The Indian economy is going through one of its longest spells of slowdown - six quarters and counting
Even as government and independent commentators are groping in the dark for possible ways to turn around a decelerating economy, Business Today's Dipak Mondal and Joe C. Mathew caught up with P. Chidambaram, who has presented eight Budgets as finance minister. Excerpts from his analysis of the crisis:
What is your diagnosis of the problems the Indian economy is facing?
My overall assessment of the Indian economy is on the same lines as (former Chief Economic Adviser) Arvind Subramanian's paper jointly with (IMF's former India head) Josh Felman, which was published in December 2019. The economy faces serious problems, both structural as well as cyclical. The structural problems are deeper and more serious. This government believes that the problems are entirely cyclical and therefore they come up with what they consider solutions to the cyclical nature of the problems. As a result, the crisis has worsened.
Let me just tick off a few heads where the crisis has deepened - non-food credit, exports, NPAs, stalled projects, fiscal deficit, revenue collection, and expenditure constraints. In each of these heads, the crisis is deeper today than what it was three-four months ago. There is simply no improvement.
How many of these can be attributed to global factors and how many to domestic factors?
Exports can be attributed to global factors. (But) even in this scenario, there are countries with export surpluses. We are not even touching the level of exports we had in 2013/14 or 2017/18. Of the other indicators that are pointing southwards, you can attribute FDI to global factors to some extent, though it has been reasonably good this year. But apart from exports and FDI, I can't think of any other indicators that are affected by global factors. These are all caused by domestic factors and developments, and domestic policy failures.
What are these domestic policy failures?
The first is that they have not addressed the question of investment. The private sector in India is not willing to invest. There are several companies that are sitting on piles of cash but not willing to invest. Even public sector companies are sitting on piles of cash but are loath to invest unless pushed by the government.
They are not addressing the issues of demand; why is there such a demand constraint? Perhaps, closer studies will reveal the real reasons. Rural wages have fallen, rural incomes have fallen, prices of agricultural produce have fallen. So rural demand is principally lower than what it was. And that was revealed in the NSSO survey, which they suppressed. So, the only way you can reignite the economy is to address both investment by the Indian private sector and somehow push up demand in the economy, specially rural demand. They have done neither.
Does this government have any leeway in this Budget to boost consumption?
None. The new expenditure secretary has already limited the last quarter's expenditure to 25 per cent (of Budgeted Estimate) as against the traditional 33 per cent. They have no leeway now to spend anything more in the last quarter.
Technically, April 1 is the new (financial) year. You can have an entirely different set of priorities for expenditure, and an entirely different set of instruments to raise revenue. What those will be, I do not know. But technically, you're starting with a clean slate.
What according to you is the real growth rate of the economy?
The real growth of economy comparable to the pre-methodology change and base change regime is perhaps about 3-3.5 per cent. This is not my view alone. Former CEA Arvind Subramanian feels the same.
How can the government get us out of the situation given that three of the four engines of GDP growth - exports, private consumption and investment - have slowed down considerably? (Government consumption is relatively high.)
The government has four years and five months remaining. So, we can't think beyond that. It'd be naive to think that the government will change; it will not change. If this government is going to be there for another four years and five months, it better hire talent. It simply does not have the bench strength - within the government or the party - to handle the economy.
The government is saying that a lot of the problems are legacy issues, and that it is now in the correction mode, hence the slowdown?
These are lame excuses. The UPA can turn around and say we had legacy issues of (Atal Bihari) Vajpayee; Vajpayee can say he had legacy problems of (I.K.) Gujral and Deve Gowda. Where do you take this argument, back to Jawaharlal Nehru? They are in office for five and a half years. It's their business to set things right.
As far as lending (bank NPA crisis) is concerned, I asked a pointed question to (Arun) Jaitley (former finance minister) in Parliament. I said, please break up the NPAs into three categories. How many loans were given during Vajpayee's period, which were rolled over during the UPA period and have become NPA? How many were given initially in the UPA period, which have become NPA? And, how many were given in the Narendra Modi government, which have become NPA?
