By Chaahat Khattar
Edited by Shambhavi Singh, Senior Editor, The Indian Economist
According to numerous reports by renowned bankers and consultants, by 2050, India will be the World’s largest economy. Accordingly, in 2061 India will be a developed nation with a super power status.
To understand the same better, let us analyze several economic variables that would primarily indicate India’s strong economic foot hold over the World.
In 2061, India will be home to streamlined tax policies with controlled inflation rate. The Goods and Service Tax (“GST”) will be the prime mode of taxation in the economy. The absence of the double taxation will be prevalent in the economy along with credit system to keep a check on inflation and prices under control. The GST will comprise of Central GST, State GST and Integrated GST for inter-state transactions. There will be harmony and mutual understanding among the central and state governments that will ensure increased tax base and fair unbiased disbursement of funds from centre to state.
The Income-Tax slabs will be as follows in 2061:
|Income (In INR)||Tax Rate|
|650,001-1,000,000||10% of amount by which the total income exceeds INR 650,001|
|1,000,001-1,600,000||INR 112,000 + 25% of amount by which the total income exceeds INR 1,000,001|
|1,600,001-2,500,000||INR 200,000 + 40% of amount by which the total income exceeds INR 1,600,001|
Apart from this, the government will levy an additional tax known as High Net worth Individual (“HNI”) tax of 10% over and above the relevant income tax rate on individuals with taxable income over INR 10,000,000. The tax base of the economy will be quite large and the individuals will not be much worried about high tax rates as basic facilities such as medical, primary education and transportation will be well maintained and provided by the government only.
In case of corporate taxation, a flat corporate tax of 25% will be there for business entities. A withholding will apply at the rate of 30% which can be eliminated in case of application of a unilateral or a bilateral Double Taxation Avoidance Agreement (“DTAA”) India is having.
By 2061, India will be following the International Financial Reporting Standards instead of Accounting Standards and due importance will be given to economic factors for accounting purposes. This will allow companies with much more flexibility in preparing accounts due to IFRS’s principles and rules based philosophy. This will also help the taxman in the case of comparability of the companies.
Economic Parameters in 2061
The following will be the economic standing of Republic of India in 2061:
Gross Domestic Product (“GDP”):
India’s GDP will be around USD 85 Trillion. Since India will be a great exporting nation and a hub for manufacturing facilities, the GDP will be healthy for the nation.
Real GDP Growth Rate:
The real GDP growth rate of the country will be hovering around 2% to 3%. This will majorly because of the fact that the country will be in a stable position. The government’s spending towards public sector will be significant setting off the income from tax base.
GDP Per Capita:
The GDP per capita of India will be around USD 30,000. The purchasing power should be around USD 32,000 while will correspond to the GDP of the nation and will keep the circle of economy on track.
The inflation rate will not be abnormal at all. The country will be producing optimally to cater the demand of the nation. It will stay in the range of 4% to 5% in the year 2061.
The public debt of the nation will be tilted towards the higher side since the population of the nation will go nowhere but up in due course. To cater the demand of the nation, the government will be raising as much funds as it can. The public debt will be 30% to 35% of the GDP.
Let us now discuss some of the fiscal as well financial position of the economy in the year 2061:
Balance of Payments:
The capital inflows in the country will be around USD 8.5 trillion. In 2061, India will be the generator of Foreign Direct Investment. The multibillion dollar firms of the nation will be a pool of cash surplus and they will be investing in their subsidiaries or holdings in other companies across the globe. This implies that India will be an exporting hub in the year 2061, the country will be self sufficient in production and the imports will be extremely limited. The export of goods and services will be making sure that India has positive and healthy balance of payment account.
Indian equity markets will be experiencing massive inflow of portfolio investments on accounting of global liquidity and emergence of India as the most favorable nation among foreign investors. The increased capital accessibility coupled with strong position of the Rupee will raise net capital inflows (Capital Inflows- Capital Outflows) to the tune of USD 1 trillion. The Foreign Institutional Investment (“FII”) in the economy will be more than the FDI. Also, Indian financial players will be putting FII across the globe but India’s economic boom will be the focused point for majority of overseas FII players.
