How do you assess the current status of the Indian economy? Also, how did you find the budget?
The present government inherited a very difficult legacy. When it assumed office, the economy was in doldrums. There were more thorns than roses. The domestic investment and savings were both down, which is a complex situation. The demand had gone down despite all freebies doled out by the UPA government. This was basically because of the lack of confidence in Indian economy. Leave the foreign investors, even Indian investors were not willing to invest in India. The consumer had decided to curb his consumption and save less which is quite a contradiction in itself. Resultantly, the Indian economy, which is basically a domestic demand driven economy, had started to falter. This is the situation that the present government inherited. The first impact of BJP’s coming to power and Narendra Modi’s becoming the Prime Minister was that the confidence came back. The unexpectedly strong mandate brought back the positive sentiment. However, this sentiment had to be backed with positive government policies.
Economically, Make in India has been the most powerful initiative of this government so far. But this initiative has to be supported by a number of steps. The government needs to work on them. The present government has been helped by some international factors. The crude prices, for example, came down by more than half over last one year, which helped the economy by bringing down the government’s subsidy bill by Rs. 25,000 crores. The return of confidence also ensured that gold imports came down, improving the current account profile. As for budget, the Finance Minister has stuck to the fiscal target given by Chidambaram and it appears he would achieve the target for 2014- 15. The improvement on the fiscal and current account deficits has also boosted confidence. Everyone was looking forward eagerly to this year’s budget, which clearly has a number of very good things that can and hopefully will change the face of the economy as we go along. There has been a great emphasis on infrastructure development in which lot of money is expect to go into.
The last point I would like to mention is the burden on banks which had amassed a large amount of NPA which in turn was the result of the slow growth during the UPA regime. The private sector was not in a position to invest. They did not have money and banks were not willing to finance their projects. The govt. had no money either and public investment could have stressed the fisc. The public sector, however, did have some investable money, about 2-2.5 lac crores. So, the emphasis had to be on the public sector investment which could trigger private sector investment. I am hopeful that moving forward, this strategy would lead to better growth.
What I am not impressed by, is the new, revised growth figures that the government has come out with. While the approach is right as this is how most countries calculate growth, but I have my doubts about the competence of our statistical organizations to capture the value added. As such, the figures of 6.9 per cent and 7.4 per cent are not supported by other indicators of the economy such as industrial and agricultural productions, saving and investment etc. So, that is something which would need to be looked into. But in totality, I feel it is a positive budget and should spur growth.
What is your opinion about the new NITI Aayog? Do you think states are going to benefit from the same, compared with the erstwhile Planning Commission?
Because of the report of the 14th Finance Commission, which recommended devolution of a larger pool of resources to the states, the government was forced to revisit its approach towards the centrally sponsored schemes(CSCs). Even in the last Finance Commission, which I had headed, we had recommended to restrict the number of CSCs to ten. It was suggested that the government should identify its flagship schemes and provide only for such schemes. For the rest, it was recommended that the central government should transfer the resources and schemes to states with the requisite authority to decide what they wanted to do with those schemes. The recommendation of the 14th Finance Commission basically forced the government’s hands and this has reflected in the new arrangement.
I would have wanted the NITI Aayog to retain the authority to allocate resources for the crucial centrally sponsored schemes which has not been given to it. Under the new arrangement (in which the power to allocate funds has gone to the Ministry of Finance), my feeling is that too much power has got concentrated in the Ministry of Finance. Earlier, the Planning Commission used to differ with the Ministry of Finance on many issues, but the new body has been made a completely independent assessor, leaving Ministry of Finance with no counterweight. So, while the government has accepted the recommendation of the 14th finance commission on the devolution of resources, the approach for rationalization of the CSCs is somewhat missing. The Ministry of Finance had ample time to critically look into the schemes and think about what the abolishing of the Planning Commission would mean, in terms of power to allot funds, running of schemes etc. They could and should have come out with a fundamentally altered approach than has been the case.
You mentioned about the make in India being an important initiative of this government. How to make it a successful program?
I have a different take on this. In an article for an economic newspaper a few days ago, I wrote that during the Vajpayee government, we had followed a policy of make India to ensure make in India follows. What does make India mean? It means constructing thousands of kilometres of highways and rural roads, building ports, implementing major irrigation projects, and undertaking rural and urban infrastructure projects; in all, developing overall infrastructure of the country. This would lead to things being made in India. for example, when we started the national highways program and the Pradham Mantri Gram Sadak Yojana, the heavy machinery which was required to build roads faster, was not made in India and has to be imported, for which we had provided custom waiver. However, as the highway project endured, these machines started to get built in India itself.
Second aspect is that manufacturing needs investments, markets and easier clearances, or else entrepreneurs won’t invest. We have to do a lot more to improve ease of doing business. Then there are labor laws which are considered as big source of impediment and as such need to be worked on. And while implementing reforms on all these fronts, the need is to work in the spirit of federal system. I would give you an example. When we introduced VAT, I had created the empowered group of state finance ministers which has endured. So we need to get states on board because ultimately, the factory or plant would be set up in some state. In this situation, questions like who provides the land, road and rail connectivity, power etc. becomes crucial. Since states are going to be doing all these, they must be involved in deciding how to ensure ease of business. As states provide infrastructure, which is essentially make India, the demand would be generated which would enable make in India.