There's been no answer so far. He didn't give an answer in Parliament, nor has the government ever given this answer. I've raised this question in several fora. Break it up and let us see what the numbers are. The government doesn't put out the numbers, yet you believe all this is legacy.
Have we seen the worst of demonetisation, because even the government agrees that both demonetisation and GST had an impact on the economy?
The government has reluctantly and partially conceded. But even in the last session of Parliament, the finance minister declared on the floor of the house that demonetisation is a great thing. So I don't believe the government has had a change of heart.
I don't think we have seen the worst of demonetisation. The worst impact was unemployment. And that continues. Demonetisation, within just weeks and months cost jobs and then it shut down micro, small and medium enterprises. We have not recovered from that blow.
GST was flawed. On the day they passed the Bill, I pointed out in Parliament that this is wrong. Have one rate, and they flatly refused. Now they're coming around to the merits of one or two rates.
There is a proverb in Tamil that says, you do Surya Namaskar after you have lost your eyesight. Now they're trying to correct the flaws. But in the process of correction, they're committing more mistakes.
What are your views on the rift between states and the Centre on the issue of compensation?
States are bound to ask (questions). In the GST Council, the finance minister talks about consensus, but the Council is dominated by BJP chief ministers/finance ministers. So, whatever the central finance minister says is what it approves.
The then central finance minister persuaded nearly all state finance ministers to agree on a particular GST structure. The central finance minister cannot shift the blame to the States; the blame is squarely and entirely on their shoulders. If revenues are not forthcoming, how can the states be blamed? This is not because the GST is inherently wrong, which it is, it is also because the economy is doing badly.
What would be your suggestions to revive consumption cycle, and improve exports?
It's a wrong question to put to an Opposition MP because if I must answer the question, I must have full information. I must have all the information which is available to the finance minister. I don't have that information. In fact, whatever information is available is suspect. Because they themselves have now conceded that their data is suspect. They have appointed the Pronab Sen committee (Standing Committee on Statistics to be headed by the former Chief Statistician) to revise data and statistics, but unless I have full information about revenues, expenditure, current account deficit, fiscal deficit and borrowing, it's difficult to answer the question. We can give the theoretical options. Which is the desirable and practical option will depend upon full information on full data, which we do not have.
What according to you is the problem with India's economic data?
We never had a situation where our data was suspect in the eyes of most people. The current government has changed both the base year, which is normal, and the methodology. And I'm told they have changed some of the deflators they use for calculating GDP.
Unless we are told what the old deflators are, what the new deflators are, what the old methodology was and what the new methodology is, sitting outside the government, what can I say? All I can say is that a number of economists think our data is flawed. They have all the indicators, which are pointing southwards; how can GDP alone point northward?
We understand that from time to time adjustments and corrections have to be made in how data is gathered and statistics are reported because the underlying economy is undergoing changes. We understand that. If what you are doing is right, go ahead and do it. What we are pointing out is for comparability purposes. Why didn't you publish the data under both methodologies, old and new?
In a time series, you can see how the old data under the old methodology yields what results, and what results the data under the new methodology yields. We can then draw our own conclusions whether the changes and adjustments they have made are justified.
Why don't you publish data under 'old methodology' as well as under 'new methodology'? Do it at least for some years until the new methodology stabilises, and gains credibility.
Another number that people suspect now is the fiscal deficit.
During your time, people said you try to hide some bit of it. Even now, people are saying that fiscal deficit number is much more than 3.3 or 3.4 per cent. Economists say the government should be more transparent about this.
For many, many years, some off-Budget borrowings were there. Nobody is denying that. We corrected it and brought nearly all to the Budget. But I can see, there could have been one or two borrowings which were shown as off-Budget on the balance sheet of either the Food Corporation of India, or some oil company. I'm not denying that. We never denied that. We accepted it. Yes, there are borrowings that are outside the Budget, and economists and analysts factored that in when they decided the true fiscal deficit.
