akrishnarao

Tag: finance

  • Beyond Slogans: The Structural Gaps Threatening India’s 2047 Aspiration

    As Parliament remains caught in political confrontation over issues ranging from the Indo-US trade deal to federal fiscal transfers, the Standing Committee on Finance has quietly presented a detailed roadmap for achieving the ambitious goal of Viksit Bharat 2047. In its Twenty-Ninth Report (2025–26), the Committee delivers a sobering assessment: India’s reform story is no longer constrained by policy imagination but by the depth and quality of implementation. The timing of this intervention is significant. With state elections scheduled in 2027 and general elections in 2029, the current budget cycle may represent a narrowing window for politically difficult structural decisions before electoral considerations begin to shape fiscal policy more decisively.

    The Committee identifies three interlinked structural risks that could undermine India’s long-term growth trajectory. First is the persistent implementation lag—administrative capacity at various levels of government continues to trail policy ambition. Reforms are announced with clarity, yet execution remains uneven across states and sectors. Second, India’s growth model remains heavily credit-driven. While lending has expanded, equity capital, technological upgrading, and productivity-enhancing reforms have not kept pace. Third, federal capacity gaps threaten to dilute national reform gains, as state-level disparities in regulatory quality and institutional strength create uneven investment climates.

    To achieve high-income status by 2047, India would need to sustain annual growth of around 8 percent for at least a decade. That objective requires raising the investment rate from roughly 31 percent to nearly 35 percent of GDP. Yet private capital formation has slowed considerably, with its share in total fixed investment declining from over 40 percent in 2015–16 to about 33 percent in 2023–24. Government infrastructure spending has remained robust, but manufacturing capital expenditure continues to lag. The Committee’s message is clear: fiscal stability is not the principal constraint; the revival of private investment is. That revival depends on deeper financial sector reforms, faster judicial enforcement, regulatory harmonization across states, and a more predictable business environment.

    Food inflation volatility poses another macroeconomic risk. The Committee stresses that stabilizing prices requires stronger agricultural supply chains, expanded cold storage networks, and deeper digital market linkages for farmers. Without supply-side strengthening, inflation shocks could erode real incomes and dampen domestic demand. At the same time, accelerating investment could widen the current account deficit, underscoring the need for domestic demand-led growth and deregulation that enhances export competitiveness without compromising macroeconomic stability.

    Progress on disinvestment has also been slower than anticipated. The Committee calls for concrete timelines and incentive-based frameworks to encourage reform of state-level public sector undertakings. Credibility in execution, rather than repeated announcements, will shape investor confidence. Similarly, in the MSME sector, inadequate risk capital remains a structural constraint. The Self-Reliant India (SRI) Fund has attempted to provide equity-like financing, but uptake has been limited by legal structures, small ticket sizes, and information asymmetries. Expanding credit alone, the Committee warns, will not yield productivity gains unless firms adopt technology upgrades and integrate into larger supply chains.

    Labour market reforms occupy a central place in the roadmap. The Committee advocates establishing a centralized Labour Market Information System to bridge mismatches between job supply and demand. It recommends benchmarking India’s labour force participation rate against advanced economies and upgrading Industrial Training Institutes in Tier 2 and Tier 3 cities. With artificial intelligence reshaping global employment patterns, curricula must become modular, industry-co-designed, and multilingual to address widening digital divides. The emphasis is on agility and employability rather than scale alone.

    Innovation remains another area of concern. India’s R&D expenditure, at just 0.65 percent of GDP, is far below the global average of 2.7 percent. The Committee cautions that increased funding by itself will not deliver results unless accompanied by stronger intellectual property enforcement, faster patent processing, dedicated commercial courts, and deeper industry–academia linkages. Translating research into commercially viable innovation requires institutional reform as much as financial commitment.

    India’s digital public infrastructure has transformed governance delivery, yet the Committee notes that digitalization must move beyond registration metrics toward measurable income and productivity outcomes. The proposal for an indigenous government-owned AI server reflects concerns over data sovereignty and strategic autonomy, but its true test will lie in whether it enhances productivity across sectors rather than remaining a symbolic asset.

