“Capital expenditure-led growth will create jobs, but over a longer period of time,” said former Union finance minister P Chidambaram, while stressing that enough money also must be provided to alleviate the distress of the people. In an interview with Surabhi, he shared his thoughts on the Union Budget 2023-24 and said the exemption-free new income tax regime may impact household savings. States are as sovereign as the Centre, he noted, and spoken against making transfers and borrowing limits, conditional.
What is your view of the assumption in the economic survey that the economy, having reached the pre-pandemic level, is now poised for growth at the potential rate? Do you think the government’s focus on its capex, fiscal consolidation and macroeconomic stability are enough for growth to pick up? Has a private investment cycle begun?
I welcome the government’s emphasis on fiscal consolidation and macroeconomic stability. That’s a necessary condition but not a sufficient condition. In order to drive growth, the traditional four engines of growth must be firing and running. Today, three engines are sputtering. Exports are down and if the world or the major advanced economies go into a recession, exports will further slow down. Private investment is sluggish and even the government admits that private sector is not coming forward to make large investments. Private consumption is good. India is a consumption-driven economy, 60% of our GDP is accounted for by consumption. But with inflation, unemployment, the effect of a global recession and a slowdown in global trade, and indirect taxes, our consumption also will decline. For example, two-wheeler sales have dropped dramatically, which means the middle class and the lower middle class are consuming less. The only engine that is within the control of the government is capital investment, which has been raised to an astronomical sum of Rs 10 trillion. It’s a bold bet and I hope they succeed. But I think it’s too ambitious a bet to take government capital expenditure from Rs 7.5 trillion in FY23 to Rs 10 trillion in FY24.
Has the economy’s productive capacity fallen? If yes, what should be strategy to address the issue?
There is no direct evidence for this but there is indirect evidence. If the government claims that gross fixed capital formation is at 27% or 28%, then on an incremental capital output ratio (ICOR) of four, the economy should easily achieve 7% growth. But the government seems to be hoping for 6% to 6.5% growth. If you match the two numbers, then obviously the ICOR is no longer four, it’s more than four. If the gross fixed capital formation is 30% and economic growth is at only 6%, the ICOR has become five, which means that the efficiency of the economy and the productivity of investments has declined. The government must pay attention to that and find out why ICOR is perhaps more than four.
What kind of reforms or steps are necessary to correct this?
I don’t make any suggestions to this government as it does not accept suggestions. Let them come up with their own ideas. then we will comment upon it. If they are good ideas, we will welcome it.
The government cites formalisation of the economy as a wholesome development and says this is boosting tax revenues. But the MSMEs and small businesses are apparently bearing the brunt of it. Do you think ‘formalisation’ is a desirable objective?
I have no objection to formalisation; it is a good development. But one can’t formalise an economy, which is largely informal, overnight. Formalisation requires laws and compliance with the laws. There are 14 million MSMEs in this country and the overwhelming majority are not subject to laws like the Industrial Disputes Act, the Payment of Wages Act, the Provident Fund Act or the ESI Act. And therefore, to expect them to formalise their businesses is, I think, a little ambitious.
Do you expect greater formalisation of the economy over a period of time?
It will happen over time provided the very tiny and very micro units acquire some size. In other countries, these units won’t even qualify as a micro enterprise. They must acquire some scale but they are unable to do so due to lack of capital. They are unable to get enough credit. Unless these units acquire scale, I think formalisation will be halting formalisation.
In your column, you quoted the Economic Survey statements on downside risks to the economy, slowing economic activity, strains in supply chains, dampening trade growth, slackening global demand etc and said that the Budget has omitted this context. What are the solutions you have for these problems other than what the government says it has?
