By Subrata Majumder
Even though India and Japan are far apart by geography, demography and economy, there is one common thing in their political leadership. Both witnessed new charismatic leaderships in recent years with a lot of hope for an upturn in the economic narrative. Indian economy is engulfed by continuous slide in the growth and Japan is facing an unabated recession for last two decades. Prime Minister Narendra Modi and Prime Minister Shinzo Abe are sailing on the same boat. Given the leg up of political majority in the people’s representative houses, both vowed to bring the economy on a strong track of recovery. They laid the seeds to germinate big hopes by committing radical reforms in the economy. But the euphoria was short lived. Mr Modi’s big-ticket reforms seemed to have been stuck in the pipeline and Mr Shinzo Abe has suspended the third stage of his ‘Three Arrow’ economic reforms, after Japan re-plunged into recession in the first two quarters of the current fiscal years.
After the insurance bill was stuck in Rajya Sabha, there was no move by Modi government to push forward any big ticket economic reform. It announced “Make in India” with a buzz. But, soon it lost its steam. It was merely a campaign and not a policy reform. Mr Abe’ first two of Three Arrow reforms, viz, monetary easing and fiscal reforms, had positive impact. But, the rise in consumption tax acted like a boomerang to throw Abe’s 3 arrow reforms upside down. Once again, Japan went into deeper recession.
What went wrong with the much talked about models of economic reforms, which were hyped in Modi’s election campaign and Abe’s Three Arrow economic reforms to get rid of Japan from the protracted economic recession? Modi’s reforms buckled down to the perils of democratic process and Abe’s reforms failed to tame the Japanese consumers’ fears, who are burdened with long years of recession and without any hope for economic revival. Aging population and plunge in age-long recession dwindled saving ratio and stymied the Japanese consumers from spending.
Modi’s “Make in India” has failed to stir the sentiment of the investors. According to Mr Swaminathan Ankleswar Aiyer, “why will foreign investors come to invest in India when Indians are not investing”. RBI Governor Ravi Rajan was skeptical on Modi‘s call to “Make in India” and make the country a global manufacturing hub of export. He apprehended that the world has little appetite to import, given the volatility of sustainable growth in world economy.
General consensus among the economists is that Abenomics was lackluster in its delivery, just as repeated quantitative easing failed to deliver in USA. The 3 Arrow economic reforms of Abenomics failed to hit the mark. Abenomics depends largely upon weakening of value of yen against most of the world currencies, resulting a prop up in the export opportunities, increase in employment and upturn in the corporate profits. But, as the world economy has little chances to resuscitate the higher growth, appetite for imports will slide. East Asia is the biggest importer of Japanese goods. More than half of Japanese exports go to East Asia. China is the guzzler of Japanese merchandise. With the dwindling of Chinese hyper growth, the import appetite of China is slated to decline. Given the situation, Japan is unlikely to reap much windfall of export related growth, underpinned in Abenomics’s growth model.
Japan’s economy needs to be bolstered based on domestic consumption growth and buoyant manufacturing activities. Quantitative easing alone will not spur the domestic consumption. Given the disadvantage of aging population, spur in employment opportunities and loosening of immigration are likely to be boon to the growth in domestic consumption. Japanese investors need to be impelled to invest in Japan. Japanese binge for overseas investment need to be reversed into inward investment with more incentives. Incentive is the first and prime attraction to woo the investors. In fact, the first two arrow of economic reforms of Abenomics seemed to have dismayed the inward investment in Japan.
In making India a hub for global manufacturing, the investors were looking for tangible changes in the economic policies. The overwhelming desire of the investors is to have ground realities conducive to investment. So far whatever the reforms Mr Modi unveiled, they were related to socio-economic reforms, such as easing of provident fund benefits and tinkering with factory regulations. The major investment hurdles, which require policy changes, are difficulties in land acquisition, hire and fire system and the multiple approvals required at state level.
India has to pitch for a global competiveness to woo the investors. Global competitiveness depends upon three factors. They are ease of doing business, low cost structure and the domestic demand. After the world economy reels under the uncertainty of growth, exports related growth are loosing sheen with the world appetite for import shrinking. In this perspectives, India’s large domestic demand will be a better bet for the investors.
Fiscal incentives are one of the major drivers to woo the investors. India is known for unhealthy tax structure for its high rates of business taxes. At 33 percent corporate taxes, 10-12 excise duties and 26- 28 percent custom duty, business taxes are one of the highest in India. Despite having the advantage of high domestic demand catalyzed by large demography, the unfriendly tax structure dampens the effective demand. Fiscal incentives are essential to negate this high tax regime. Modi’s reforms in FDI policy and launching of Make In India programme are far from any new fiscal incentives.
Ease of doing business is an important tool to put manufacturing on fast track. Unbundling the complex procedures of approval system for setting up manufacturing units are the pre-requisite to gear up the active manufacturing activities. It is heartening that Modi Government is up in the arm to let the ease of doing business on progressive stream. But, since State has a bigger role in making the ease of doing business congenial to investment and since BJP is still under minority in large number of states, a political will needs to be built up between the Centre and states to give trigger to the manufacturing. (IPA Service)