    In an era marked by global fragmentation and shifting supply chains, India’s growth advantage rests on macroeconomic stability and the strength of its domestic demand base. However, the Committee’s overarching message is that the next phase of economic transformation will depend less on new policy articulation and more on execution discipline, institutional strengthening, and sustained private-sector dynamism. As political debates continue to dominate the parliamentary landscape, the roadmap offers a quieter but enduring reminder: achieving Viksit Bharat 2047 will hinge not on reform announcements, but on reform credibility and productivity-led growth.

  • Rethinking Tax Devolution in Uneven India

    India’s fiscal federalism is facing a moment of quiet but consequential strain. Chief Minister N. Chandrababu Naidu’s remarks on tax devolution have once again brought to the surface a long-simmering grievance among better-performing states: that they contribute disproportionately to the Union’s tax kitty but receive a shrinking share in return. The data broadly supports this sentiment. A small group of economically advanced states account for the bulk of direct tax and GST collections, while a significant share of tax devolution flows to poorer, high-population states. However, for the country to prosper, all its regions have to prosper, Naidu said in an interview on Sunday with PTI Videos, adding that the states are allies, not enemies.

    Yet, framing this issue simply as “performers versus non-performers” risks obscuring a deeper structural problem. The real question is not whether redistribution is justified—it is—but whether India’s current system of fiscal transfers is equipped to handle the vastly different development trajectories its states have chosen.

    Finance Commissions are constitutionally mandated to address horizontal imbalances among states. Inevitably, this means that poorer states such as Uttar Pradesh, Bihar, and Madhya Pradesh receive a larger share of devolved taxes.Poorer states like UP, Bihar and MP received 36% of the tax  meant for sharing with the states. Against this, these three states contributed only 5% of the total direct tax and Central GST collected by the Centre during that period. This is neither accidental nor malicious; it reflects the principle that citizens should have access to comparable public services regardless of where they live. From this perspective, redistribution is not a penalty on success but a cornerstone of national unity.

    However, this logic begins to fray when redistribution appears perpetual and weakly linked to outcomes. Southern and western states that invested early in education, health, and population control now find themselves disadvantaged by formulae that give significant weight to population size and income distance. Their success in managing fertility and building human capital—once seen as national assets—now translates into lower relative shares. This creates a perverse incentive structure and a growing political resentment.

    Complicating matters further is the Centre’s increasing reliance on cesses and surcharges, which lie outside the divisible pool. While the official share of states stands at 41 per cent of Union taxes, the effective share is considerably lower. States are being asked to shoulder expanding responsibilities—especially in health, education, and infrastructure—without commensurate fiscal space. It is unsurprising, then, that demands are growing to raise the states’ share to 50 per cent.

    Yet, linking devolution directly to tax contribution alone would be equally problematic. Tax collections reflect not just effort but historical advantages, agglomeration effects, and the location of corporate headquarters. A purely contribution-based system would risk locking poorer states into a low-development trap, undermining both equity and long-term national growth.

    The way forward lies in recognising that India is attempting to achieve too many objectives with a single instrument. Tax devolution is being asked to equalise, incentivise, and reward all at once—and predictably, it satisfies none fully.

    A more mature framework would separate these goals. A core equalisation transfer should continue to ensure minimum fiscal capacity for all states. Alongside this, a distinct performance-oriented component could reward states for expanding the national economic pie—through growth, tax effort, infrastructure creation, demographic management, and human capital outcomes. Such a structure would acknowledge both need and contribution without pitting one against the other.

    Equally important is addressing sectoral imbalances. States like Kerala, which prioritised social development, now face infrastructure constraints. Others, like Gujarat, built strong physical infrastructure but lag in social indicators. Poorer states struggle on both fronts. A dedicated, outcome-linked national infrastructure fund—outside routine tax devolution—could help bridge these gaps without distorting the principles of redistribution.

    India’s diversity in development paths is a strength, not a flaw. But managing that diversity requires fiscal institutions that are transparent, differentiated, and forward-looking. Unless redistribution is paired with clear incentives and a fair sharing of resources, political “heartburn” will only intensify.

    The choice before India is not between rewarding success and supporting the vulnerable. It is about designing a federal compact that does both—openly, credibly, and sustainably.