Rathin Roy, a member of the Prime Minister’s Economic Advisory Council, and Director, National Institute of Public Finance and Policy, says inflation targeting is not a technocratic exercise. Rather, it should be a political decision. Edited excerpts from a conversation with The Hindu:
The Congress party has promised Universal Basic Income (UBI) if they come to power? What are your views on such a scheme?
India is not a developed economy. So, when someone proposes a UBI in India, the first question I ask is why an UBI? The economy is at least growing at 6% and has grown at 8% in the past. Are we saying that an economy that grows at these rates is unable to secure the participation of the majority? And, therefore, the state needs to compensate them by giving them an income? If you are saying that, I do not mind, but then give up the pretense of inclusive growth. When growth is inclusive, an UBI is not necessary.
Is such a scheme fiscally prudent?
Sure. Then you have to spend less on other things such as health, education, irrigation etc. Then, it is fiscally prudent. Or, you increase the total size of the state, in which case, somebody, a firm, an household, will either spend less or save less.
There are consequences, but I can always make it fiscally affordable.
Do you think, all the subsidies should be abolished if such a scheme is implemented?
The purpose of subsidies is not to increase income. If we are abolishing subsidies, then we are saying subsidies such as credit to farmers, agriculture inputs and the like are no longer necessary. We provide mid-day meals to school kids, which is subsidised. Will you cut that? The objective of mid-day meal was not to increase income, it was to provide meals to children in school so that they attend school and also overcome problems such as hunger. We have to think very carefully about it [abolishing subsidy].
Coming to the implementation of GST, there are still many rates. Do you think that should come down?
Any economist will tell that the number of rates should be much fewer than what we have now. But you ask a politician, they have political compulsions. All I can tell the politicians is that, the more rates you have, the lower will be the compliance. The more complicated you make a tax, the more diverse you make it, the less of a single tax it becomes, the less efficient it becomes in terms of less administration and, therefore, compliance. It is a trade-off. Having said that, I see a consensus coming around that we are landing up with about three rates. So, I am confident that in the medium-term, we will come up with an effective GST regime with a limited number of rates.
There are concerns over slowing growth. Do you think the country needs a stimulus?
I think a growth rate of 6.5-7.5% [next fiscal] is possible, depending on circumstances that prevail both within the country and outside, which are, to some extent, exogenous such as performance of agriculture or global trade. A growth rate of 6.5-7.5% is eminently achievable, given our current institutional framework.
A higher growth rate than 7.5% is only an aspiration unless we make some fundamental reforms. What underlines low growth in India is low productivity. And, what underlies low productivity in India is poor institutions and weak governance. I see no impulse, whatsoever, for fundamental reforms. So, I have to accept that productivity will remain low, and in that circumstances do not overheat the economy by giving a stimulus and settle for 7.5%.
We have tricky situation so far as inflation is concerned. While the headline numbers are low, core inflation is high. Do you think that RBI needs to be cautious in cutting rates?
I do not think that the instruments at RBI’s disposal allow it to micro-manage inflation.
The inflation target is probably the broadest in the world. It is very difficult to think of a country where the inflation target spans 400 basis points. That being said, I am very happy with 5%, I am also happy with 4% and also with 3%. If you want to reconsider this entire framework, then the time to do it is now, because this particular inflation targeting regime ends in 2021. These are actually things which cannot be done at the last minute.
Careful advance planning and thinking about what kind of framework we want next time and what should the instrumentation ought to be, has to begin now. I don’t have the answer but we need to ask — is the CPI right target or we should be targeting core inflation? Should we have a relatively narrow band within which RBI targets inflation, but allows for higher inflation in that narrow band? What are the trade-offs involved in keeping inflation at or below 4%? Does the finance ministry or the government of India have a view on what the inflation target ought to be? Because setting the inflation target is not a technocratic exercise. But in India it has ended up being one. The inflation target is a political decision, and the ultimate owner of the setting of the inflation target has to be the government of the day.