External Commercial Borrowings by Indian companies will also be result of increased economic base of Indian companies. Indian companies will giving loans and advances to their subsidiaries or partners across the globe at lower interests through ECB route which will be added source of income for India firms.
The Bombay Stock Exchange (“BSE”) and the National Stock Exchange (“NSE”) will be the only operating stock exchange markets of the country. More than 50,000 companies will be listed on BSE and close to 10,000 companies will be listed on the NSE. The stock exchanges will be very much prone to shocks and limits. There will be numerous crashes on the stock markets but the markets will bounce in very short term itself as the investors in the year 2061 will be more aware, risk adverse and will be very much informed. The moves of the investors will not be merely limited to sentiments but calculated decisions.
Capital Formation and Private Consumption Expenditure:
The capital stock of the nation will be very much on a rise due to increased foreign investments as well as country’s self dependency. This will further be strengthened by rupee’s continued growth against other several currencies across the globe.
Similarly, due to increase of foreign investments and low domestic lending rates, investment fueled consumption will be accelerating and there will be stability and growth in the debt markets. There is no doubt that there will be unemployment but the same will be limited to a certain extent say around 7% to 8% only which will also result in increased private consumption expenditure. Also, rising unemployment and domestic savings reduced private consumption expenditure. The same will be well complimented with rise in government consumption expenditure.
Tax Treaties and Agreements:
The scope of international tax treaties such as Double Taxation Avoidance Agreements (“DTAA”) will certainly be wider in 2061. In 2061, there will be uniformity across all the DTAAs India will have to ease the process of litigations and to minimize the controversies hovering over the same. Also, there will not be hoard of DTAAs India will be having. The number of DTAAs will be less than 50. The lower number will be due to conservative position of the country which in 2061 will be a massive economy. The economy will be prone to foreign exchange risk and exposure and to stay unaffected by the same, the country will have stringent policies while continuing with current DTAAs or entering into new ones.
Also, India will be playing elemental role in several multilateral agreements aimed at reducing non-trade barriers among the participating nations. BRICS (Brazil, Russia, India, China and South Africa) will have more say in the international economic cooperation and BRICS will be more than powerful ever before in influencing international taxation and trade policies.
The policy of Reserve Bank of India (“RBI”) regarding exchange rate which is to promote flexibility and floating rate keeping strict control over volatility will hold the same in the year 2061 as well. Consequentially, it will let market supply and demand determine the price of Rupee in foreign exchange markets while intervening with market operations to maintain sufficient amount of foreign reserves. Since, the reserves with the RBI will stand close to USD 15 trillion, RBI will keep monitoring and playing around with the same in the long run keeping rupee as a strong currency in the world currency basket. India’s currency will be on par with currency of United States of America but will be below par when compared to other nations such as Singapore, Hong Kong and Nigeria.
In 2061, the banking sector of India will the most robust and stable across the globe. It will always remain unaffected from any direct contagion of banking crisis owing to macro-prudential regulations and stringent regulatory environment imposed by the RBI. Bank lending in India will not reach unsustainable levels due to strict provisional requirements laid out to grand housing and other kind of loans to the individuals. Apart from collateral requirements, income capability of a person will remain a major determinant of the leverage arm of housing payments. Apart from these, there will be ban on complex structured financial products which mask the inherent risk in the collateral value. This will help the banks to manage strong balance sheet with very small toxic component as opposed to banks in other nations. Apart from that, capital adequacy ratio requirements will be well above 15% (necessitated by BASAL VIII accord) for commercial banks. Thus, risk will be further mitigated due to sound equity backup coupled with rising asset values.
India will continue to have unique structure of banking regulation in place wherein various kinds of banks will be subjected to differential regulatory requirements.
Thus, banks which will exercise high degree of financial inclusion in their business strategy will be allowed to have large debt-equity ratios as compared to commercial banks. Even the other requirements will be comparatively relaxed for public sector and cooperative banks. These banks offer low-interest credit to low income groups and agricultural labor and preferential back up to these banks prevents the liquidity squeeze to sink down to grass root economic levels.