There is a large number of projects stalled. How to get them moving again?
Well, the Economic Survey talks about projects worth some 9 Lac cores being stalled. Basically, the projects are stalled on account of three factors. First, the land was not provided; second, environmental and forest clearances were not given; and third, there was shortage of money. All these issues need to be addressed. The present and last government did clear projects, and because of this, the amount stuck in the stalled projects came down from about roughly 19 Lac crores to the current level. But the financing part is still problematic. I would give you an example. In my erstwhile constituency of Hazaribag, a national highway project got stalled because the contractor was found involved in coal scam and his contract was cancelled. However, the new contractor has not being able to procure fund for project. As such, the project got stalled because of lack of financial connectivity. There must be many such projects which are stalled because of any or all of the three factors I mentioned. It is the duty of the government to provide clearances and finance to ensure that these projects get off the ground.
Do you think UPA I & II squandered the opportunity to undertake big ticket reforms? Can things be sorted out in five years?
Well, you have to think big when you are planning for the economy. But in a decade of UPA rule, you cannot find a single big idea as far as economy is concerned. While they carried on with the big projects that we had initiated, they did not initiate anything really big of their own. They did not come up with any big program to say, build ten big steel plants or a certain number of cement factories or ports. So much so, the projects that we had started, also got stuck in tracks. This is the policy and governance paralysis that people have been talking about.
No, you cannot do all of that in five years. But you can surely start working on them. For example, you can start building roads at say 20 km per day. Surely everything cannot be completed in five years, and that’s why in this budget, the finance minister has said many things which would be completed only by the year 2022.
The issue of GST has been hanging for long
Well, we need to understand what all is involved in implementation. The makers of constitution had given certain financial powers to state governments.
Through the GST, some of those powers are going to be taken away. There will be one tax. While this will be collected by the state governments also, but their taxation powers will more or less cease to exist after the GST. And so will be the case with the taxation powers of the government of India. This is a huge departure from the practice that we have been following since 1950 when the constitution came into being.
There are many issues on which states have reservations. One big issue is compensation which the finance minister has taken care of by promising to compensate for three years. But compensation is only one part. Next major issue is that of procedures. First, the government of India will have to get a constitution amendment bill passed from both houses of parliament. Then this bill will go to states and at least 50 per cent of the states will have to pass it. Then it will come to the President after whose approval, it will become part of the constitution. After that, the parliament of India will have to enact laws for implementation of the GST, because you cannot do it only on the basis of constitutional amendment. The states will also have to pass laws in accordance with the new constitutional arrangement. After the laws are passed, the rules must be framed. Then the acts will have to be notified. This will complete the legislative part. Then comes the administrative part. Multiple departments at central and state levels would have to be merged. This all will have to be done to create one single body for GST.
Most importantly, a reliable GST IT platform would have to be ready, with the capability to scan through the trillions of transactions to verify the tax status of each transaction vis-àvis payment of taxes and inputs that can be claimed thereon. This is what had to be done when we introduced Cenvat. The Finance Minister has said he would implement GST from April 1, 2015. However, to complete the legislative part of the business and put the administrative machinery in place, both in states and at the centre, and start implementing it would be a very challenging task. I wish him luck.
Opposition says that the allocation for social schemes has come down in this budget. But govt. says that with extra money devolved to states, they would have to take responsibility of such schemes. But considering the variation in quality of state administrations, do you think this is a prudent thing to have been done?
The quality of state administrations has varied in past and would continue to vary in future too. That is the reason why I am of the view that the NITI Aayog should have retained the authority to disburse funds for those crucial schemes which the government of India would continue to run with full funding. Even Nitish Kumar, who is politically not with the government of India, has said that it is the responsibility of the government of India to deal with backwardness. So, there always are issues of equity which need to be dealt with in economic policy, and these issues can be dealt with only at national level because these are national problems. And when I am talking of equity, I am talking about backward and not-so-backward areas and populations, weaker sections etc. To ensure equity among regions and populations is the responsibility of the government of India and it can be dealt only with the national programs. As such, the government of India should have to run those schemes.
What is your take on the Govt’s agreement with RBI on inflation management? Don’t you think it would make RBI hawkish on inflation?
The RBI has always been hawkish. That’s why we saw interest rates go up 13 times during UPA II. Now, with the agreement, it is being institutionalized. Earlier, it depended on the governor who had internal consultation. But now, there will be a monetary policy committee, as is the practice in many countries, including the US, and the governor would have to consult with this committee on the issue of monetary policy, including inflation. I think it is a good development; it clearly puts the responsibility to curb inflation on the RBI.
What are your suggestions for the present administration to boost economic growth?
My suggestion is that they should not only carry on with the big projects that the previous Vajpayee government had initiated, they should embark upon
newer, bigger projects. For example, they could start the river linking work wherever it is environmentally feasible; it is one big idea that has been pending since the last NDA government. Second, they should ensure that the heavy industry in the country is strong enough to export finished goods compared to the raw material. The export of finished steel against the export of iron ore is a classic example. Mineral sector is a huge opportunity which needs to be looked into; the recent Mines and Minerals bill is a good initiative. Apart from these, I would suggest the government to provide all possible assistance to the MSME sector because they are employment intensive and create jobs in rural and backward areas. While talking about MSMEs, the area where there is immense scope is the food processing and agro based industries. So, we should encourage investment in these sectors.