India's In the News For All the Wrong Reasons

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India is in the news for all the wrong reasons. Most recently, people took to the streets to protest horrific cases of sexual violence. Last year saw a popular movement to protest blatant corruption in the political system. Then came the world's largest power outage in July, which left 670 million Indians, or 56 percent of a national population of 1.2 billion, without electricity for two days.

India's social troubles have been accompanied by an economic slump, induced by inefficient governance and a slower world economy. But India has one major advantage: the highest fertility rate of the world's ten richest countries, according to United Nations data. If it can reform its economy, it will overtake China as America's leading competitor.

Between 2005 and 2010 India's average fertility rate was 2.73 children per woman, compared with 2.07 children per woman for the United States, 1.64 children per woman for China, and 1.32 children per woman for Japan, according to United Nations data. Declining fertility rates mean that a shrinking pool of workers is responsible for an expanding group of retirees. Lower birthrates in Europe and China will slow economic growth, and are already resulting in slower growth in Japan.

About 65 percent of Indians are of working age, 15 to 64. Half of Indians are under 25, and 29 percent are under 15. So as Europe, America, Russia, Japan and China grapple with aging populations that must be supported, India's millions could be made productive through a more dynamic economy.

But India's economy is far from dynamic. After experiencing GDP growth rates of around 8 percent for the last few years, 30 economists surveyed by Bloomberg News expect a growth rate of 6.5 percent, hefty by American standards, but low for India. Goldman Sachs and others expect inflation to moderate only slightly from the current rate of nearly 8 percent.

One of India's major problems is poor infrastructure, which its central and state governments are unable to modernize. Indians do not even have access to reliable electricity services, as was seen during last year's power outage. India should harness the private sector to provide the transportation and power facilities needed for industry and commerce, just as private companies provided the cell phones used by so many in India.

Another major problem is excessive and inefficient regulation. Over twenty years ago, in 1991, a nearly bankrupt India instituted a wide range of economic reforms that revived the economy. The centerpiece of this reform was the dismantling of some of the layers of regulation that stifled new and existing enterprises. That regulatory system, called sardonically the "License Raj," required Indians to purchase permits or certificates for many economic transactions.

Unfortunately layers of regulations are still alive and well. For one of many examples, look at the intercity tax system in the region of Maharashtra, home to Mumbai, and some cities in Gujarat. Termed Octroi, the tax is levied on items brought into cities for local use from elsewhere in India. Building materials for roads and houses, goods for sale, all are subject to Octroi.

The Web site of Jupiter Express Services Pvt. Ltd., an international transportation company,, provides a guide to Octroi payments for its customers under "Documentation." It's enough to discourage anyone from doing business.

Jupiter Express helpfully lists multiple forms for Octroi, along with procedures for paying or getting refunds. It explains, "Levy of Octroi is based on the value, weight, length and number of articles and the basis of levy may vary from State to State or even between different local bodies within a State."

To pay Octroi in Mumbai, there are A Forms for the check point authority, B Forms for the customer, and C & CC Forms "in the event of a wrong payment of Octroi or rejection of a material by the consignee... due to a valid reason." The C Form is for shipments by sea or air and the CC Form is for shipments by road.

The N form is for exemption from Octroi in case the item is imported for future export. "In case of non closure of N form both the consignor and the carrier, in our case JTB Jupiter Express Limited, are liable to pay an amount equivalent to the Octroi amount that may have accrued had the shipment not been cleared through N-Form, and the risk of being black listed and de-recognized by [Municipal Corporation of Mumbai.]

There's an R Form for items coming into Mumbai for repairs or demonstration, an X Form "for articles imported into Mumbai by charitable institution for charitable purpose."

The complete rules for Octroi in Mumbai, which comprise a 150-page document which can be viewed here, also require that transporters halt at checkpoints or at the request of Octroi officials, present an itemized list of forms, and allow a full inspection of all goods. Octroi is assessed after these inspections. In cases of importation by road or at the official's discretion, each item must be stamped, at the importer's expense, to verify the importer's payment of the tax. All additional costs for transport diversion, delays, unloading and reloading, and stamp-worthy packaging rest on the importer.

And, of course, there are the perennial exemptions from Octroi. Government officials, officials of corporations, retired central and state government officials, family members of state and central government officials, diplomats, and representatives of the United Nations, World Health Organization, International Labour Organization, World Bank, and International Monetary Fund don't have to pay the tax.

In addition to the burden of daily commerce, wasteful subsidies such as those for fossil fuels ($9 billion dollars in 2010-11) absorb public funds. Although fuel subsidies are intended for the poor, they largely benefit car owners, most of whom are affluent, instead of poor farmers. The government plans to reduce central subsidies to 1.75 percent of GDP in the following three years from the current level of 2.4 percent, including diesel subsidies.

The Public Distribution System (PDS) is supposed to deliver subsidized essentials like cereal grains to the poor. Unfortunately, almost 60 percent are lost to middlemen, traders and public officials.

The PDS was devised in the 1960s, when India struggled to be self-sufficient in grain production and imported a large part of its requirement. However, since the 1970s the harvest has exceeded expectations and now produces a surplus that is exported and even donated to countries like Afghanistan. The system needs to be eliminated, trimming government spending.

One sign of progress is that the government has begun to allow foreign direct investment in the retail sector. The prospect of large stores such as Walmart coming to India alarms small businesses, but it is likely to bring growth and with it net gains in steady nonfarm employment. Investment in India's infrastructure and distribution systems will improve food availability, making it cheaper for consumers. For a country constantly struggling with food price inflation, this would be a big relief.

India, the world's largest democracy and second most populous nation (after China), enjoys vast economic potential. The big question: can it replace its government with energetic, creative younger men and women, who are not encumbered by notions of hierarchical promotions, communal politics, or burdensome taxes?

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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