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Budget 2018
Last Updated : Jan 10, 2018 03:47 PM IST | Source: CNBC-TV18

Budget 2018: Hope government meets fiscal deficit target of 3.2%, says Arvind Panagariya

The former Vice Chairman of NITI Aayog said he hopes that 'populist spending' is a one-time affair and does not become a permanent programme.

CNBC TV18 @moneycontrolcom

Speaking to CNBC TV18, former Vice Chairman of the NITI Aayog, Arvind Panagariya, has said that he would like the Finance Ministry to meet the current fiscal deficit target of 3.2 percent.

Ahead of the Union Budget, the economist said that he hopes the Centre has made serious efforts to stick to the fiscal deficit target.

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Panagariya said he hopes that 'populist spending' is a one-time affair and does not become a permanent programme.

When asked about media reports suggesting that Commerce Minister Suresh Prabhu is mulling incentives for the states which play an active role in promoting exports, Panagariya said it is 'not the way to go' if incentives are seen as subsidies.

However, Panagariya said that he would like to see the process of clearances needed to move exports goods out is expedited.

Panagariya added that the Centre should focus on exports to create more jobs, including the labour-intensive industry such as apparel. According to Panagariya, the sector should be given higher priority as it also requires limited investment.

Below is the verbatim transcript of the interview:

Q: What will be the big Budget imperative? You have written a paper where you believe that Modinomics has worked for the economy. We have now seen the advance estimates coming in by the Central Statistical Organisation (CSO) for FY18; growth has slowed down to a four year low of 6.5 percent for the gross domestic product (GDP) and gross value added (GVA) at 6.1 percent. In this context what would be the imperative for the finance minister in the Budget?

A: I am no longer inside the government. So it is difficult for me to make any guesses but one imperative I certainly see is that I very much hope that the finance minister sticks to his Budget consolidation or fiscal consolidation- that is an important priority and since this is the last Budget before the election, I also hope that any populist expenditures are of the kind that are one time expenditures rather than programmes that are not fully well thought-out and they end up becoming permanent fixtures. This, particularly under the United Progressive Alliance (UPA), has been an issue that election time programmes that were launched; they were long-term programmes which permanently staged. So I call the Tamil Nadu model, where during elections you see the politicians distributing televisions and what not. These are just one time things.

Q: If I could pick up on the point that you have made there and you have spoken about how the government should stick to the path of fiscal consolidation, in fact this was your cautionary warning in September as well that the government should avoid the temptation of moving away from the fiscal consolidation roadmap that it set out. Your successor in the Niti Aayog believes that heavens will not fall if we move beyond 3.2 or even 3.5 percent. If you go by the CSO date then 3.2 percent in terms of fiscal deficit looks like it will be breached for in all certainty. Do you believe, like now Rajiv Kumar in the Niti Aayog believes that a little bit of a slippage is not going to cause any great harm to the economy or the government's reformist credentials?

A: Personally I would like it and I prefer it. If the government is able to bring it into 3.2 percent which was the target, certainly you can make that case that a small slippage is not going to bring down the heavens - that case can certainly be made but my personal preference is that this government, at least that was my experience during the three years I was there, this government made very serious effort to stay with its fiscal consolidation plan and so much hard work has gone into it that I would personally not for letting this slip.

Q: I want to pick up another issue which is a controversial and contentious issue. You have also cautioned the government to resist the renewed temptation of returning to an import substitution policy to make a success of Make in India. We have seen clear directive as part of the Department of Industrial Policy & Promotion (DIPP) circular - the Make in India policy does provide for preference as far as local manufacturers are concerned, in fact, Nripendra Misra in the Prime Minister's Office has recently restated that objective through a directive to various ministries. What is it that you fear because you believe that this is the wrong way to Make in India?

A: This is a difficult battle for the trade economists and it has been fought for the last, nearly 250 years and certainly particularly in the last 70 years, since the developing countries embarked upon their development programmes, it is tempting always and it also gives a sense of certainty that these are the things that we consume at home. Why can't we or why shouldn't we produce them at home ourselves. That did a lot of damage to us for over four decades. Our imports as a proportion of GDP at one point, in about 1970 or so, fell to barely 4 percent and that was a decline from the peak of about 10 percent during 1950s and we learned it the very hard way and we launched that reform process in 1991 and a very important part of that reform process was to liberalise trade and we indeed succeeded eventually from something close to about 17 percent was our trade to GDP ratio; trade meaning exports plus imports of goods and services as a proportion of the GDP and from '91 it was 17 percent and then due to liberalisation we expanded that, we almost went at peak, we were about 55 percent of the GDP. It has now come down a bit.

