Business Today

The Economy Debate

The Indian economy is being buffeted by a series of crises. Economic growth has slowed down considerably.
twitter-logo Rajeev Dubey   New Delhi     Print Edition: November 5, 2017
The Economy Debate
Photo: M ZHAZO, Photo: Shekhar Ghosh

P. Chidambaram on Economy

Demonetisation and GST are being hailed as the prime reasons for slowing growth? Did things start to worsen well before that?

The slowdown started in the second quarter of fiscal 2017. That is information available on hindsight. When that information was available, the government should have asked what to do about it. Instead, they did demonetisation, which worsened the situation. When you pull out 86 per cent of currency by value from circulation, it will bring the economy to a grinding halt. That is what happened. I had cautioned it will take at least eight months for the effects of demonetisation to work through the system. Before that was over, they pushed through GST. The country was not ready. That made it even worse. So it would be correct to say that while the slowdown began in the quarter before demonetisation, demonetisation and pushing through GST hastily accelerated the slowdown.

The government believes GST is settling down. July collections were Rs 94,000 crore and in August it was Rs 90,000 crore when 55 per cent filed. Once the rest file, collections will be far higher..

These are gross collections. There's a question of refund. They said Rs 65,000 crore is an inflated number; it's only Rs 12,000 crore. It means there will be huge amounts of litigation. People will raise disputes. The way GST works is not how CENVAT worked. In CENVAT, you take credit and you pay the difference. You pay the excise duty liability partly by CENVAT credit and partly by cash. In GST, you pay the whole GST by cash and then apply for refund of input credit. That may come two to four months later, which is why people are crying hoarse about working capital problems. It's too early to take a call whether GST collections are good or bad; you can only say it after 12 months.

Would you have implemented GST differently?

Absolutely. First, I would not have designed GST the way they have. This is six or seven tax rates with discretionary cesses on top of that. This is not GST.

Your suggestion was three rates?

One rate.

With so many rates and cesses, was that possible?

One rate; but to soften the blow, we suggested there can be a rate plus for demerit goods and rate minus for merit goods which is what the chief economic advisor said in his report. After the transition is over, move to one rate. Most countries that have implemented a true GST have one rate. What's the point of saying 'One nation, one tax' when you've six or seven rates plus discretionary cesses?

How much of the grey money post demonetisation will be black money? Do you think they will be able to unearth substantial amount of black money in the economy?

You'll get an answer after 15 years. The income tax department does not have the capacity to audit so many accounts. If it goes through the whole process, it will take several years. There's the assessing offer, there's an appeal to a commissioner, further appeal to an income tax appellate tribunal, then to High Court. Some cases will go to the Supreme Court. So you won't have an answer for the next 15 years. At the moment, all the money has come back.

Do you agree with some of the thoughts that Jayant Sinha put out in response to his father Yashwant Sinha?

They are not Jayant Sinha's thoughts. The response reads exactly like two or three PIB press releases put together overnight. And whether he wrote it or he was told to own it up, I don't know. Yashwant Sinha has come up with cogent arguments which I have been making; arguments that my party has been making for the last 12 months. There's no attempt to answer those issues. On the contrary, Jayant Sinha's article is simply stringing together various announcements.

Where do you think the government's balance sheet is headed?

I'm told we're short on direct tax revenues, too. If they miss the 3.2 per cent fiscal deficit either because they can't achieve the target, or by deliberately relaxing it, there will be terrible consequences. Money flows into the country because of the interest differential. That's the single biggest magnet that developing countries have - our interest returns are much higher than what they can get in the US or Europe. Once that differential narrows, money will go out. If you miss the fiscal deficit target, the first thing that will happen is interest rates will go up. When interest rates go up, inflation goes up; there's a feeling that your revenues are under pressure or expenditure is out of control.

Rajiv Kumar on Economy


The narrative in the government on the economy has swung between defensive to offensive to denial and, at times, defiance. What is the current narrative? Are we or are we not in a state of slowdown?

We are in a state of the beginning of a recovery.

What's the evidence?

