary and pension liabilities significantly.
• 16th Finance Commission: Likely to reshape Centre-state fiscal dynamics, requiring a delicate balancing act.

2. Implications for Fiscal Architecture
The challenge lies in balancing developmental aspirations with fiscal discipline.

• Redefining responsibilities between the Centre and states is crucial to ensure financial sustainability.
• Managing political promises with realistic budgetary allocations is key to long-term economic stability.

Leveraging Policy Focus Amidst a Calmer Political Landscape

Unlike the bustling election years, 2025 offers a relatively calm political calendar, with only state elections in Delhi and Bihar.

• Opportunity for Long-term Planning: With fewer distractions, policymakers can prioritize structural reforms and growth-oriented strategies.
• Focus on Implementation: Reducing delays in executing existing programs will yield better outcomes.

The Way Forward: Navigating India’s Economic Crossroads

To achieve sustained growth and overcome looming challenges, India must adopt a multi-pronged approach:

1. Industrial Policy Revamp
   • Move beyond sector-specific incentives to support a broader spectrum of industries.
   • Encourage small and medium enterprises (SMEs) to participate in high-value manufacturing.
2. Trade Integration
   • Strengthen bilateral trade agreements to reduce reliance on volatile global markets.
   • Enhance competitiveness through quality improvement and technology adoption.
3. Fiscal Prudence with Flexibility
   • Balance spending on welfare and infrastructure without exceeding fiscal deficit targets.
   • Increase efficiency in revenue collection to fund developmental initiatives.
4. Encourage Innovation and Sustainability
   • Promote research and development (R&D) in renewable energy and advanced manufacturing.
   • Integrate sustainability goals with economic policies to attract global investors.

Conclusion

The year 2025 represents a defining moment for India’s economy—a time of immense promise and significant challenges. While the transition to a $4 trillion economy is within reach, the road ahead requires deft navigation of global uncertainties, fiscal constraints, and domestic reforms. By fostering inclusivity, innovation, and sustainable growth, India can strike the right balance on its economic tightrope, ensuring prosperity for all.

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Analysis of The Indian Express Editorial 2 : More Money, Less Problem

Introduction

India stands at an economic crossroads, balancing its aspiration for rapid growth with the pressing need to address inequality and fund essential social programs. One potential solution is the implementation of a wealth tax, which could provide much-needed revenue for sectors like education and healthcare. While the concept is promising, the feasibility and challenges of such a move require careful consideration. This article examines the current state of taxation in India, explores the case for wealth tax, and evaluates its potential impact on the economy.

The Current State of Taxation in India

1. Tax Collection and GDP Share
India’s tax-to-GDP ratio remains relatively low compared to other nations.

• Union Budget 2024-25 Projections:
  • Total tax collection as a percentage of GDP: 11.78%.
  • Contribution from direct taxes: 7%.
• When state and local taxes are included, the total tax-to-GDP ratio rises to approximately 17%, still lagging behind global benchmarks.

Impact of Low Tax Revenues:

• Insufficient spending on critical social sectors like education and health.
• Low productivity and incomes for a significant portion of the population.
• Weak demand in the economy, leading to slower growth.

2. India’s Narrow Tax Base

• Of India’s 1.4 billion people, only 90 million (around 6.5%) are taxpayers.
  • Among these, only 15 million pay significant taxes.
  • Nearly half file nil returns, while others contribute negligible amounts.
• Agriculture incomes, even if taxed, would barely increase this base, as the issue lies in the under-taxation of services, India’s dominant economic sector.

3. Over-Reliance on Indirect Taxes

• Indirect taxes, like GST, are inherently inflationary and regressive.
• Raising revenue through indirect taxation disproportionately burdens low-income groups, further exacerbating inequality.

Why is Tax Collection So Low?

1. Black Income Generation
The shadow economy remains a significant hurdle to effective tax collection.

• According to Oxfam estimates:
  • The top 1% of earners control 22% of national income.
  • The top 5% may account for nearly 40%.
• If black income could be curbed, tax collection from this group alone could contribute approximately 10% of GDP at an average tax rate of 25%.

2. Tax Avoidance by High Earners

• Wealthy individuals and corporations exploit loopholes to evade taxes.
• The lack of transparency and accountability further exacerbates revenue losses.

The Case for Wealth Tax

1. Wealth is Visible and Traceable
Unlike income, which can be concealed, wealth—especially in financial assets and real estate—is easier to track.

• Billionaire Wealth:
  • Much of it is in stocks and financial instruments, making it visible and taxable.
  • Even real estate, often held as benami, is registered, providing an opportunity for taxation.

2. Historical Challenges and Modern Solutions

• India previously attempted wealth taxation but failed due to complexity and loopholes.
• With digital records and improved tracking mechanisms, implementing a streamlined wealth tax is now feasible.

3. Economic Benefits of Wealth Tax

• Discourages speculative investments:
  • Wealth tax would reduce inflated asset values, pushing funds into productive sectors like manufacturing and infrastructure.
• Addresses inequality:
  • Revenue from wealth tax can fund education, healthcare, and other social programs, creating a more equitable society.

Potential Challenges to Wealth Tax Implementation

While the benefits are evident, wealth taxation is not without its risks.

Challenge	Explanation
Capital Flight	Wealthy individuals may move their assets abroad to avoid taxation.
Currency Depreciation	Increased capital outflows could weaken the Rupee, affecting imports and foreign reserves.
Balance of Payments Issues	Declining foreign investment might lead to a trade deficit.

Mitigating the Risks

1. Stricter Capital Controls
   • Temporary regulations to prevent capital outflows until the wealth tax stabilizes.
2. Boost Domestic Demand
   • Use wealth tax revenues to invest in infrastructure and social programs, stimulating economic activity.
3. Enhance Transparency
   • Build a robust framework for asset valuation and tax compliance to instill confidence in the system.

Wealth Tax vs. Other Taxation Models

Type of Tax	Advantages	Disadvantages
Wealth Tax	Equitable, targets the rich.	Risk of capital flight and compliance issues.
Income Tax	Stable and predictable revenue.	Prone to evasion through underreporting.
Indirect Taxes (GST)	Easy to collect and broad-based.	Regressive, disproportionately affects the poor.

The Roadblock: Political Will

Implementing a wealth tax requires strong political resolve, which is often hampered by:

• Pressure from influential business lobbies.
• Concerns over losing electoral support among high-income groups.
• The challenge of overcoming bureaucratic inertia and resistance to change.

Conclusion: Why Wealth Tax is India’s Next Step

A wealth tax offers India a powerful tool to bridge its revenue gap, reduce inequality, and invest in long-term growth. By targeting the wealthiest individuals, it ensures that the burden of funding development is distributed equitably.

With digital tools and international best practices, the challenges of implementation can be mitigated. The key lies in crafting a transparent, streamlined framework and demonstrating the political will to see it through. If done right, a wealth tax could transform India’s economy, making it not just larger, but also fairer and more sustainable.

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