Fear factor, a cumbersome tax regime and tax laws criminalising defaults have depressed private investments, noted economist and former Planning Commission chief Montek Singh Ahluwalia said on Sunday
Mr. Ahluwalia, speaking to The Hindu ahead of the formal launch of his book Backstage, where he shares an insider’s account how economic policies were formulated in the past few decades, asserted that the current Budget did not do enough to change all the situation.
He, however, did maintain that India’s economy may have bottomed out and could now head towards a slow recovery.
Talking about the latest Union Budget’s approach to tackle the economic slowdown, Mr. Ahluwalia said, “For a cyclical revival you have to look at the demand side and I don’t think the actions taken so far will actually have the impact that is expected on the demand side”.
“Private investment is subdued because of a lack of animal spirits. Investors who have the capacity to invest are not able to get credit from the banks. Banks are not extending credit because they're very cautious. Some people have also talked of a fear factor depressing investment. Many people say that our tax laws have become so complex and cumbersome, and we are also criminalising certain aspects of tax avoidance, that people are discouraged from adopting a high profile and are trying to cover their tracks,” he added.
Asked about the recent debate around government data with regard to the economy , he said that “there is a widespread perception that the government was not adopting a transparent procedure” and such concerns needed to be addressed by the government.
Edited excerpts from an interview.
From a ‘Hindu rate of growth’ we are talking about a $5 trillion economy by 2024-25. Is it possible in this time frame?
In order to reach the $ 5 trillion target by 2024-25, the economy has to grow at something close to 9 % starting with 2019-20 . We are going to end the year 2019-20 with growth below 5%. The economy may have bottomed out and next year, growth will be somewhere between 5 and 6 per cent on optimistic assumptions. But with that pace of recovery, we will not get to $ 5 trillion in 2024-25. We must acknowledge that we are not growing at the kind of growth rate needed to reach that target. We will get to 5 trillion ultimately but not by 2024-25.
Finance Minister Nirmala Sitharaman recently said that there are green shoots and that the economy is not really in trouble. You too have said the economy may have bottomed out.
Bottoming out just means that next year will be better than 4.5%. You could claim to have bottomed out if growth next year is above 5%. But it would be wrong on th at basis to say the economy is not in trouble. What people are now looking for, is a quick and strong recovery. What we are likely to get is a rather slow recovery . And there is no evidence of an early return to 8% plus which is what we need.
Read : Union Budget — full speech
Many experts have said the focus of the government has been wrong. Instead of pushing consumption, focus has been on the supply side.
For a cyclical revival you have to look at the demand side and I don’t think the actions taken so far will actually have the impact that is expected on the demand side. I think the key areas on the demand side are reviving investment and reviving exports .
I don't believe that the steps taken are going to succeed in reviving private investment. Private investment is subdued because of a lack of animal spirits. Investors who have the capacity to invest are not able to get credit from the banks. Banks are not extending credit because they're very cautious.
Some people have also talked of a fear factor depressing investment .
Many people say that our tax laws have become so complex and cumbersome, and we are also criminalizing certain aspects of tax avoidance, that people are discouraged from adopting a high profile and are trying to cover their tracks. I don't think there's anything in the budget that changes all this.
These days there is a lot of questioning about the reliability of our data. What's your view on this?
It is worrying that there is a widespread perception that we are not adopting totally transparent methods of producing and clearing data. We did change the method of calculating Gross Domestic Product [GDP] and the way it's calculated, the negative impact of Demonetization on the informal sector was not reflected in GDP growth. There have been other instances when Survey data have been held up and trashed.
In your book you mention about President Venkataraman not being happy when the rupee being devalued in 1991. But there is a view that Indian rupee is still overvalued and has been kept artificially high.
I am sympathetic to that view. If industry says they are not competitive, that only means they are not competitive at the existing exchange rate. The government has responded by raising import duties. This in my view is the wrong response If we had achieved a weaker exchange rate, we would not have to impose import duties. When you impose a 10% import duty, it makes imports 10% costlier. But if you depreciate the exchange rate, it has the same effect but it exports get a push. Import duties on the other hand actually harm exports. We would be well advised to go back to the trend of gradually reducing duties which successive governments followed, including the Vajpayee government.
You have seen several Prime Ministers from close quarters. Who do you think was the most decisive and a quick decision maker?
That's very difficult because each Prime Minister operated in a different political and economic context.
Indira Gandhi's decision to go in for imported wheat seeds was a highly controversial decision at the time but we wouldn't have had the Green Revolution now.
I worked directly in the office of Prime Minister Rajiv Gandhi and he was the first to signal the need for getting ready for the 21st century. He said in Parliamemnt that we cannot expect to be competing with other countries if we are working with systems that are 20 years out of date.
Under Prime minister Narasimha Rao government, very dramatic changes were made. He gets full marks for backing his Finance Minister [Dr Manmohan Singh] who orchestrated a broad ranging reform program. Prime Minister Vajpayee [A B Vajpayee] continued the reforms and also brought in privatisation.
In the case of the UPA 1 the coalition by itself didn't have a majority and had to depend on the Left for outside support. And course, Dr Singh was not the political head of the Congress. Nevertheless, working within those constraints, in the first seven years of the UPA, we saw a growth rate of 8.4%, which had never been seen earlier. The Indo US Nuclear deal was a very bold decision by Prime Minister Manmohan Singh taken in the face of a lot of opposition.
If you were to advise this government on key issues, what would you tell them to do?
In my book I have outlined a number of ideas which I think should be on the future agenda. The bottom line is that the government should outline a credible action plan to get the economy back to 8% growth as quickly as possible. Reviving private investment and rejuvenating public sector banks is critical. We also need to bring about much needed reform in GST. In all this, we need the widest possible consultation, listening to expert opinion outside the government. But to do this we need to be realistic. If we feel we are on track to hit the $5 trillion target, nothing more needs to be done. The trouble is we are not. The problems are very clear. We have to get the GDP growth up to 8% as quickly as possible. Unless we do this we will not be able to generate the jobs we need. We also need to improve our export performance which has actually deteriorated. The government should outline a credible programme to achieve these objectives and subject it to comment and criticism to take on board as wide a range of technical expert opinion as possible.