State of the Art Infrastructure:
In 2061, India will be home to best infrastructure facilities which will stand as benchmark for any other nation. There will be no dearth of public transportation anywhere in the country. Every 150kms, there will be one airport and the same will be connected to the city through widespread links of metros and monorails. The national highways across the country will provide unstoppable movement of road transport. There will be more explored sea ports for movement of shipments. The government will be adopting Public Private Partnership (“PPP”) models in majority of infrastructure projects so as to help private sector boom and at the same time the funds of the government will not stay limited merely to infrastructure projects.
Effect on Social Sector:
In context of poverty, India will not be gripped by poverty in 2061. Poverty will be there but in minority. The government spending in order to reduce the difference between the rich and the poor will reap benefits during 2060s. The basic necessities of life will be well in reach of majority of the population. Due to free availability of medical facilities and primary education, the level of poverty will be minimalistic. The availability of credit facility will be there across the nation. There will be consistent check on inflation by the central bank as well as the government to make sure that Below Poverty Line keeps on going up and there is marginal presence of nutritional deficiency in the economy.
Also, as the result of availability of credit facilities, capability of government to finance various programs meant to promote employment, health and education in the poor will be strengthened. With the widening of private investment in agriculture and industry, government will be in a better position to concentrate on minority areas of the society and spending in such sectors will be focused to increase standards of living and keep the economy booming.
The Problems in the route 2061:
- The picture of India in 2061 looks rosy, but there are several issues which hinder the country to grow to its full potential.
- India is heavily depended on oil imports. More than 70% of India’s demand for crude oil is met through imports. Oil is one very important determinant of economy’s several variables such as foreign exchange. The rupee will never rise till the oil imports are controlled. The only solution India has for this is to first bring down the oil subsidies as much as possible and let the price of crude be determined by the forces of demand and supply. Another solution is to force India companies to stop exporting oil and to sell the same in domestic markets. There are several companies extracting oil from India and exporting the same due to their presence in Special Economic Zone. The same oil must be sold in India at fair market price. Also, the Indian companies extracting oil abroad (such as in Africa) might be suggested to import the oil to India at lower rate.
- India needs political stability. With the presence of tons of political parties and absence of one ruling political party leads to instability and delayed actions and reactions from the government. Till the number of political parties does not get limited, there will be difficulty in decision making and the uncertainty over numerous factors will continue to loom.
- The fiscal deficit of the country is still very high. The government needs to cut its fuel subsidy and agricultural subsidy bills. It need to make people and industries self sufficient. Otherwise, the losses of the companies will balloon and government will be forced to give away billions of dollars in bailouts in the long run. Controlling fiscal deficit will automatically control current account deficit of the country as well.
- There are major sectors of the economy which are underutilized. One such sector is the power sector of the country. Power plants capable in producing power worth billions are underutilized.
- There are several supply constraints which are backed by curtailed FDI policies. The FDI has been opened in the retail sector but not much will benefit out of this as the same is limited to only few states and the political instability over the same will loom forever till any concrete and binding decision is taken over the same.
- The rupee is depreciating not only against US dollar, but against almost every currency in the world. It’s the right time when the government can indicate the RBI to opt for foreign bonds against its foreign exchange reserves.
The Republic of India has long way to go. But nothing is unachievable. The economy has been shielded by various watchdogs of the economy which has protected the country from several economic meltdowns we have witnessed in recent past. The country can well leverage upon the restricted growth of Americas and European Union. The country can well attract the foregone investments. Such initiatives will not only lead to capital inflows but also act as major steps towards strengthening of rupee.
Chaahat Khattar is an ardent economist and is working with an international consultancy firm. He is an MBA and pursuing Masters in Business Laws. He is also a Harvard University alumnus and a certified financial modeller. He has keen interest and experience in authoring research papers and case studies and have contributed to various renowned journals. Chaahat can be reached at [email protected]