Path to recovery

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<pre><pre>Who is (not) a citizen?

Question: Do you agree that the most pressing economic priority for the government is to find ways to fuel demand? If so, what can it do to achieve this result? Or what should be the government's top priority flowing into this budget?

Dharmakirti Joshi

Yes. With a sharp slowdown in private consumption and investment, domestic demand is currently the biggest victim. Coordinated pro-cyclical monetary and fiscal policy is the order of the day. The Reserve Bank of India (RBI) has repeatedly lowered the key interest rate and this has had a certain impact on lending rates. However, credit growth remains weak due to risk aversion and weak sentiment. So now the ball is in the government's court to create fiscal leeway and boost demand.

Duvvuri Subbarao

No. The government's most pressing economic priority is not to fuel demand, but to revive investment. We are in the middle of a structural slowdown. Treating it like a cyclical downturn and hoping that we can do it through a demand stimulus will be poorly thought out and ill advised. What the economy needs is not an incentive for demand, but a reaction on the supply side. The government's primary role should be to strengthen investor confidence by addressing the double balance sheet issue and initiating structural and governance reforms. This is a long-distance effort, but, as Mao once said, even a 1,000-mile journey must start with the first step.

Samiran Chakraborty

Counter-cyclical fiscal policy is the order of the day as the economy goes through a phase of structural and cyclical headwinds on the demand side. While fiscal prudence is an integral part of macroeconomic stability in normal times, strict compliance with fiscal targets could become another obstacle to growth if the economy is severely constrained. So it makes sense to consider the possibility of deviating from the objectives of the Fiscal Responsibility and Budget Management (FRBM) Act to reduce the budget deficit, but the incentive must be "targeted" and "temporary".

Tajamul Haque

Yes. The main reason for the current economic slowdown is the slowdown / decrease in the growth of effective demand in the economy. It would therefore be vital for economic recovery to find ways to increase demand. Effective and efficient public spending in critical areas can help revive the demand cycle. The main aim is to increase the income of rural and non-rural households in rural areas. This is possible through the effective implementation of minimum support prices, MNREGA and at least doubling the amount of income transfer by PM Kisan from 6,000 rupees per year to 12,000 rupees per year. This can work if unproductive subsidies are eliminated. The low hanging fruit is the fertilizer subsidy. This should be transferred directly to farmers across the country. In addition, an increase in the income tax exemption limit and a lower tax rate increase the disposable income of taxpayers in the middle and upper middle class and boost demand.

Rathin Roy

Absolutely. There is no doubt that we have a demand problem, and this problem is caused not only by a lack of income, but also because India is an expensive place to manufacture and produce. One reason why we cannot compete with Bangladesh is that we cannot locate medium and high quality textile factories with moderate prices in those countries where labor is relatively cheap. Tiruppur and Gujarat are high-wage regions for the production of shirts worth 400 rupees. Why can't we localize the industries in Bihar, Jharkhand or Varanasi? So if you boost your investments in the North and East Indies, you will benefit from India's greatest capital – a rich pool of labor at reasonable prices. I would call that competence and industrial policy. This is complex policy making and requires political investment. So you have to produce things that Indians can afford with minimum wages. Slowing down is supply side constraints and demand side constraints.

Vinayak Chatterjee

Yes, I think the government needs to push demand. This can be done with a two-pronged plan: a) to put money directly into the hands of people living in rural areas and at the foot of the pyramid, and b) to create an ecosystem to revive the investment cycle. There is no better way than to invest in infrastructure. It not only has the best multiplier effect in job creation, but also in goods and services. This includes cement, equipment, steel et al. The demand can be generated by pushing these two engines.

Q. Can the government spend more to boost consumption? What should the government focus its spending on to drive growth?

Dharmakirti Joshi

What is needed now is a targeted and temporary fiscal stimulus. This would complement government measures on the supply side (e.g. corporate tax cuts). How can this be done given the limited control room? By putting money in the hands of low-income / high-consumption people. In particular in three areas:

  • More effective income transfers to farmers (spending remains in PM Kisan)
  • Emphasis on construction (e.g. roads, housing, irrigation and rural infrastructure)
  • Increase your spending on MNREGA as a short-term safety net

The latter two will serve the dual purpose of creating jobs for unskilled and semi-skilled workers that contribute directly to meeting consumption needs.

