Where is the Growth Mantra?

Here in Pakistan, we have a situation where the economic managers seem to be averse to growth, whereas, almost everywhere in the world the governments are trying to somehow return back to the growth pattern? Frankly, one fails to see any wisdom in such a mindset and the logic, if any, remains a mystery. An ailing Europe has drastically cut down on interest rates, renewed cum enhanced sectoral protection tariff structures and is busy re-incentivising industry to revive investment, growth and job creation. The new Trump administration within hours of assuming office has unleashed a similar, albeit an even more aggressive strategy to ensure that investment and growth rekindles itself in the US. Within our own region, we have seen this trend take fruition with our next-door neighbour India, where last weekend its Finance Minister, Nirmala Sitharaman presented her eighth successive Union Budget (a record in itself), which not just prioritises growth, but also gives a clear message that the government gives it more importance than mere maximisation of revenue for the exchequer. The session didn’t end with the finance minister, but thereafter, the prime minister himself took the floor to emphasise that how usually the focus of a budget is to fill the government’s treasury, but this Indian budget is exactly the opposite, because it aims to lay a very strong foundation on how the pockets of the citizens of the country will be filled, how the savings of the citizens of the country will increase and how the citizens of the country will become partners in development. By adopting this refreshingly new approach, the Indian economic managers have signalled a new fiscal strategy: One in which revenue is a by-product of growth, taking a very bold bet that assumes lower interest rates will spur economic activity, broaden the tax base, and disincentivise tax evasion; something that our managers can also learn from! In deeper essence, what this direction really means is that the government firmly believes the time has come to move to a tax regime that emphasises lower rates and has combined it with a soft touch on tax regulations in order to stimulate the animal spirits (Robert Shiller, Yale) and consumption levels in the economy. Further, it is worth mentioning here that Indian government has been experimenting with behavioural economics for quite some time now and perhaps it would be fair to say that in taking these positives steps, it enjoys the advantage of hindsight.

A similar experiment with corporate tax rates undertaken in 2019 did not impact the government exchequer, in fact it complemented it. Interesting, the post-Budget interviews with the FM reveal that the biggest stumbling block was to convince the bureaucracy, whose machinations are threatening to undermine India’s biggest tax reform ever, the Goods and Services Tax (GST) surprise, surprise! Meaning, what we saw in the Indian budget was more of the same recipe that has led it to its current economic success, however, this time with even more intent and purpose. Now, this author has been advocating consistently that Pakistan’s GST scheme is flawed and needs a major over-hauling cum a 180 degrees re-think in order t make it productive rather than destructive. Well, the real feel-good factor in all this is that this Indian growth mantra stems from some solid philosophic economic thinking and not just an off the cuff or plagiarised vision. It was painstakingly advised that one of the biggest challenges of the annual budget exercise, prior to FM Sitharaman’s latest announcements, was the business of setting revenue targets for the year. Since expenditure is inelastic, the only way to balance the fiscal deficit is by raising revenues. Unfortunately, this often led to mindless tax overreach. Worse, a realisation has set in that in recent years that the tax framework has not kept pace with the transformation of the Indian economy, in just two decades the Indian economy has grown seven-folds to $3.5 trillion, but an aggressive tax regime is now beginning to take a significant toll on economic activity. Worse, honest tax payers coping with sell-past-the-date public services felt aggrieved twice over. So, a sort of soul searching was done to unearth the real factors behind this stubborn malaise. Taking queue from the work of the 2024 Nobel Prize winners in economics, Daron Acemoglu and Simon Johnson from the Massachusetts Institute of Technology, along with James A. Robinson from the University of Chicago, a strategy has been devised to tame and improve the bureaucracy.

These scholars argue that India inherited colonial-era institutions designed primarily for revenue extraction, and unfortunately, these frameworks were perpetuated post-Independence. Over time, powerful political groups have ringfenced these institutions, preventing much-needed reforms. And if they do come under pressure, this cabal allows for incremental reforms which do not disturb the status quo. Worryingly, these very outdated bureaucratic frameworks that have shaped domestic institutions, since Independence, are continuing to prevent or slow down the process of democratisation of power, even though socio-economic conditions have long changed. Ironically, the same study perfectly fits the situation in Pakistan, by only replacing the country’s name India with Pakistan!

Dr Kamal Monnoo
The writer is an entrepreneur and economic analyst. Email: kamal.monnoo@gmail.com