What the Government Can Do to Boost the Economy After the Lockdown

The lockdown has been devasting for the Indian economy. Read here to know about the economic impact of the lockdown

Capital is King

What India needs right now is capital – that’s the only thing that can generate jobs and wealth. You may have a brilliant idea and the required skills. But can you turn that into reality without money? It’s the same for a country. India must make it worthwhile for foreign capital to come in.

Improving India’s business environment needs to become the top priority for the government right now. Easing of policy restrictions and lowering taxes are the cornerstones of meeting this objective. Improving the business environment will attract FDIs and foreign manufactures, given our wealth of human capital and raw materials. Not to forget, our huge market.

Learnings from China

In 1978, China’s per capita income was lower than India’s. By 2019, it was 5X that of India. How did China achieve this growth? It did that by encouraging FDIs. Like India, China lacked capital and had abundant and cheap labor. It recognized that growth is impossible without capital and went ahead to improve its business environment to attract capital, even in industries like retail.

Opening up does come with challenges. Some domestic industries in China did suffer with foreign-owned companies coming in. On the other hand, these domestic industries also benefited from reforms and the improving business environment. Chinese manufacturers learned how to do big business. They learned about processes, technology, efficiency, capital managements… and gradually moved higher and higher in the value creation chain, finally reaching the top. In time, not only did these industries survive, but also became globally competitive.

India, too, needs to make this journey… from agriculture to industry. For this, capital-friendly policies are the need of the hour.

Lower Taxes

What businesses need is easy access to financing to overcome shortage of working capital. A business needs money to manufacture a product – to pay for raw materials, rent, salaries and other overhead expenses. Only when the product is ready can the business sell it and make money. So, in the interim period, funds are needed. What do high taxes do? It adds to the liquidity crunch. It also makes products more expensive, as businesses transfer this cost to customers. So, both businesses and consumers suffer.

Imports and Exports Go Hand in Hand

Measures like hiking tariffs on imports under the pretext of protecting domestic production will not work. Such measures are counterproductive to the country’s efficiency. It makes raw materials more expensive for businesses and finished products more expensive for consumers, adding to inflationary pressures. Reciprocity – free imports and exports – is key to sustainable development. Imagine if we had restricted the import of computers, we would not have had the thriving software industry that we have today.

Relax Labor Laws

India had more than 40 central labor laws and hundreds of state level labor laws. Most of these were antiquated and complex – a huge impediment to economic growth. The multiplicity of rules, number of permissions needed, and procedural delays all add to the cost of doing business. Although the government has done a commendable job of easing these laws since 2014, far-reaching changes are still required to improve the ease of doing business and attract foreign investment. Relaxing labor laws is critical for revitalizing the Indian economy.

We need to create conditions in India that welcomes foreign capital. In fact, conditions should be such that no one wants to pull out capital from India. With the right conditions, why would any capital want to exit the country?

These changes will enable India to integrate into the international value chain. By sitting on the shores, we will never master the skills to sail through a storm.