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Last Updated : Jan 09, 2018 04:37 PM IST | Source: CNBC-TV18

Good time for India to join the global growth expected in 2018: Rakesh Mohan, Former Deputy Governor, RBI

In an interview to CNBC-TV18's Latha Venkatesh, Rakesh Mohan, Former Deputy Governor, RBI and Former Executive Director at IMF, M Govinda Rao, Former Member of the Prime Minister's Economic Advisory Council, Ajit Ranade, Chief Economist at the Aditya Birla Group and A Prasanna, Chief Economist at ICICI Securities Primary Dealership shared their views on what should be the economic philosophy underpinning the Budget.

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In an interview to CNBC-TV18's Latha Venkatesh, Rakesh Mohan, Former Deputy Governor, RBI and Former Executive Director at IMF, M Govinda Rao, Former Member of the Prime Minister's Economic Advisory Council, Ajit Ranade, Chief Economist at the Aditya Birla Group and A Prasanna, Chief Economist at ICICI Securities Primary Dealership shared their views on what should be the economic philosophy underpinning the Budget.

Below is an excerpt of the interview.

Q: In a situation like this when there is fiscal disruption because of a major tax reform and there is so much of farm sector pain, is fiscal prudence the priority?

Mohan: I think that given the disruptions that we have experienced in 2017 and the growth slowdown that has happened presumably    as a consequence, we really need to concentrate our attentions to reigniting growth. Of course, fiscal prudence is a constant. I do not want to go into the particular numbers because that is a bit too much detail at the present time. But I think that it is very important to really refocus on rekindling growth in the economy and particularly in industry and manufacturing.

The most distressing figure in the data that has just been released is indeed the 4.6 percent manufacturing growth and this is a big issue at the moment because since I am now based outside India, I am looking much more at the world that this is the first year that is 2017 and the coming year 2018 where you have essentially a worldwide recovery taking place after almost 10 years. Of course, different economies have indeed grown at higher rates in the last 10 years, but this is the first year where the expectation is that worldwide global recovery is indeed broad-based.

Second, also very interestingly, this is the first time since 2008 that the expectation of trade growth is over 4 percent. This is the first time in over a decade. For emerging markets, it is something like 4.8 percent expectation in 2018. So my point is that this is an opportunity for India to leverage what we do domestically with the kind of global recovery that is taking place.

Q: Do we have the luxury of giving growth an accent over fiscal deficit? What is the appetite of the market to be able to absorb 3.2 percent fiscal deficit even next year or a higher government borrowing programme that this year?

Prasanna: Given that this year, already the fiscal slippage is more or less a given and also which has been signalled by the government in the form of extra borrowing, the market is kind of prepared for the 3.2 percent kind of deficit number for next year. Of course, if it goes higher, our own projection is the deficit will be higher, so suppose the government prints something like 3.5 percent which is our estimate, that would lead to a lot of surprise and negative sentiment in the market.

In terms of borrowing, what we have to remember is the consolidated fiscal deficit or general government deficit both the centre and states put together is very high in India. And therefore, when you look at borrowings also, you have to look at the total figure. This financial year, for example, both centre and states together mist be borrowing around Rs 10.5-10.6 trillion and our sense is by next year, probably this number will go up to Rs 11 trillion. So that is the extent of borrowing which you are asking the bond market to support and then probably one has to brainstorm and see that how much excess funds will remain in the system to support private sector credit growth after meeting this borrowing requirement.

Q: Would your sense therefore be that if the borrowing number were to be higher, there is a very good chance that this lower cost of capital advantage may go away and the cost of capital could rise?

Prasanna: That is right. Already, we have seen in the bond market there has been a sell-off so even without the RBI doing anything, the cost of funding is actually going up for corporates. Any corporate which is preferring to borrow medium to long term that has gone up already and if the fiscal deficit is going to be much higher than what anyone anticipated and if that is seen as pushing up growth and therefore inflation at a later point in time then at some point, even the Monetary Policy Committee (MPC) will decide that some monetary tightening would be required which would mean again that even in the short-term the cost of funding will go up.

Q: You represent a group which has something to say on both sides, a high infra spend or a pump priming of some kind by the government may help investments in the private sector, but at the same time, cost of money could rise. Which way would you tilt: growth or fiscal prudence?

Ranade: It is not an easy trade-off. As Dr Rakesh Mohan said that this is the first time that we have synchronised global growth and at this time, we also have India's growth rate projected to be the lowest in the last four years. And if you look at the four growth drivers, consumption spending, investment spending, especially private sector, net exports and governments, so the first three are not up to potential, maybe they are sputtering. So, we definitely need a growth push.

The government yields on ten-year government securities (G-Sec) have gone roughly from 6.7 percent to 7.3-7.4 percent which is almost a 10 percent movement in the yields which translates on a sustained annual basis of something like Rs 50,000 crore in extra interest payment. But on the other hand, if you can get about 1-2 percentage point increase in the growth rates, that is almost Rs 3 lakh crore. So that is why it is a difficult trade-off. Remember, let us not forget that India's demography, it is young, it is a structural advantage, so today's borrowing is tomorrow's tax collection.

So, when you spend it on infrastructure today, the infrastructure assets live for multiple generations. So therefore the next unborn generation should also have a fair share of their burden of the cost of infrastructure. So in that sense also, the sanctity is not the number itself, but the sanctity and credibility of a promise. So even if it is a 3.5 percent of gross domestic product (GDP), to achieve that number is more important that the number being itself 3-3.1. So whatever number is decided and I think it should be on the higher side, the government should try and stick to that number but even if it is 3.5 or 3.7.

