The upcoming Budget should focus on creating jobs and bridging the widened inequality in the economy besides accelerating growth, former RBI Governor D Subbarao said on Thursday while observing that given the continuing need to raise spending on education, health and infrastructure, there is not much leeway for tax cuts.
Subbarao also opined that experience shows export promotion behind protectionist walls is seldom competitive, so there is a case for reducing the tariffs.
“Accelerating growth is the objective of every Budget as it should be of this one. But this Budget should pay special attention to bridging the widened inequality in the economy,” he told PTI in an interview.
While noting that the COVID-19 pandemic has caused enormous distress to the low-income segments who operate in the informal economy, Subbarao said the upper income segments have not only been able to protect their incomes but have in fact been able to grow their savings and wealth.
Citing the latest World Inequality Report which had said that India is among the most unequal countries in the world, he said, “Such wide inequality is not only morally wrong and politically corrosive, but it will also dent our long-term growth prospects.” Finance Minister Nirmala Sitharaman is scheduled to present the Union Budget 2022-23 in Parliament on February 1. “We need job intensive growth. If there is a theme for this Budget, it should be jobs,” he said.
The former RBI Governor pointed out that jobs have been lost because of the growth slowdown and also because of the shift in activity from the labour-intensive informal sector to the capital-intensive formal sector.
“Growth is necessary to generate jobs, but not sufficient,” he said, adding that there is a need for stronger emphasis on improving the ease of doing business through governance reforms so that investment becomes a promising option for both domestic and foreign investors.
Subbarao pointed out that raising the level of exports is good not just for balance of payments reasons but also from a jobs perspective because export production is labour intensive. “Experience shows that export production behind protectionist walls is seldom competitive. There is a case therefore for rolling down the tariffs,” he said.
Asked if there is any scope for reduction in taxes in the upcoming Budget as that will provide some relief to the poor, Subbarao said as per media reports, this year’s tax collections will be better than the budgeted target which, he said, will be largely offset by lower privatization proceeds and higher expenditure on food and fertilizer subsidies.
“So, the net positive impact on the fiscal deficit is likely to be marginal,” he said.
Also, Subbarao noted that the tax buoyancy the country saw this year will dissipate next year as the informal sector revives.
“Besides, given the continuing need to raise spending on education, health and infrastructure, I don’t believe there is much leeway for tax cuts,” he argued.
Asked whether the government should continue with stimulus measures in order to stimulate growth, Subbarao said in the last Budget, the finance minister committed to a fiscal consolidation path of reducing the fiscal deficit to 4.5 per cent of GDP by 2025/26. “I believe it’s important to operate within that space. Any deviation from the fiscal consolidation path will impair credibility, dent investor sentiment and hurt our growth prospects.” he said. Asked how big a concern is inflation, Subbarao said inflation has remained in the upper reaches of the RBI’s target band for much of the last two years. Going forward, he said there will be pressure on inflation because of an unfavourable base effect, rising commodity prices and output price hikes by firms.
“Controlling inflation can go a long way to redress the distress of the poor,” Subbarao observed.
On the risk of stagflation, Subbarao said he thinks that’s being too alarmist. “Yes, inflation has been persistent over the last two years but note that it is still within the RBI’s target band. RBI should be able to bring it down to the mid-point of the target band by normalizing the policy.” Stagflation is defined as a situation with persistent high inflation combined with low growth. Retail inflation in India rose to 5.59 per cent in December 2021, while the wholesale price-based inflation eased to 13.56 per cent last month.
On economic growth, he said if Omicron remains mild, mobility restrictions are likely to be targeted and decentralized.
“In the base case scenario therefore, we should achieve 9.2 per cent growth for the full year. If in fact these assumptions about Omicron do not hold, there will be a downside risk to the 9.2 per cent growth estimate,” Subbarao said.
The country’s GDP is expected to grow 9.2 per cent in the current financial year that ends on March 31. The economy, which was significantly hit by the pandemic, had contracted 7.3 per cent in the last fiscal year.
Regarding the rise in the interest rate (taper tantrum) in the US, Subbarao said there is of course need for caution but no need for anxiety.
Taper tantrum phenomenon refers to the situation in 2013 when emerging markets witnessed capital outflows and spike in inflation after the US Federal Reserve started to put brakes on its quantitative easing programme.