Duvvuri Subbarao

The government should no longer spend, let alone spend, to boost consumption. It can be assumed that the economy will slow down somewhat. H. Capacity utilization is below 100 percent, suggesting that an increase in consumption will help raise production to its potential level. However, no special effort is required for this. As the recovery continues, the output automatically increases to its potential. The challenge is to increase the potential growth rate, which requires a response on the supply side through higher private investment. Given the budgetary situation, additional government spending is more likely to be displaced than private investment.

Samiran Chakraborty

Tax incentives can take the form of tax cuts or increases in spending. It is usually more difficult to reverse tax cuts and therefore they do not qualify as a temporary incentive. With nearly 70 percent of spending tied up in advance (interest payments, wages, and subsidies), there isn't much flexibility in redistributing spending. Nevertheless, the growth in infrastructure spending should increase to around 15 percent of the average in FY17 / 19. A revival in social housing and tourism could boost demand by creating more jobs. Even an increased allocation of income transfer funds to the bottom of the pyramid could have a greater impact on consumption.

Tajamul Haque

Yes. The government has to spend more to boost consumption. The government should spend more on PM Kisan, MNREGA, water catchment areas and social security systems in rural and urban areas.

Rathin Roy

The budget alone cannot inspire demand. Our loans make up 4.3 percent of GDP. The way forward is to enable states to run a higher budget deficit. We are also not a command and control industry. We have to accept that this recession is structural. We need structural measures to consistently achieve growth rates of up to 7 percent. Short-term measures can keep the growth rate above 5 percent over a period of two years. The RBI can increase the amount of money in the economy. Public banks can use this along with interest rate policies to simply lend. A large loan offer should lead to cheaper loans. This must be supported by reducing the administered credit repo rate. Borrowing hurdles must be overcome. The government needs to hold detailed talks with the private sector. The center should focus on the efficiency of spending on three important goods: defense, railways and internal security. A more economical internal security policy would make a major contribution to correcting the recession in demand. We have to focus on productivity spending.

Vinayak Chatterjee

The government is aware that it wants to reach beneficiaries with a direct transfer of benefits, such as Prime Minister Kisan Yojana, who grants farmers 6,000 rupees (annually). It's a great way to fund the bottom of the pyramid and the rural sector. The really strong driver will be investments in the infrastructure there. This will drive the entire economy into a positive cycle.

Question: Does it make sense to have the budget deficit widen to focus on growth?

Dharmakirti Joshi A fiscal incentive would cause a temporary deviation from the fiscal glide path. This can also be achieved through rapid tracking of divestments and monetization of assets on a large scale. Do both to support growth. Corporate tax cuts etc. have a positive impact on growth in the medium term, but should not help in the short term. A certain relaxation of the fiscal target to boost growth is therefore inevitable. At the same time, demand-related inflation is unlikely to occur. This is because we expect the economy to remain below potential despite fiscal incentives. If the sale and sale of assets is increased, the government can overcome the downturn while limiting tax declines.

Duvvuri Subbarao

It is not advisable to let the budget deficit widen further. It is well known that the government reports a lower budget deficit than the real one by deferring payments and taking out off-balance sheet loans. This also applies to the states. Analyst Ananth Narayan estimates that this balance hides a budget deficit of more than a full percentage point of GDP. The negative impact of this fiscal problem has so far been contained since inflation has been dampened, credit growth has slowed and the current account deficit has been low. But in the future these degrees of freedom will shrink and disappear. Any fiscal expansion will affect growth rather than support it. When the center draws on loans and spending, it means a contractive fiscal expansion.

Samiran Chakraborty

Extraordinary times require extraordinary reactions. Even the FRBM glide path offers some flexibility to increase the deficit in exceptional circumstances such as the introduction of major structural changes (GST is an example). The widening budget deficit does not improve the growth trend, but can provide some support if the rate falls well below the trend. However, the limited fiscal leeway should be used for targeted, good quality spending, preferably for investments that have a larger growth multiplier. The biggest challenge is the recent sharp rise in supply-induced inflation. The fiscal incentive must be carefully balanced so that a mix of high inflation and a large budget deficit does not destabilize the macros.

Tajamul Haque

There is no need to manage a slightly higher budget deficit, especially if deficit funding is used productively to increase production, jobs and income.

