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Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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Reformist Budget, Please

For Ms. Sitharaman, the key to unlock the economy’s hibernating animal spirits lies in deep structural reforms – implementing sustainable privatisation, cutting personal income tax rates, and modernising India’s antediluvian agriculture, land and labour laws.

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India is known for it migratory economists and authors. They fly into India every winter to escape the rigours of their adopted countries’ sub-zero temperatures in the United States and northern Europe.

Often they have books to sell. Less frequently, they have Nobel Prizes to display. And always, of course, they have economic advice to offer. With the 2020-21 Union Budget just weeks away, the advice have flown thick and fast on accommodative TV channels and in daily newspapers.

Here’s what former Chief Economic Advisor (CEA) Arvind Subramanian, who pops up in India more than most other seasonally migratory economists, advised Finance Minister Nirmala Sitharaman in an interview with The Indian Express on what should be in next month’s Budget and what shouldn’t: “Unfortunately, I have much stronger views on things that should not be in the Budget. First is budgetary accounting. This is a serious step. Second, I would say, don’t add to the stimulus, but don’t also have some dramatic fiscal consolidation which is not going to be realistic. So let’s get the accounting clean, let’s have realistic ambition on the targets, no individual income tax cuts – absolutely not. Also, I don’t think we should boost consumption in order to boost growth because no country grows in the long run based on consumption.”  (Euphasis mine.)

So Arvind Subramanian stands conventional wisdom in its head and says: “Don’t boost consumption.” Every other economist has said exactly the opposite: boost consumption because the lack of demand, urban and rural, is the principal cause of the economic slowdown. For Subramanian it clearly is not.

He’s not done yet. He goes on to say the following: “Now, the individual income-tax payers are the top 5 per cent of the population. If you really want to boost consumption, it’s the bottom 95 per cent that you have to look at. So if you want to boost consumption you should have something like UBI (Universal Basic Income), DBT (Direct Benefit Transfer), extend PM-KISAN. So, no raising GST rates. My view is that the GST revenue performance is not bad at all. What I do think we should do, not today, but when the economy recovers, maybe in six months or whatever, is we should have a bigger reassessment of GST and get back to something close to what I recommended in my report.” 

So after saying that boosting consumption is not a good idea, Subramanian contradicts himself almost immediately in the interview and offers a laundry list of things India should do to boost consumption: UBI, DBT, PM-KISAN and so on. These will put money in the hands of the poor. But cutting personal income-tax, Subramanian says, will benefit only the 5 per cent slice of Indians who pay taxes. He doesn’t add – as he should – that the direct tax that this 5 per cent slice pays is nearly Rs. 6 lakh crore a year, which is around 25 per cent of the Budget’s gross tax revenue. Cutting personal income-tax rates by an average of 10 per cent would put Rs. 60,000 crore in the hands of the middle-class and quickly spur just the demand Subramanian decries (and then ambidextrously backs).

Subramanian is not the only itinerant economist visiting our shores. The 2019 Nobel Prize-winning couple Abhijit Banerjee and Esther Duflo are back after their earlier whistlestop tour in October 2019 and have this to say on the forthcoming Budget: “I think you have to get the demand side going. For that, you need to get money in the hands of people who will spend it now.” 

So one economist (Subramanian) says demand doesn’t really matter, the other (Banerjee) says it matters very much. 

Common sense dictates that there are several things Finance Minister Sitharaman should do on February 1, 2020, when she presents her second Union Budget. First, rationalise personal income-tax rates. It is unconscionable that a company like Reliance Industries or Hindustan Unilever with taxable profits of several thousand crore rupees pays 22 per cent corporation tax (excluding exemptions) while a middle-class professional with an income of Rs. 15 lakh a year pays tax at 30 per cent plus cess and surcharge. A simplified, low-tax regime will improve compliance, reduce paperwork and increase overall tax revenue.  

The second key aspect of Ms. Sitharaman’s Budget speech must be to state the revenue and expenditure numbers clearly. The fiscal deficit has enough headroom to go up to 3.8 per cent of GDP – a slippage of 0.5 per cent translates into an extra spend of Rs. 1.20 lakh crore. Fiscal fundamentalism is not a good idea for a developing economy. India has lived with fiscal deficits of over 4.5 per cent in the past and recorded strong growth. 

The root cause of India’s economic slowdown is deflation sparked by several factors: one, demonetisation which derailed the informal cash economy; two, a hastily (and clumsily) implemented Goods and Services Tax (GST) that rattled MSMEs by forcing them into the tax universe which for decades they had avoided; three, high-interest rates by the Reserve Bank of India (RBI) under former governors Raghuram Rajan and Urjit Patel which impacted the profitability of the corporate sector and slowed private investment; and four, the whiplash of the phone banking malfeasance that proliferated in 2004-14, leading to unrecognised bank NPAs and the collapse of non-banking financial companies (NBFCs) like IL&FS, DHFL and others. That sucked liquidity out of the market, squeezing investment, production and demand.   

Together, these four events in 2016-19 created the perfect storm. Inflation plummeted and investments froze as the economy seized up, leading to the current downward spiral in GDP growth. 

For Ms. Sitharaman, the key to unlock the economy’s hibernating animal spirits lies in deep structural reforms – implementing sustainable privatisation, cutting personal income tax rates, and modernising India’s antediluvian agriculture, land and labour laws.

Let us leave Ms. Sitharaman with this nugget of advice from former CEA Subramanian: “I feel there are no real magic short-term bullets. I feel that the Budget should not aim to do too many surprising things.”

If she were wise, Ms. Sitharaman should do the exact opposite: do lots of good, surprising things in this Union Budget.