We have no control over certain factors affecting the global economy. For example, we have no control over the slowdown of global trade, we have no control over the Ukraine war and we have little control over the oil prices. Some of these have to be endured. But given this atmosphere, the government must take active steps to increase domestic production and to increase the use of domestic goods. Why are we so dependent upon China even while China is sitting on our border areas and being aggressive? Our trade with China alone will have a trade deficit of over $100 billion this year. Cannot many of those things that we import from China be made in India? What happened to this government’s much-touted Make in India and Atmanirbhar? They have not paid attention to increasing the domestic production of goods and the goods which we mainly import from China. Therefore, today, we are faced with a situation where the trade deficit is growing, the current account deficit will grow, and even to keep our economy growing at about 6% or so, we’re entirely dependent upon imports.
You were among the several eminent people and economists who asked for much higher fiscal concessions and stimulus during the pandemic. The government chose to limit these and the succour was targeted at the most vulnerable, and focussed on capex. It now says this was proven to be the right call. The Budget FY24 also lacks a big consumption booster and speaks about a virtuous cycle of investment led growth. Your comments.
Capital expenditure-led growth will create jobs, but over a longer period of time. A government owes a duty to its people to be kind, compassionate and helpful when they are in distress. According to the Azim Premji University, several million people fell below the poverty line during the pandemic. This means they are still below the poverty line unless the economy picks up and jobs are created.
The demand for MGNREGA shows that not all people who migrated back to the villages have returned to the cities. Learning loss during the pandemic, the increase in anaemia among women, the increase in stunted children and wasted children in the National Family Health Survey — all these point to continued distress among a very large section of the people. I think the government’s first duty is to alleviate the distress of the poor people. This government is completely stone-hearted when it comes to the distress of the people. Why have we slipped in the Global Hunger Index? It is because there is hunger in this country. And if the government does not wish to recognise or acknowledge hunger, all I can say is that this government is stone-hearted. While capital expenditure-led growth is a strategy on which I wish them well, enough money must be provided to alleviate the distress of the people. But, today, what do we find? The allocation to MGNREGA has been cut and the food and fertiliser subsidies have been reduced in the Budget estimates for FY24. This means fertilizer prices and food prices will increase.
The Budget FY23 size is re-estimated to Rs 41.9 trillion from BE of Rs 39.5 trillion. There seems to be regulation of the non-tax transfers to states, under various central sector and centrally sponsored schemes. The total transfers to the states are flat even in absolute terms at Rs 17 trillion for both FY22 and FY23. This comes on top of the use of cess to bolster the Centre’s net tax receipts…
A part of the increase in expenditure is accounted for by inflation. In fact, adjusted for inflation, under many of the expenditure heads, the revised estimate will be, in real terms, less than the budget estimate.
Also, several riders are attached to fund transfers to states and their borrowing limits. Is this a sound strategy?
The transfers to states in 2022-23 is much lower than that in 2021-22. Riders are attached to the borrowing. The Budget has said states will be allowed to borrow up to 3.5% of their GSDP, of which 0.5% is attached to certain criteria. I am fundamentally opposed to the Centre trying to play boss over the states. The states are as sovereign as the Centre, transfers and borrowing limits must be, as far as possible, unconditional. If the Centre has the right to borrow, so does the state, except that our Constitution says the states require the prior permission of the central government to borrow. That’s fair enough. I am not in favour of conditional permission for borrowing.
Net financial savings of households fell to 4% in H1FY23 from 7.3% in FY22 and 12% in FY21. The Budget has no major incentives for savings. It is being feared by many that the thrust on exemption-free tax regime will be a disincentive for savers. Do you agree with the finance minister’s argument that people are the best judges of what to do with their money?
It’s all very nice to say that people can decide. Why has government over the last 75 years promoted small savings? The finance minister must also examine the origins of these tax exemptions. It is not the natural behaviour of humans to save, it is to spend. Therefore, over the last 75 years, wise people devised these provisions in order to motivate people to save. Now, overnight, has human behaviour changed just because the finance minister says the Budget has given the choice? The danger is household savings will be hit. Private investment is made up of two elements — household savings and corporate savings. If household savings are hit, total private capital formation will be hit as well as private capital formation will be hit. I read an interview by the finance minister saying people should spend. I think that is retrograde. If the finance minister has to give any advice to the people, they must be told to save and spend and strike a balance between saving and spending.