This slide that you are talking about actually has a long history. It began about five years ago towards the last two years of the UPA regime. The 9.3 per cent growth was in fiscal 2013 and since then the slide began. This was the downswing of the business cycle. My own thinking is that this has bottomed out in July 2017. If you look at the PMI for manufacturing, from 47.1 in July, it rose to above 50 - which shows growth. In services, it became 47, but now it is closer to 50.

The civil aviation and auto sectors were already growing..

But if you see, commercial vehicles had not grown. Now it's showing a growth of something like 14 per cent in August 2017. Commercial vehicles growth is a strong leading indicator because commercial vehicles don't get bought unless there is growing demand. Moreover, there's now a strong pipeline of IPOs in the stock market and the offtake in the corporate bond market crossing more than `14,000 crore which substitutes for the lack of borrowings from public sector banks. Private sector banks had already been lending out much more. Several other high frequency indictors such as steel and cement sales have begun to rise.

But that's because of the government push in infrastructure..

Whatever the reason. The point is that there is an upturn in critical sectors in the economy. Electricity demand is also rising. These are not indicators of an economy in a tailspin, doom and bust and going towards depression. These are hyperboles.

The last quarter was the worst we had. Chidambaram says next quarter will be equally bad and the fiscal is almost a write-off..

That's where he is completely wrong. That's where he is not being what he would have been had he been a Congress Finance Minister, and had the Congress been in power. He would have pointed out the same indicators. I accept that the economy is bottoming out in this quarter. April-June was a quarter where you had a huge amount of de-stocking because of GST. It was also a quarter where people were still not sure about what was coming ahead.

P. Chidambaram on Jobs


We were generating up to 12 lakh jobs a year not too far back. It's down to a trickle - barely four-five lakh a year now. What caused all this and how do we get out of this?

Even that is an exaggerated number. Anecdotal evidence says no jobs are being created in the organised sector. Only attrition is allowing people to take the jobs of those who have left. This has happened because there is no investment. Private investment, one of the four engines of growth, has stopped for the past 18 months or so. Unless you revive investments, you will not get jobs.

One suggestion made by economists, including Surjit Bhalla, is that if you reduce interest rates we will have investments coming in and the economy will crank up..

As a theoretical construct, it's correct. But interest rates have been reduced in the past; the RBI has cut repo rates but not all of it is transmitted by the banks. Assuming that some part of it is transmitted, even then it has not revived investment. The reason is that the private sector, for a variety of reasons, has lost the confidence to invest in India. Among the reasons are: the raid Raj, the unleashing of the tax administration upon business persons, and stalled projects. Besides, 40 large companies have been sent for bankruptcy resolution and there is no credit from banks. How would anyone invest if all these factors are playing at the same time?

And then there is under-utilisation of capacity..

That is because of falling demand. That's a more recent phenomenon. But the engine of private investment, the engine of export, both were sputtering for nearly 18 months. Then they simply died down.

Rajiv Kumar on Jobs

Jobs are growing at a trickle and employment numbers haven't even been released since January..

In contrast, the Employee State Insurance (ESIC) numbers have increased by 10.6 million over the last three years.

Are you saying jobs are growing in the states that are not tapped?

I don't know; that's for you to decide. EPFO is a similar number, too. These are active accounts. T.N. Ninan pointed out that job numbers don't reconcile with each other. Having said that, people like Manish Sabharwal will tell you that start-ups and Mudra loans have created jobs in the informal sector. We don't know the numbers. I don't deny that there is a huge gulf between the attainment on the ground versus the aspiration of our young people. Jobs is a real issue; they have to be good quality jobs and in the formal sector. Informal sector jobs will not work for us. That's an issue successive governments in this country have not paid attention to for the last 10 years. We have never created as many as nine to 10 million jobs per year. That's an issue this government is very sharply focused on.

Is there a roadmap now for job creation?

There is a task force looking at this. We will come up with those suggestions and recommendations very soon. The only other recommendation I have for the government is to expand their apprenticeship programme as much as they can, so that the private sector can give openings to a much larger number of apprentices because this will be an on-the-job training looking at the future. If you encourage apprentices, this is where factories across industries can bring in more people in positions which are more forward looking and train them. In 2008/09, post the crisis, the German government paid companies to keep labour in place so that the crisis would not affect them.

