Another trilemma to deal with?

An analysis by Prof VA Nageswaran found that "countries that enjoyed a capital inflow, domestic credit and investment boom along with currency appreciation in the first decade of the millennium experienced a reversal in the next decade". Measured in dollars at current prices, growth of India's per capita annual GDP "dropped off from 11.8% in the decade 2000-2010 to 3.1% in 2010-2020". "It might be happening already. On current trends, this year could see India's highest foreign institutional investor inflows (debt and equity) since 2014-15." Foreign portfolio investors (FPIs) brought in Rs 603.58 billion in November and Rs 527.22 billion till 23 December. "In the coming decade, India will have big opportunities and face big risks," he wrote. "So, what should India do to effectively deploy the abundance of capital flows that India is going to receive this decade? Governments, state and central, should get out of the way. Simplify and reduce rates of both the goods and services tax (GST) and income tax, remove restrictions on startups and simplify categories of micro, small and medium enterprises (MSMEs). India has 63.4 million MSMEs employing 111 million people, contributing 29% to India's GDP and 49% to its exports. Trouble is, the government has an enormous hunger for revenue and so is always looking to increase taxes. "India plans to set tough financial targets for state-run firms" because the government "is trying to rein in its fiscal deficit, wants state-run firms to focus on improving market capitalisation and dividend payouts from 2021/22 fiscal year, starting April," reported Reuters. As the majority owner, if the government sucks out all the profits from public sector firms they will have nothing left for new investments and new jobs will not be created. "India's unemployment rate jumped to 9.90 percent in the week ending December 13, recording a 23-week high, latest weekly data from CMIE said." However, the labor force participation rate, which measures people working and actively looking for work, may be increasing, showing that some of those who had dropped out of the workforce are beginning to return, wrote Prashant K Nanda. "Between March and December, Brent crude prices have fallen more than 3%, but petrol and diesel prices have climbed 17% and 15% respectively. Since "fuel prices are not under GST, tax increases cascade into higher prices of everything". A third of tax revenues goes in paying interest on past debt and adding salaries, pensions and subsidies means there is almost nothing left for capital expenditure, wrote Ajit Ranade. To attract new investments the government needs to keep tariffs low. But high tariffs on imports gives protection to domestic industries to increase prices which increases tax collection. As growth returns, following the virus-induced global recession, commodity prices will cause inflation, interest rates will rise and FPI flows may turn negative. The rupee will adjust lower against the dollar, raising inflation in India. You cannot have high taxes, low inflation and high growth. Another impossible trilemma.