Editorial 1 : An Economic Tightrope
Context: In 2025, the hurdles to India’s growth
Introduction: The year 2025 is likely to be pivotal for the Indian economy in many ways. There is a possibility of India overtaking Japan to become the fourth-largest economy in the world. This will be a significant milestone and serve to reaffirm the more optimistic medium-term outlook for the Indian economy.
Advantages of Large Economy
- A larger economy offers a bigger market and more investment opportunities for the private sector.
- It will also generate more resources for the government, which, if the political class so chooses, can be effectively deployed to build the foundations of a developed nation.
- A $4 trillion-odd economy will also add to the country’s growing heft in geopolitical matters.
Challenges
- Declining nominal growth rates
- There is a very real possibility of the economy growing at less than 10% in nominal terms for two consecutive years.
- A lower growth trajectory can affect household incomes and employment, and government's fiscal stability.
- Global Economic Uncertainty
- Impact of US policies under Donald Trump
- Tariff threats against Canada, Mexico, and China could lead to market volatility.
- RBI’s dilemma: Balancing interest rate cuts to stimulate growth and defending the rupee.
- Fiscal Policy Constraints
- Declining capital expenditure: Government capex-to-GDP ratio may have peaked.
- Fiscal Deficit target: Reduction from 4.9% to 4.5% of GDP implies tighter fiscal policies.
Efficacy of Production-linked Incentive Scheme
- As per data from ICRA, between 2021-22 and 2023-24 (RE), only Rs 11,535 crore was disbursed under the PLI and the subsequent design scheme.
- Of the 13 industry segments, data shows that roughly a third of the entire amount is being disbursed to one segment i.e. mobile phones.
- Another quarter is allocated to the semiconductor segment. This implies that for most of the remaining sectors, disbursements are almost negligible.
- National champions strategy
- Risks of relying on a few large firms highlighted by fluctuating investment commitments.
- Need for a broader base of companies to drive investment and job creation.
Fiscal Pressures and Reforms
- Rising committed expenditures
- Imminent Eighth Pay Commission to add pressure on government finances.
- Centre-state fiscal dynamics to evolve with the 16th Finance Commission's recommendations.
- Implications for fiscal architecture: Balancing diverse interests to redefine fiscal responsibilities and political promises.
Policy Focus Amidst Uncertainty: Less hectic election calendar in 2025
- Only state elections in 2025 are of Delhi and Bihar, which provide an opportunity for policy focus.
- Government can prioritize long-term economic strategies over optics.
Way Forward and Conclusion
- India faces a mix of opportunities and challenges in 2025.
- Achieving a $4 trillion economy will strengthen the nation’s global standing, but lower growth rates and fiscal constraints pose significant risks.
Effective industrial policies, trade integration, and balanced fiscal reforms will be critical to sustaining economic momentum and addressing uncertainties in the global and domestic environment.
Editorial 2 : More Money, Less Problem
Context: Wealth tax in India will boost economic growth, roadblock is political will.
Current State of Taxation in India
- As per the Union Budget 2024-25, the Centre’s tax collection according to the estimated GDP would be 11.78% with direct taxes contributing 7%.
- Additional taxes are collected by the states and the local bodies, taking the total tax to GDP to around 17%.
- This is low compared to most other countries, which means inadequate expenditure on social sectors like education and health leading to low productivity and low incomes for a majority, resulting in weak demand and slowdown of growth.
- Narrow Tax Base: Despite tax reforms, there are only 90 million (6.5% of the population) taxpayers. But, only about 15 million are effective taxpayers. About half of the 90 million file nil returns and the rest pay negligible tax.
- Even if agriculture incomes are taxed, the numbers will not rise much. The real problem is the taxation of services, the dominant sector of the economy.
- Indirect taxes are inflationary and regressive, thus cannot be used for raising more revenue for development.
Reason for Low Tax Collection
- Low tax collection is a result of black income generation.
- According to Oxfam estimates, the top 1% on the income ladder earn 22% of the national income and the top 5% may be earning about 40% of the income.
- This means income tax collection from this 5% should be about 10% of GDP at an average tax rate of 25%.
- Much more tax could potentially be collected if black income generation by the top 3% in the income ladder could be checked.
The Case for Wealth Tax
- Wealth and its value are largely visible and/or recorded, so it can be taxed.
- Billionaire wealth is largely financial, in the stock market and the rich in India also hold real estate which is registered, even if benami.
- Wealth tax failed earlier because it was deliberately made complicated by allowing concessions, loopholes, etc.
- Now, with digital records, it should be easier to implement, if there is political will.
- Economic Impact: Wealth tax would lower speculative asset values, promoting more stable investments.
- This encourages a shift of funds from speculative markets (e.g., stocks) to productive sectors.
Challenges
- The real problem could be the:
- flight of capital,
- decline of the Rupee
- Balance of Payment
Mitigation
- Stricter capital controls would be needed temporarily.
- Revival of growth through enhanced demand and increased profits.
Conclusion: Wealth tax is feasible in India. It will boost tax collections to fund greater investments in social sectors, resulting in a more productive workforce, higher economic growth and reduced inequality. If structured right, the black economy will decline, yielding even more direct taxes. The roadblock is political will.