NEW DELHI—To help India tide over the economic slowdown, the Narendra Modi government needs to do five things, says economist and entrepreneur Laveesh Bhandari: present an honest budget which reveals the full extent of the fiscal deficit; ensure that government departments make payments they owe to other private and government entities on time; do away with the notion that the rupee’s exchange rate needs to be stable; discontinue import duties to protect domestic industry; and avoid indulging in a spending spree.
The empirical economist, who was among the economists and businessmen invited by the NITI Aayog recently to attend a meeting presided over by Modi for discussing the economic slowdown, told HuffPost India in an interview, “I think the first thing which is really critical is to recognise that the government budgets are extremely dishonest as of now. It has gotten so bad that even parts of the government may not be knowing what is really happening.”
Linking the problem of “dishonest” government budgets and pending payments from government departments, Bhandari explained that knowing the full extent of the fiscal deficit will help it make more informed decisions about the impact of both reducing public expenditure and ramping up public investments, both of which have a bearing on whether the government clears its pending bills as well as the ongoing economic slowdown.
He emphasised that state governments as well as public sector units also need to come out with honest budgets which give a more accurate picture of public finances.
These remarks come at a time when popular expectations from the forthcoming union budget, which will be the first full budget of the Modi-led government’s second term in office, are sky-high thanks to the worsening economic slowdown. The economist clarified that most of these measures are not for the short term but will be beneficial for the medium and long term.
Bhandari, who runs the Indicus Foundation, also added that one of the reasons why the private sector was not investing in new projects was because the Modi government “is not being seen as industry-friendly” due to the increased number of scrutinies initiated by the Income Tax department, among other reasons. There is a “fairly unfriendly investment climate” and the Modi government needs to change that, he said.
India’s rank in the World Bank’s Ease of Doing Business, which improved due to certain decisions of the government, did not do much to improve the investment climate as other measures to counteract them were also taken by the same Modi government, Bhandari said.
To tame the frequent seasonal high inflation in prices of non-grain foods like onion, the Modi government needs to start looking at the “hoarding” problem as a storage problem and set up or facilitate the setting up of enough localised, transparent warehouses to prevent periodic fluctuations in onion prices, he argued.
About the meeting with Modi, other ministers in his cabinet and top officials of the NITI Aayog last week, Bhandari said it had nothing to do with the forthcoming budget and was more of a “stock-taking exercise” to get an idea about “what people are thinking”.
Edited excerpts from an interview:
We are speaking on a day when the newspapers are filled with worrying news about the economy. Inflation is the biggest worry now. It has breached the five-year record at 7.35%. So, as an economist, how do you look at these numbers?
There are two problems that are very, very immediate. Then there are the longer term ones. So the two ones are obviously always growth and inflation; that’s something that any government which looks at its macroeconomy has to look at.
Now, the inflation problem that we are right now seeing is food inflation. It is a temporary thing. It sometimes happens. Some adverse weather conditions here or there etc and the whole thing goes... now why should a small weather fluctuation impact is one issue and what can the government do so these small seasonal impacts don’t affect adversely? That’s one aspect of it but it is a temporary one.
There is a longer issue of the growth slowdown. But unfortunately when these two happen together, then one has to be a bit more careful. Because when there is a growth slowdown and there is an inflationary condition, and the inflationary condition continues for a long time, then the government will have to squeeze on the economy, which can further have an adverse impact on growth. So that is the overall issue that the government is grappling with. Now what should be done about it?
Just to interject before you speak about the solutions, so are you talking of, because people are using this word a bit hesitatingly but it’s still part of the discourse, stagflation?
Right now it’s not a stagflation. There is nothing of that sort right now. Any economy that goes through a growth slowdown always has to be careful about stagflation. And so should India be. But there is no fear of that happening right now.
“The best solution is one which is not knee-jerk, which is not reactive, which looks at the longer term problem.”
Coming to the solutions bit. What can be done to address this situation?
The best solution is one which is not knee-jerk, which is not reactive, which looks at the longer term problem. What is happening in India is that, for a strange set of reasons, our food, especially non-grain foods, are not really stored. So they come into the market and then they get sold. When they are stored, the government historically has been fearful that they will be hoarded. Like in the case of onions.
So the government really does not like people holding these kinds of stocks, which are equated with hoarding. Because the government goes after the people who keep these stocks, if they are not going to retain stocks, so then small production fluctuations translate into big price fluctuations. If people were keeping these, then you would not have such large fluctuations.
So essentially what the government needs to do is that, whether at the co-operative level, whether at the level of the state or industry or the trader, we need to have warehousing, which is spread across the country, which is storing some of these... that’s one.
Second, there are some foods which always get into everyone’s mind. Onion being the classic one. Every few years you have this one thing and then everyone bothers about it. After a few weeks, when the next crop comes in, then obviously it dies out.
So, you think it is a seasonal thing with onions as well?
Yeah. Right now onions are not a serious problem. It’s the others...in fact, garlic is now shooting up.
But these two till December remained of serious concern.