Q: About this argument of future generations bearing, I am not convinced but we may not have the luxury to debate that. I think this is the argument with which the Indian government has been imposing a higher debt to GDP for the past several decades now and infrastructure is not really improved and we are paying out for all those high interest accumulation or debt accumulation. However, where would you stand, I think you have seen the largest number of fiscal deficits from your perch at National Institute of Public Finance and Policy (NIPFP) -- what would you say, should growth be given an advantage?

Rao: I think growth should definitely get an advantage but growth should get an advantage not by pushing government expenditure, but by reviving the industrial climate in the country. Revival of the industrial climate in the country will have to be done through many other measures including effective functioning of the National Company Law Tribunal (NCLT). You really have to deal with the twin balance sheet crisis. In fact if you continue with the type of deficit that we have, one is there is a credibility of the government itself. In fact recent report of the Comptroller and auditor general (CAG) says almost Rs 80,000 crore bills were actually postponed in 2015-2016. So there is huge problem of credibility.

On top of it, you have the international interest rates rising, petroleum prices rising, and with all these if you say that I will also have a larger deficit, you may end up with twin deficit problem of both current account deficit and the fiscal deficit problem. I think the solution will have to be to revive the industrial climate which would mean that we need to really sort of reform our subsidiary regime and if we could go about doing demonetisation, the way we did, certainly the government can muster sufficient courage to reform the subsidies, particularly the fertiliser subsidies. We do need to really sell-off unwanted public enterprises and we need to really do much more to contain the revenue deficit and release funds for capital creation, infrastructure creation and at the same time revive the industrial climate in the economy for which you need to contain the deficits.

Q: I will come back to the credibility argument, there are serious problems with even the April-November numbers that we have. Integrated GST (IGST) you have a number, but you are very sure that the state’s share has not gone and now we have fresh doubts that even the direct tax collections are looking big because refunds have not been paid out. We don’t know how many of these stories are true but credibility is an issue across several numbers. However, I want to take your point that we have to encourage growth and that need not necessarily come at the expense of deficit, at the expense of fiscal prudence, it can come otherwise. On that, an excellent article that you wrote I think a year ago, that the time has come for long term capital gains on shares to be taxed. Would you say that is a sitting duck which we should shoot in this Budget?

Ranade: Absolutely. Among the various priorities in this Budget, are job creation, farm sector, exports, private sector investment, but also the fact that the share of indirect taxes is rising. For the last three years, it has steadily gone up to almost 55 percent and India's direct tax to GDP ratio is among the lowest among its peers in the world. The tax department says something like Rs 60,000-70,000 crore of capital gains are going tax free. We need to have a very uniform treatment of all long term capital gains of all asset classes -- shares, real estate, private equity and I believe like in most countries that that is about three years.

The people who make income on long term capital gains typically tend to be more wealthy people. So, we also have to worry about the fact that higher share of indirect taxes is inherently regressive. So, we need to correct that skew. So I think that time has come to look squarely at this capital gains exemption which has come because of the Mauritius treaty from 1983; so that was tail wagging the dog. So the Mauritius treaty was amended by this government last year and now the time has come to just straighten it out and go back to three years of long term capital gains exemption.

Q: Do you think that instead of trying to juggle growth and deficit, it would be good to impose this fresh tax, the long term capital gains which as Ajit said, was taken off on shares because of the Mauritius argument that there is a dissonance, discrepancy between the way we treat foreigners and domestic share investors. Now that that advantage for the Mauritian investors has been grandfathered, time to impose this tax so that we can meet both growth and fiscal discipline?

Mohan: I do not have a sense of the kind of revenue you would get from this, so whereas I would support the idea in general and particularly since it is coming from the private sector, I do not have a difference with that, but I do not have a good idea of how much revenue you will actually get to solve that kind of problem. I want to make another point in terms of manufacturing that given the increase in global demand that is now expected over the next couple of years, this is indeed a good time again for reviving manufacturing growth. And we will come back to the issue that we have often talked about that is the Indian exchange rate.

It is really quite bizarre that the nominal Indian exchange rate with the dollar has remained about constant for almost three years now. So, the real exchange rate index, the six country index is about 130, that is 30 percent over 2004-2005 and a 36-country index is around 115-116 and in the last three or four years or so, countries like China, Japan, UK, Korea, Brazil have all depreciated in real terms. So, it is almost a no-brainer that the Indian manufacturing sector is suffering a great deal from the appreciation, almost consistent appreciation in the real exchange rate. And this is reflected in the merchandise trade deficit of just under 10 percent of GDP, it is about 8-9 percent or thereabouts.

Of course, it is balanced by the software and the invisibles, but my point is, even in the case of software now, we are beginning to suffer because of the exchange rate. So, the kind of point that also Dr Govinda Rao was making and Ajit Ranade that manufacturing, just somehow, we have lost the focus on manufacturing. And so whatever measures that the Budget process can come up with and I would once again say, if we can do demonetisation why can we not do big labour reforms in this coming fiscal year because that is really essential. A lot of manufacturing is moving out of China, it is all going to Vietnam, Philippines, Cambodia, Bangladesh, but not to India. And therefore, it is absolutely essential to do labour reforms.

Let me give you one suggestion on that. It seems to me that one feasible way of doing labour reforms is to actually say, we will apply the existing laws to everyone who is currently employed in organised manufacturing and the grandfather current employees, there is only about 10 million of them and all the new employees will be subject to new laws. This is what we did when we went to the new pension system.

For entire discussion, watch accompanying videos...
First Published on Jan 8, 2018 06:04 pm
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