Rathin Roy

The government has not demonstrated the ability to provide detailed guidelines on the budget deficit. An increase of 10-20 basis points is not enough. When a lowering of the corporate tax rate is announced, the government has to think about how to bring the lowering of the tax rate back into the economy. It didn't. If the government wants to widen the budget deficit or even take out extra-budgetary loans, it is important that, unlike last year, it decides in advance and that the revised estimates, particularly on the revenue side, do not vary as much as it did last year. The credibility of the revenue projections needs to be maintained and improved to fight the recession. When the government is financially constrained, it is important that other business actors understand that bailouts are not the answer.

Vinayak Chatterjee

There are good reasons to loosen the budget deficit by 100 basis points. This gives the government an additional Rs 2.5 lakh crore to spend. This money can be used to set up development finance institutions (DFIs) that provide long-term debt for infrastructure projects. The global reach of PM Modi is phenomenal. This is the time to monetize them. It will not be difficult to get long-term money from Canada and Australia who believe in the history of India. There are arguments that easing public finances can lead to inflation or overcrowding of domestic debt markets. But that's the price to determine the growth path.

Question: Why are private investments not attracting the economy? What can the government do to fix this?

Dharmakirti Joshi

According to the latest GDP information, investment growth for the 2020 financial year is unchanged at 1% compared to the previous year. The decline in consumption demand has led to lower capacity utilization. This is confirmed by the current RBI survey on order books, inventories and capacity utilization (OBICUS) for the manufacturing sector. Together with the depressed business mood, this means that private investment decisions are put on hold. The recent cut in the corporate tax rate further eases the burden on corporate balance sheets and reduces capital constraints for future investments. However, we believe that stimulating household demand and strengthening sentiment are the keys to starting the private investment cycle.

Duvvuri Subbarao

Private investments are not recovering due to the smoldering double balance problem and low investor confidence. To revive investment activity, the center can encourage public sector banks to resolve NPA cases using the tools at their disposal, even if the bankruptcy process is ongoing. Bankers should be able to rely on being protected from investigative authorities when making good credit decision decisions. Such assurances have been reportedly given to PSBs, but the government's word does not appear to be convincing. Secondly, one has to come to terms with the fact that fiscal constraints do not fully enable banks to recapitalize. The government should bite the bullet and work out a roadmap for the full or at least partial privatization of public security agencies. Third, structural reforms in the areas of land, labor and foreign investment should be undertaken. This is politically difficult, but we choose leaders who do such difficult things. Fourth, the focus must be more on governance reforms. Despite India's leap into the World Bank, which makes it easy to rank on Prime Minister Narendra Modi's watch, the stereotype of an indifferent, corrupt bureaucracy remains. Much of the reform must take place in the front end of the states. Modi must call a meeting of prime ministers to agree a national agenda for governance reforms.

Samiran Chakraborty

Private investments suffer from 3D demand, debt and default. Due to the sharp decline in consumer growth, capacity utilization has dropped to below 70 percent. The corporate debt relief process is still incomplete and the risk of an increase in NPAs has dampened credit flow. Political uncertainties (both global and local) could have created further headwinds. There are no quick fixes to these problems because higher public investment has not been able to "crowd out" private investment. Supply side reforms could improve business sentiment and provide the right platform to benefit from a future cyclical recovery.

Tajamul Haque

Private investment is not picking up as household income / savings are declining. In some core sectors, capacities are also underutilized. Unless the demand side of the economy is strengthened and an investment multiplier causes full capacity utilization, there is no incentive for private investors to invest. So increase public spending to drive demand and make private investments.

Vinayak Chatterjee

It is important to bring back the PPP model. The then finance minister Arun Jaitley made 500 billion rupees available for the PPP India institution in the NDA's first budget. At that time, the government considered it appropriate to set up the facility to troubleshoot and accept best practices. This was later pushed into the background. A year later, the Vijay Kelkar Committee recommended a list of measures to revitalize the PPP model to the government, including the establishment of regulators, provisions for renegotiating contracts, and protecting bureaucrats from unnecessary difficulties in trading decisions. Modi 2.0 must take into account the implementation of this report in order to put the PPP model back into operation.

Question: Can a simpler GST regime with lower taxes and lower rates be a temptation? Some advise lowering individual income tax rates to boost spending …

Dharmakirti Joshi

So far, the implementation of the GST has given the economy more headwind than tailwind. The unfinished agenda for the GST is to get a handle on elements like petroleum products, in addition to further streamlining the structure. This could include lowering rates and plates. However, this can happen gradually because the GST collections are still weak. Once streamlined, the GST could give growth an additional boost over the next few years. When it comes to tax cuts, targeted spending can stimulate consumer demand more effectively.

