With the elections to the Indian Parliament nearly over, whichever party comes to power needs to seriously worry about how to kick-start the economy. In February, the Index of Industrial Production contracted for the first time in 21 months. To add to the slowdown woes, automobile sales fell to an eight-year-low in April. More worryingly the data put out by government agencies showed that capital equipment production shrank by a massive 8.7 per cent.
Capital goods production is seen as an indicator for future growth as unless industries invest in new machinery and factories, there are hardly any chances for acceleration in the years ahead. The chances of a demand impetus from abroad to rescue domestic growth also seem quite bleak as trade war rages between the US and China. An economic blockade imposed by America on Iran will also ensure crude prices will rise.
The election itself has seen an injection of fresh funds into the economy that could help push demand. It has been estimated that politicians and the state spent Rs 20,000- Rs 50,000 crore across the country. However, the manner in which this money has been injected is not very well understood and one cannot say how exactly it would impact the economy.
The new government will have to devise better ways of boosting demand and creating jobs. It has to think beyond money injections while cutting the ever-increasing expenditure of governance.
A slew of bold reforms would have to be taken: disinvestment, expansion of infrastructure, agricultural reforms, rationalising subsidies and a massive, calibrated reform of India’s banking and shadow banking sectors.
Needless to say, the fiscal policies which the new government will need to bring in must be in tune with the overarching need to spur growth and jobs, not by increasing the tax burden on people and businesses, but by giving enough scope for growth to gather momentum.
This in itself would increase revenue generation both for the nation and for tax collectors.