My thought is why should not the government pay companies who are exporting a labour subsidy? If you can have a capital subsidy like the technology upgradation fund in textiles, I think you can also have a labour subsidy for exporters who are employing a large number of workers to encourage them to employ more. The biggest job creator would be the PM's low-cost housing programme. If we can put it on mission mode and construct and complete them on a mission mode, then you will generate a large number of jobs which will also have a multiplier effect on the rest of the economy.

P. Chidambaram on Fiscal Stimulus

Do we have the makings of a fiscal stimulus now? Should we have a stimulus?

Stimulus is not the answer to restarting the engine of private investment and exports, and to some extent cranking up the engine of private consumption. To some extent, private consumption may go up, but you must have the money to do the stimulus. If you are going to borrow and do the stimulus that remedy is worse than the disease. UPA tried it for two to three years in the second stimulus package and the third stimulus package. According to most economists, that was perhaps the reason why we busted the fiscal deficit targets, busted inflation limits and landed ourselves in a crisis. We had to pull back.

So what's the solution? If you were the FM, what would you do?

Please remember, even Yashwant Sinha, in his long article has not given solutions. That's the correct position to take because one does not have the full information - on the tax revenues, on what the CBDT is projecting for the rest of the year, and on what the RBI expects the reserves will be at the end of the year. Therefore, you cannot actually suggest a way out. The only person who has all the information is the finance minister. The best one can say is, let him throw up the suggestions backed by some data, and then may be some of us will respond.

Rajiv Kumar on Fiscal Stimulus

Is there a case for a fiscal stimulus or a monetary plus fiscal stimulus? Or bursts of fiscal stimuli?

It's always better for policy to work on two legs. Monetary and fiscal should both act in tandem. My own understanding is that this is the time for the government to start investing in productivity enhancing investment, so that they can crowd in private investment.

Do you think interest rate reduction is going to lead to any uptick in demand?

I would rather focus more on the lending rate of commercial banks than keep talking about the repo rate. The lending rate is 11.5 to 18 per cent and 22 per cent to MSMEs. There's a huge gulf out there. Rakesh Mohan called it lazy banking, and I think we're still stuck there. That's where I would focus much more on, rather than keep talking about repo rate.

P. Chidambaram on Agriculture Crisis

How bad is the agri distress in the economy?

Very bad, because of insufficient prices. In the first two years, the government caused distress by not increasing MSPs adequately. They gave paltry increases of `5-10 and nil in many cases. In the third year, they woke up. They gave reasonable increases, but due to a variety of reasons consumer prices remain high, while produce prices have crashed. The producer today is not getting adequate prices today for what he grows. These prices have crashed at the producer level. Therefore, there's acute distress in the farms sector.

Rajiv Kumar on Agriculture Crisis

There's serious rural distress in the agri sector. Growth is down from 8.6 per cent in 10/11 to 4.9 per cent..

It's 8.6 per cent after a very bad year, a negative year. Let's not get into those numbers. The 4.9 per cent growth now is very good. If you look at a long-term average, it's about 3 per cent. But the point is agricultural distress is a result of lack of modernisation of the agricultural sector and because the average holding of each farmer is less than one hectare. He cannot eke out a living from that holding, and we are not doing anything at all to tackle that central problem of de-risking the farmer from all the seasonality he faces and from giving him any means to aggregate that land and to use modern means of production and agricultural cultivation that he should be doing.

For the first time today, we are talking about trying to double the farmer's income. Niti Aayog is trying to set up about a dozen pilot projects where we would de-risk the farmer. A very important land leasing law has been passed which assures the farmer that his land will not be alienated. Five states have already drafted new laws according to it. Why would you not give credit for it? You should. Assuring the farmer that his land will not be taken away, giving the soil health card, giving eNAMs, abolishing the pernicious APMC Act, getting the GST which will make interstate movement of agriculture products much better - all these are major steps that have not been taken for the past 70 years. This is becoming the basis of the agriculture economy which, along with agro processing and better logistics, will be the surest way of addressing farmers' distress, rather than only depend on the hike of MSPs, which only creates inflationary pressure. You've got to improve productivity, and that is what the government is trying to do.

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