By Bill Spindle
When it comes to its economy, India is divided into two
worlds.
One is rooted in its cities. Here enterprises trade on global
markets, operate through banks and pay taxes. This more modern
economy is made up of family owned and publicly listed companies.
It's where almost all of India's new wealth has been generated in
recent years.
Then there's the vast informal economy, which sustains as many
as nine of every 10 Indians who work and accounts for almost half
the country's economic activity. The informal economy is largely
rural and comprises day-laborers, one-man shops and roadside
haircutters. They operate in cash and pay no taxes.
A critical goal for India has been to enlarge the more-modern
economy and shrink the informal one, but now progress is stalling.
A deepening economic slump that started in the informal economy is
hitting the more-developed parts hardest.
Whether India manages the economic transition matters far beyond
its shores. It is projected to become the world's most populous
country in 2024 and by then will also likely be the fifth-largest
economy. With China increasingly closing itself off to foreign
firms or being shunned by them in the trade war, India has emerged
as the last huge growth market for companies ranging from digital
trailblazer Amazon.com Inc. to old-line oil giant Aramco.
Prime Minister Narendra Modi's government has tried to keep
India on track, by imposing a new nationwide tax plan, for example,
among other policies. But economists say his changes haven't
created jobs, particularly in manufacturing, which are needed to
get Indians to shift away from the informal economy.
"You also have to have carrots," says Vivek Dehejia, an expert
on the Indian economy at Carleton University, in Ottawa,
Ontario.
Moving people into what economists call the formal economy could
supercharge growth, because urban manufacturing and services wring
more value from each worker than farm labor. Those industries pay
better because they are more productive. That lifts people out of
rural poverty, while simultaneously raising productivity back on
the farm, since fewer laborers are usually able to produce the same
crops.
The shift also vastly expands tax rolls, in theory giving
governments resources to invest in infrastructure and other public
goods to sustain the transition.
Western countries traveled this road through the industrial
revolution in the 19th century, and much of East and Southeast Asia
trod it via a manufacturing-export explosion in the 20th. India
wants to take a similar path.
In trying to speed India's passage, Mr. Modi introduced the
nationwide goods and services tax two years ago, replacing a
patchwork of local tax regimes. The value-added tax requires all
but the smallest businesses to sign up online, submit electronic
filings and pay taxes on a common platform. In other words, join
the formal economy.
That followed Mr. Modi's novel overnight move back in 2016 to
ban cash notes worth almost 90% of the currency in circulation. The
aim was to curtail tax evasion and official corruption. It also
prodded the suddenly cashless masses to transact cashlessly on
their mobile phones and through bank accounts the government
provided to all poor Indians.
Replacing currency notes and broadening the tax system disrupted
the informal economy but did little to stimulate the formal
counterpart. As a result, business confidence and investment
declined, stymieing the formal economy's ability to provide more
and better jobs.
The auto industry, for example, saw passenger car sales fall 24%
in September, the 11th straight monthly decline and the longest run
of declines the industry has ever experienced. Growth for the
overall economy posted a six-year low of just 5%. For a country
with some 10 million young people pouring into the workforce each
year, that's the equivalent of a recession.
To turn things around, the government recently cut corporate
taxes, especially for manufacturers that set up new facilities, in
hopes of attracting companies that are now considering moves out of
China. Economists say more is needed to tackle deeper structural
changes.
India's economic upgrading started to gain traction early this
century, when the country became first call-center, then computer
coder to the world. Those industries helped create an energetic, if
tiny, new middle class.
Meanwhile, manufacturing's share of the economy has stagnated at
around 17% for most of the past decade, as India has failed to
attract significant pieces of the global supply chains that produce
everything from iPhones to autos for world-wide consumption.
India would have to attract only a tiny fraction of China's
share of that global manufacturing to break from a "vicious into a
virtuous cycle, " says Carleton's Mr. Dehejia.
To do that, the Modi government would need to summon the
political will to loosen labor laws and restrictions on land use.
The former makes it onerous to set up large-scale manufacturing
ventures while the latter impedes the consolidation of agricultural
land.
If those changes aren't forthcoming, economists say much of
India's vaunted economic potential could be squandered as most of
its fast-growing workforce remains mired in the informal
economy.
Write to Bill Spindle at bill.spindle@wsj.com
(END) Dow Jones Newswires
November 10, 2019 09:14 ET (14:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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