But as far as the reported fiscal deficit is concerned - the Budget Estimate and Revised Estimate of the fiscal deficit - the question is did we adhere to the glide path more faithfully or have the NDA adhered to the glide part more faithfully? They missed the target every year. This year also they will miss the target.
What is your realistic assessment of the likely fiscal deficit?
Keeping aside the off-Budget, they'll end up probably at 4 per cent. Now with a new expenditure Secretary (T. V. Somanathan), who is a bit stringent, they will probably end up with 3.7-3.8 per cent. But they will certainly cross 3.3 per cent, which is their Budget target.
What do you think of the current disinvestment policy?
If you have genuine disinvestment, we welcome it. But what is the use of asking one public sector to buy the government's shareholding in another public sector (company)? Not that no other government has done that before, I'm not saying that; but don't call it disinvestment. It will drain the resources of public sector companies, and drain the cash holdings of cash-rich companies. ONGC's resources have been drained; Indian Oil's resources have been drained.
What should be the industrial policy in India? Is manufacturing the way to go when it comes to exports?
No country has become an economic power without a strong manufacturing base. You cannot build an economy on Uber and WeWork. You need three dimensional factors which produce goods and equivalent, and which produces services.
We missed the first Industrial Revolution. We have tried to catch up in some areas like automobiles. We are a major manufacturer of automobiles today, especially two-wheelers, but we lost out of the electronics manufacturing. Now, I'm afraid, we are losing out on artificial intelligence, robotics...
This government is completely clueless about how to make India a manufacturing hub. My best experience has been bringing the automobile majors to India - 1992 onwards.
The government says that the spate of free trade agreements (FTAs), and the liberal reduction in tariffs even when not required, has resulted in India missing the bus in manufacturing of products, including electronics goods.
Wrong. All the Asian tigers, Germany and Japan benefited and became major centres of manufacturing by reducing tariffs. When you reduce tariff, you don't do it only for the final product. You're doing it for inputs, parts, accessories and technology also.
This government doesn't believe in reducing tariffs. In fact, it is increasing (tariffs). It is becoming protectionist. It doesn't believe in WTO either. It's more in the category of (Donald) Trump.
So, what should be our industrial policy focusing on?
First of all, in the past six years, both the DIPP (Department of Industrial Policy & Promotion) and the administrative ministries have become more like controllers. Sebi (Securities and Exchange Board of India) has gone back to the pre-1999 days. It's become a very stern control. The RBI has acquired more control.
No industrial policy can succeed if controls have come back. You must first believe in the market and start with light regulation. Allow the market to decide what will be manufactured, who will manufacture, where will it be manufactured and sold. Yes, there will be some mistakes, but I think a freer market makes fewer mistakes than the joint secretaries sitting in the government.
How will the Citizenship Amendment Act (CAA) protests impact the economy?
CAA has created greater uncertainty. No economy will flourish if there is uncertainty in people's mind. Firstly, investments would not happen. Tourism has already taken a hit; footfalls at the Taj Mahal have come down. This means jobs will not be created, at least, new jobs will not be created. Social conflict will rise. You and I would start looking at each other with mutual suspicion.
If social conflict and mutual suspicion rises, how will it benefit the economy? If these guys roll out the NPR (National Population Register), it will affect the economy quite badly. If these guys roll out the NPR across states - and states are resisting - there will be Constitutional crisis in some states. There will be law and order problem in many states, and there will be resistance from government servants.
If they roll out the NPR on April 1, against the wishes of 10-15 states and of a large section of the people, it will bring down the (economic) growth rate further.
Is there is a case for an income tax rate cut?
No, this is a wrong tax to cut. If you have to cut taxes, you should cut indirect taxes. Whenever there is a demand constraint, you cut indirect taxes.
If the government is thinking of increasing GST rates, they are wrong. In his presentation, former CEA Subramanian has said that if you want to cut taxes, cut the indirect taxes... and he is correct.