India’s Economic Challenges and Policy Reform Needs

Source: The post India’s Economic Challenges and Policy Reform Needs has been created, based on the article “Behind India’s economic slowdown, our very own Deep State” published in “Indian Express” on 24 January 2025

UPSC Syllabus Topic: GS Paper3- Indian Economy and issues relating to planning, mobilisation, of resources, growth, development and employment.

Context: The article criticizes India’s outdated budget-making process, high taxation, and restrictive economic policies. It blames the “Deep State” of bureaucrats, industrialists, and media for harmful decisions, leading to slowed GDP growth, excessive government spending, and declining foreign investments.

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What Is the Issue with India’s Budget-Making Process?

1. India’s budget-making process is outdated and resembles colonial-era practices.
2. The process is secretive, with decisions made behind closed doors.
3. It primarily benefits TV media and senior bureaucrats (IAS officers), sidelining external experts.
4. Policy-making lacks input from professionals outside the government, unlike in mature democracies.
5. For example, despite calls for lateral entry by leaders like Manmohan Singh and Narendra Modi, such reforms were not implemented effectively.
6. The secrecy and limited participation hinder transparency and accountability in creating effective economic policies for modern India.

Why Is India’s GDP Growth Slowing Down?

1. Excessive Taxation: The personal income tax to GDP ratio (X-PIT) is projected to reach 3.9% by FY2025, higher than most non-advanced countries like China (1.1%) and Vietnam (1.8%).
2. High Overall Tax Burden: India’s tax-to-GDP ratio (X-TAX) is likely to exceed 19% in FY2025, higher than East Asia’s 13.5% and close to developed countries like Korea (20%) despite India’s lower per capita income.
3. Restrictive Trade Policies:

• High tariffs on manufactured goods increase the cost of imports, making them less competitive in the Indian market. This protects domestic industries but reduces efficiency, innovation, and global competitiveness.
• Restrictions on foreign direct investment (FDI) limit the entry of international firms, cutting access to advanced technology, capital, and expertise.
• Together, these policies discourage global investors, reduce competition, and slow economic growth by isolating India from global supply chains and markets. For example, removing Switzerland’s most-favoured nation status could have impacted investor confidence.

What Are the Consequences of High Taxation?

1. Slow GDP Growth: High taxes contribute to reduced economic activity, slowing India’s GDP growth despite global expansion.
2. Burden on the Middle Class: The middle class, which pays most taxes, faces financial strain, causing dissatisfaction.
3. Excessive Government Spending: High tax revenues lead to wasteful spending, including freebies.
4. Decline in Investments: High taxes discourage foreign investments. For example, personal income tax-to-GDP ratio (3.9%) exceeds non-advanced regions like Eastern Europe (3.4%).

What Needs to Be Done?

1. Reform taxation policies to reduce excessive reliance on personal income and overall taxes.
2. Address the Deep State’s role in policy-making.
3. Implement better economic policies to boost foreign investment and reduce tariffs.

Question for practice:

Examine how India’s outdated budget-making process, high taxation, and restrictive trade policies contribute to slowed GDP growth and declining foreign investments.