Garlic wasn’t, onion was. Now it is garlic moving up, onion is not the problem now. Because the new crop is coming. You see, what happens is with onions we have to know, there are two large consumers for onions—one are households and other are these eateries which are there all over. Now the eatery will always buy onion because its food is very intimately linked with that of the onion. Whatever the price, the eatery cannot serve the food without it. So the demand is absolutely inelastic. Households can switch. They can consume less etc. But the eateries can’t. So all that you need to do is have some sort of a storage mechanism for onions which is able to handle this or, if that is not possible, have dried onion powder which can be used in cooking.
These are the kind of solutions which the government needs to think about and do whatever is required to enable them. But, having said that, the one thing that is really critical is having warehousing.
That will address this problem in a big way.
This warehousing issue has been part of conversations and it became a big talking point during the debate about FDI in retail. Though, of course, the context is slightly different. But it was seen as one big solution for the warehousing problem for agri-commodities.
I don’t see why foreign retail should be seen as a solution for the warehousing problem. Because at whatever level they come in, it will be at one or two or three percent of the total food...we have a much larger need for it. Essentially it’s the small trader who is, at least right now, distributor of a bulk of foods who needs to be able to store these things.
So, policy wise, how can the state intervene to facilitate something like this for the small and medium trader to do it?
So, and that is the really important thing, you should allow the trader to hold food stocks.
That’s a controversial opinion.
It is the only way you can handle it. You can, you need to make it transparent. Now the trader need not own the warehouse; there can be a warehousing company. There can be many warehousing companies. All that they need to do is keep on reporting what is the different kinds of food in their warehouses. It is a storing problem, let’s not equate it to a hoarding problem. If storing is said as hoarding, then we can’t solve the problem. Let’s convert the hoarding problem into a storing problem and solve the storing problem.
But there are vested interests which benefit from these price fluctuations as well, right?
There are vested interests in any economy on everything. But still change does happen.
“...the government is not seen as investment friendly right now. And a lot of it has happened because of the kind of decisions that the government has taken.”
So that’s one part of the conversation but previously you were also talking about the larger problem of economic slowdown. This is, of course, about the immediate problem of inflation. But you said there is a two-fold problem of inflation and economic slowdown.
Yeah. So, in slowdown, I think the first thing which is really critical is to recognise that the government budgets are extremely dishonest as of now. It has gotten so bad that even parts of the government may not be knowing what is really happening.
Which is dangerous, right?
Obviously, it is not good. So if a company reports debt or delays its payments etc. we really go after it but not with the government. So, I think, first of all, we need to have an honest budget. And this needs to be a standard practice not only in the central government but also the state governments, the public sector companies and so on. The second thing which is very, very critical is all payments—whether it is to a private company or to an individual or to another government department or to a government department or government employee—should be made in a timely manner.
They go together, actually. So if you have a delayed payment, report it as a delayed payment, don’t report it as payment not happening. Or an expenditure that did not happen. So there is this really, really critical part of it that you have to do. This may not have an immediate impact but this will enable you to do things which will have an immediate impact.
Once we realise that there is such a major government deficit which is much more than what we thought; so then you realise that when we are talking about, “Ok, government should ramp up investments” or “government should reduce expenditures to make its deficit lean”, then you will realise that the government, if it reduces its expenditures, what will they do? They will only delay the payments.
It will have a cascading effect on the economy.
It will have. So now, when they will delay the payment to me, they will make me do the work, but delay my payment, I will go bankrupt, I will go into the courts so a very productive entity may actually be completely annihilated simply because the government is not being honest with its numbers and delaying payments. These are very important things. But all of these things will take some time to play out. They don’t happen immediately.
One thing that can happen a bit faster is (doing away with) this whole notion that the exchange rate needs to be stable. If Indian economy is doing badly compared to the other countries and if you can’t export, then it is but natural for the exchange rates to go down; for the rupee to be at a lower price. There is no problem of national pride or anything on the exchange rate. It’s just a price. So that’s something that the government will need to do.
But it’s seen as politically sensitive.
Then you see whether politically sensitive or economically sensitive—we have to decide on what we have to do. If politically sensitive, then we pay in terms of a bad economy. On the exchange rate front, we will have to do that.
There has to be a very, very clear agenda, apart from the exchange rate, that we cannot be putting import duties to save Indian industry. The more the import duties we put in, the more actually we hurt Indian industry. So there is the whole protection argument which, for 30-40 years, we have known of; and we have benefitted from doing away that argument. But now we are again going back into that protection argument. In terms of imposing more and more duties on some imports and so on.
Is there a particular sector you have in mind when you mention this?
I mean every sector. Whether it is automobiles or engineering or just about any products.
Because when conversation surrounding the Regional Comprehensive Economic Partnership (RCEP) was going on, people said major parts of employment generating industries will be annihilated etc.
I am not talking about the RCEP right now. That’s a separate issue. And that also, I believe, could have been handled with a 10 years timeframe to transition. You can do those things rather than a complete blank no. I am sure they will actually, eventually do that. I don’t think we will want to be out of the RCEP.
So having said that, the first one, as I said before, was the budget and payments, second one is the exchange rate and the exports including the need to do away with import duties. Third thing, which is very important, is that a whole lot of projects are locked up in courts and there is a certain fear of the government in many different ways. Fear of the government that, if you go against the government and something happens, then the tax people will send you a scrutiny notice or for that matter, if something doesn’t work with the government, bureaucrats will take you to court.