The railway and NHAI have been given more Budget funds to put a lid on their borrowings…
Of the Rs 10 trillion capital expenditure planned for FY24, the railways and the roads sectors will get Rs 2.4 trillion each. Whether they have the absorptive capacity to spend this amount in a year remains to be seen. Both are bound by government rules, which do not permit projects to be started from the drawing board to finish in 12 months. I’m very doubtful whether the Rs 10 trillion capital expenditure target can be met this year. In FY23, the government capital expenditure in the revised estimate is lower by about Rs 22,000 crore from the Rs 7.5 trillion in the budget estimate. So how does the government expect all the ministries to gear up to spend an additional Rs 2.5 trillion in FY24?
Has bringing all these outlays on the Budget increased Budgetary transparency?
Budget is as transparent as it ever was, or ever will be. I don’t think the government has hidden any number or kept anything away from the public. The only questions are how credible are the numbers and the projections.
Tax revenues appear to be robust in recent years, partly due to the more realistic budget estimates. What is your assessment of tax projections given that tax buoyancy has remained largely the same for a few years?
According to me, the revenue from the goods and services tax can be a lot more if the rates are rationalised. There is rampant evasion in GST. This is because the rates are high and the procedures are extremely difficult. Income tax and corporate tax are growing at an expected rate that is in line with the 6% to 6.5% growth in the economy. I don’t have a very different view on the tax projections.
You had commented on the ‘flawed implementation’ of GST. What are the structural changes required to make GST more beneficial to the economy?
There should be a single rate like what was envisaged by our government. In the transition, there could be an x-plus or x-minus rate but it should be made clear that we are moving towards a single rate. Second, it must be a low rate. Third, the government must set right the very disorderly manner in which they introduced the digital backbone for GST. Even now, if you go into the GST Act and the Forms that were contemplated, many of them have not been brought into force. They’re still having transitional and temporary Forms. Many traders have told me they cannot match the input tax credit return, which is supposed to be auto-populated, with the output tax liability that they have incurred.
That would imply a complete overhaul of the structure of GST?
I think the government implemented GST in a great hurry. We had told them to wait. I had asked Mr Arun Jaitley why it had to be introduced on July 1. Instead, it could be introduced on October 1, with a three-month time in between. I even suggested launching GST on an experimental basis in some jurisdictions in parallel with the existing system. I suggested that we should iron out all the wrinkles before its implementation across the country. But the government was in a great hurry and was fascinated with the idea of a midnight ceremony in Parliament. In which other country is the introduction of a tax regime heralded as a new dawn of freedom? We introduced VAT, did we have a midnight ceremony? If we introduced GST, we wouldn’t have had a midnight ceremony. This was self-glorification.
The government says that the unemployment rate has gone down. What are your thoughts?
They have the PLFS survey, but the only credible survey is by the CMIE. World over, other agencies and countries refer to the CMIE number as the most credible number of unemployment in India. What is the evidence that they have to contradict the CMIE? According to the CMIE, the all-India unemployment rate was 7.13% on February 5 and urban unemployment was 8.41%. Even the latest PLFS for the quarter ended September 2022 puts the unemployment rate at 7.2%. The unemployment rate is very high but it is understated because it hides underemployment. A lot of jobs are occupied by people where there are no jobs.
In many critical sectors of the economy including infra, energy and emerging areas like clean energy and semi-conductors, a few corporate houses seem to emerge as dominant players. This seems against the free market principles, as there is a perception that these houses enjoy undue patronage…
I can’t comment upon any particular sector or any particular corporate group. But industry and business circles tell me that there is less competition for opportunities, less competitive bidding, people are dissuaded from bidding and people are privately told to stay away from a certain bid. These are somewhere between a rumour and evidence. If these are even partially true, then we are not becoming an open competitive economy.