Duvvuri Subbarao

Tax cuts won't help. We will only sacrifice revenue that has no reasonable macroeconomic benefit. The proportion of income taxpayers is too small for a tax benefit to be a useful incentive. As I said before, the solution to our economic misfortune must come from the supply side, which means that production capacity is increased and demand is not stimulated.

Samiran Chakraborty

A simpler GST is likely to improve efficiency, but there are difficult political challenges to make big changes. In addition, frequent changes in the GST structure do not lead to a stabilization of the system. In any case, it is an issue that needs to be discussed in the GST Council rather than in the budget. Income tax is only paid by two to three percent of the population. Since the tax rate for the super-rich has been raised in the last household, any personal income tax cut must be made at the lower end, further limiting the number of beneficiaries. There is also a risk that beneficiaries of such a tax cut will increase their savings in an uncertain environment and not spend the additional income. It is also very difficult to reverse such a reduction in income tax and therefore the incentive could stay in the system longer than necessary. Ideally, a tariff revision should go hand in hand with the tightening of other multiple tax incentives to simplify the system.

Tajamul Haque

Simpler GST regulation and lower tax rates help make business easier and motivate investors to invest more. Simple taxation in a complex economy like ours is desirable. Lowering income tax rates means that middle and upper classes have higher disposable incomes and encourage them to spend more. Although only three percent of the population pay direct taxes, they also make up 60-70 percent of consumption. Higher disposable incomes will spur the cycle of demand.

Rathin Roy

The GST regime is the responsibility of the GST Council. It is not part of the budget.

Vinayak Chatterjee

The investment decision is made after the factories have reached a certain level of utilization. A simplified GST can make some of the goods and services reasonable and attract more demand. I would not recommend touching income tax. There are bigger battles to fight. Lowering income tax could leave some money in people's hands, but very few people pay income tax.

Question: Many experts say that the real boost in consumption must come from the rural sector. Do you agree? And what can the government do in this regard?

Dharmakirti Joshi

A rural surge in consumption is the order of the day. With food inflation increasing after two to three years, trading conditions for farmers are likely to improve. With higher food prices, farmers would get better returns on their products than before, even if middlemen continue to corner. As mentioned earlier, the government needs to complement this with a more effective payout by Prime Minister Kisan and an increase in MNREGA spending, as wages in rural areas remain depressed. Nevertheless, I only see a gradual recovery in overall consumer demand.

Duvvuri Subbarao

This is largely true. There is a significant correlation between the growth in rural consumption and the overall growth in the headlines. However, an increase in rural consumption without a corresponding increase in production and productivity will only boost inflation, as was the case when I was the governor of the RBI. In order to make constructive use of the demand for rural consumption, agricultural emergency situations must be remedied. I am not an expert in this area, but the government is not hampered by a lack of advice on what to do.

Samiran Chakraborty

The rural economy has been suffering from unfavorable trading conditions for some time. The situation in the agricultural sector could now improve with a sharp rise in food prices, but the non-agro-informal rural economy could still be under pressure. Transferring credit to MSMEs could be a way to support the informal economy, but more direct intervention could also be required. On the other hand, the pace of disbursement as part of income support for farms needs to be improved so that the full allocation is put to good use for the rural economy.

Tajamul Haque

It is true that the incomes of the rural population, which make up 70 percent of our population, must increase in order to stimulate demand in the economy. As previously mentioned, the government must effectively implement minimum support prices, MNREGA and at least double the amount earmarked for Prime Minister Kisan Yojana. The government has taken a bold step by increasing the MSP by 50 percent of the input cost. However, this requires some structural reforms to reach farmers. This does not mean that government agencies have to buy most of the products. Timely and intelligent intervention significantly increases farmers' income.

Vinayak Chatterjee

There are short, medium and long-term solutions. In the short term, efforts like DBT are good enough to drive growth. In the medium to long term, India needs to revise and reform the agricultural sector.

Question: What do you think of the building plan for the infrastructure of Rs 102 Lakh in five years?

Dharmakirti Joshi

It is very desirable, but ambitious. In order to achieve this, private actors have to participate more and actively. It requires public-private partnership models with newly calibrated risk sharing and balanced contracts that go beyond the build-operate transfer towards annuity and investment light models. On the financing side, in addition to the development of the bond markets, alternative sources of finance such as the development of international sources, pension funds and innovative instruments must be promoted.