“A large number of projects are held up or big foreign investors who were considering India, have not considered India because of a fairly unfriendly climate where you are not appreciating what the businessmen require...”
A large number of projects are held up or big foreign investors who were considering India, have not considered India because of a fairly unfriendly climate where you are not appreciating what the businessmen require...if we are able to get a few large projects very rapidly, that does set some sort of positive expectations that, of course, the government is doing the right thing. So this is the third one which is on the projects.
The fourth one is that, whatever you do, don’t start spending left, right and centre at this point in time. Because we will get out of it right now but two years down the line, it will create a bigger mess. So right now we have to clean up our act. And that’s what the central government needs to do. It needs to, of course, clean up the income tax problems, the Goods and Services tax issues and the various non-payment issues and so on, but it should not go ahead and start to just dump the economy with spending spree because that would be the inflation that I would be scared of, not this inflation.
That’s an interesting point you raised. Because many economists have basically argued that this a demand-side slowdown and money should be given directly in people’s hands. But your assessment is not that. Addressing it from that side would be a problem, you feel.
I am saying you address the short-term problem, you will create a bigger mess in the long run. And this is not the time to look at it from the short term, the government still has four years. This is the right time to address the medium term if not the long term, and not go short term.
You were a part of the meeting presided over by PM Modi and the NITI Aayog chief, among others. What was your sense about it?
See, when the meeting happens not even a month before the budget, then obviously it’s more of a stock-taking exercise. Because you can’t do major changes to the budget at that point in time. So, it is very clear to me that the meeting was more that the prime minister wanting to meet with people to get the idea of what was happening than to have an impact on the budget. Because that kind of a meeting should have happened in October. So I am fine with that. It is good that the PM is meeting all kinds of people. And there were not just economists, there were people from the industry, and there were different kinds of voices.
So it was more an optics-driven thing; sending a message.
I don’t call it optics. It may be optics; I don’t know. But definitely the PM was listening. And if it was purely optics, you did not need to have so many ministers there, so many secretaries etc. But even if it was optics, I don’t know if it was, I don’t think it was meant so much for the budget as to get an idea about what the people are thinking.
“The industry is fearful that even legitimate concerns are seen from a lens of... that the industry is out to exploit. Or is out to do things which are against the ethical or moral standards etc. So that is definitely a fear, which is there.”
There is another concern about the economy, especially the organised sector which has been much discussed. It pertains to companies not investing in new projects. So it is a two-part question. One, what do you make of the impact of several measures which have been announced by the government since October, starting with the corporate tax reforms and others, and second, what exactly is preventing big companies from investing in newer capacities?
Right now, at least in the basic industries, there are excess capacities already built up. So that’s one issue. There is a second issue which is related to the expectation that demand is not going to grow in the coming few months and so on. It will take a longer term.
Once you have demand growth happening rapidly, automatically companies start to look at investments. Third, I think, is the fact that the government is not being seen as industry friendly. And I would think that this is something the government needs to take very seriously. Increasingly, the kind of things—whether it is scrutinies or taking companies to court or the kind of judicial judgements that are coming out etc. So it seems to be a fairly unfriendly investment climate that’s happening and that’s something the government needs to change.
It’s not by design but I think it has happened that the government is not seen as investment friendly right now. And a lot of it has happened because of the kind of decisions that the government has taken.
The first part of my question was about the measures taken by the government. They have implemented the corporate tax reforms, met bankers and told them to give new loans etc.
This is happening in the last two-three months, right?. These things will take a year...you see, you can tell bankers. By telling if things improved, then fine. The problem is the banker has a problem. They have loaned to a real estate sector which is itself stuck. So now, just by giving moral arguments, you can’t change things so easily. You have to get going.You have to get the real estate sector out of its mess then obviously the banks will then follow with that. So these are long chains.
Much of the criticism about the World Bank’s Ease of Doing Business rankings spoke about the possibility that they might be gamed. You even wrote a column about it. Do you believe that the specific policy changes implemented in line with the requirements of the index in any way helped investment grow?
I am sure it would have helped but I am also sure that some of the other things which are not captured by the index may have harmed. I can tell you that the number of income tax scrutinies, no one is coming out with those numbers, I am sure the number of scrutinies being asked would have risen dramatically. At the same time, there has been a thing that you need not visit the office and it can only happen electronically. Which is a great thing. There are some things which the government has done, which one cannot and should not take away from, but at the same time there are some things that counteract it.
So what Dr Manmohan Singh said in an important speech recently about fear being one of the factors for the slowdown. Do you agree with it?
You need to define that better. What do you mean by fear? If fear means that the society is fearful and that would have an impact on the economy, then it may mean something and if he meant the industry is fearful, then it may mean something else. But why is that the case and the industry is fearful of what?
That’s really important to understand. The industry is fearful that even legitimate concerns are seen from a lens of... that the industry is out to exploit. Or is out to do things which are against the ethical or moral standards etc. So that is definitely a fear, which is there.