Samiran Chakraborty

The total infrastructure expenditure in this pipeline is approximately 6 percent of the GDP that we have generated in the past. However, the need for the next two years is quite high and the dependency on the central and regional government is extremely high. Funding for these infrastructure projects can only be made if the government finds ways to monetize other infrastructure. Otherwise, dependency on extra-budgetary infrastructure funding will continue to grow.

Tajamul Haque

Such investments in infrastructure are essential for accelerated economic growth. However, this must go hand in hand with reforms to get these projects going. This is directly related to improving the agricultural sector's access to markets and the penetration of education and health services in rural areas.

Rathin Roy

The National Infrastructure Pipeline (NIP) is a separate exercise because there is no macroeconomic and fiscal framework in which it is embedded. Of the 102 trillion rupees to be used by the year 25, 78 percent are to be mobilized by the public sector and 22 percent by the private sector. India's infrastructure efforts are to be implemented to a significant extent by the Indian government – an important and possibly realistic reversal of politics compared to the heyday of public-private partnerships. There is no tax picture of how states and the private sector will finance their part of the NRP. The NIP is a commendable initiative, but it is by no means a strategy or demonstrable attempt to remedy poor infrastructure performance. The weakest link is the specification of public funding challenges. In order to guarantee the credibility of the NRP among the players in the Indian economy, extensive preparatory work and thorough analysis are required.

Vinayak Chatterjee

It is a very practical plan. I've already done back-of-the-book calculations. At the end of the 12th five-year plan, India should invest 8-9 percent of its GDP in infrastructure as gross capital formation in infrastructure (GCFI). If you now use the same statistics for GDP projections, this is a very achievable goal. This is feasible, necessary and a critical goal. The real challenge is to fund these projects.

Question: What else can the government do to get the economy out of the current crisis?

Dharmakirti Joshi

First, you should lower the savings rate to make it easier to transfer money. High, low savings rates remain a structural obstacle to efforts to improve transmission. Despite general interest rate cuts, they have not decreased and continue to exceed bank deposit rates. Second, residential real estate increases demand. Additional tax benefits, such as the purchase of second homes, contribute to increasing demand and can be included in the budget for a limited period. This will complement the previously announced supply-side steps to quickly handle stuck residential property projects.

Duvvuri Subbarao

Wie wäre es mit einer Erklärung von Ministerpräsident Modi im Parlament, dass die Wiederherstellung der Wirtschaft und ihre rasche Umsetzung auf fünf Billionen Dollar seine zentrale Tagesordnung sein wird? Dass dies seine ungeteilte Aufmerksamkeit auf den Ausschluss aller anderen sozialen und politischen Belange erhalten wird und dass er alles tun wird, um dies zu erreichen? Um glaubwürdig zu sein, sollte er diese Erklärung mit einer Reformagenda, einem Zeitplan, klaren Meilensteinen und messbaren Ergebnissen untermauern.

Tajamul Haque

In diesem Zusammenhang wäre die Umsetzung einiger wichtiger politischer Reformen, insbesondere der Reform des Grundbesitzes und der Verbesserung der Regierungsführung, einschließlich der Situation in Bezug auf Recht und Ordnung, von entscheidender Bedeutung. Sowohl die Regierungen der Union als auch der Staaten sollten zusammenarbeiten, um ein günstiges Umfeld für Investitionen und Wachstum zu schaffen.

Rathin Roy

Ich würde den Ton der Haushaltsrede ändern. Es ist eine Gelegenheit geworden, alles rosig zu malen. Der Ton zeigt an, dass die Regierung die Wirtschaft ist, aber die Regierung ist nicht die Wirtschaft. Der Haushalt sollte eine ehrliche Einschätzung darüber geben, wo wir uns in der Wirtschaft befinden – in der makroökonomischen Situation – und wie lange wir damit rechnen, dass diese schwierigen Umstände anhalten. Das Budget sollte eine Erklärung über die mittelfristigen Pläne sein, die die Regierung umsetzen wird. und dann sofortige kurzfristige Maßnahmen als Reaktion auf die Diskussionen mit den Stakeholdern anzukündigen. Eine klare Einschätzung der mittelfristigen Aussichten unserer Ertragsprognosen angesichts unserer Schwierigkeiten mit der GST würde einen klaren Fahrplan für immer effektivere Ausgaben für weniger Dinge aufstellen. Zusammengenommen würde dies den Interessengruppen weitaus mehr Vertrauen geben, dass die Regierung ihre Arbeit leistet als ein defensiver Haushalt