Q: You are saying that the government must not get back into a cycle of imposing import controls. We have now seen across a bunch of categories where customs duties have been hiked. Do you believe that this is the wrong approach? This is something that the government must not tinker with, must resist the temptation to tinker with?

A: My reading is that some of these duties may have been hiked for revenue reasons and if that is the case then that should be a temporary measure. We need to resist turning that into permanent and more over once we start on this road, initially you start with 10-15 of these industries, but all the other industries begin to gather as well and begin to lobby that why not me also. So there is that kind of a danger. So if it was revenue reasons, I totally understand because there can be a fiscal compulsion but in that case this should be temporary, we should roll them back to where they were.

Q: Let me ask about exports because we have now seen a very strong global recovery and in that context, the commerce minister Suresh Prabhu is talking about the need to incentivise exports further. We have seen an uptick in our exports as well, double-digit growth for the last few months. The Budget is around the corner. What is it that you would like by way of incentivising exports? What would you like to see because the commerce minister is saying that the finance minister must not look at incentives for exports as incentives; he should look at them as investments. What would you like to see?

A: If incentives are seen as subsidies, I personally do not think that is the way to go but there are lots of barriers to exports, I think they ought to be removed. Trade facilitation is a huge area, too many clearances required by too many departments for the goods to move out. The ports do not move fast enough; look at Hong Kong and Singapore, ships turnaround in eight-ten hours. We take to raise three days. So that is one of the areas and if we then want to seriously build up also exports to create jobs. I think we need to pay very serious attention to the labour intensive industries. Apparel is the biggest example of that.

The export market is almost like, going by 2015 figure, exports in apparel are about US 465 billion. We do only USD 18 billion out of that. I really think this is a sector where jobs and exports can come together. This is an area which also requires limited investment, a very small investment and you can create jobs. So that sector is one thing I will give very high priority to. There, I would also say that all the indirect taxes should be fully reimbursed. Any indirect taxes paid, whether they happen to be on the inputs that are imported or they happen to be our own domestic taxes, they ought to be fully reimbursed and expeditiously so, so that the working capital does not get tied up. My favourite theme of labour market reforms that continues to be very important for these labour intensive industries. So, I think there is an opportunity to bring in jobs and exports together.

Allow me half a minute. One more very important focus that we need is on bringing the global players in particularly the labour intensive industries to India, a lot of these firms are now exiting from China due to their higher wages. We need to ensure that they come to the shores of India and they do not go to Bangladesh or they do not go to Vietnam which is where they have been going. So I think that is where I would put a huge amount of effort how to get the global players because my reading has been over the last three years talking to all our industrialists that they are now generally hardwired not to think in terms of these labour intensive sectors and so, as a result, we do not have very large operatives in clothing industry, in garments industry and I think, we will need these global firms to come in here and once they are anchored here, then we will see a lot of our own local manufacturers coming into those sectors as well.

Q: Let me ask you about another issue and this was an issue that you were involved with. The National Medical Commission (NMC), this was an idea that the Niti Aayog had taken forward. You had drafted the bill as well. We have seen the Indian Medical Association (IMA) come up very strongly against the NMC bill. The bill has now been sent to a parliamentary committee. The IMA's objection is that this is another blow to the medical profession that this basically bureaucratises the medical profession. It gives overarching powers to the Central Health Ministry. It takes away representation from state governments. How would you respond to the criticism of the bill and how would you respond to the concerns that have been raised about the National Medical Commission bill?

A: I am afraid that all these criticisms are completely misplaced. You should really, anybody who is seriously interested in this should read the report of the parliamentary standing committee of the Rajya Sabha. Now remember, this is the Rajya Sabha parliamentary standing committee which issued the report, this is report number 92, in March, 2016. If you hate to read the long report, just read the last four pages of that report. It in fact forecasts this fact. In its concluding paragraph, the Rajya Sabha parliamentary standing committee report actually says that the entrenched and vested interests are going to do everything to derail this important reform, but the government has to exercise its constitutional right and bring sanity to the entire educational system in medicine in medical profession.

So this was a mandate by the Rajya Sabha and we took that mandate very seriously and this standing committee report had endorsed the report by Dr Roy Chaudhury which had recommended precisely these four boards and a commission at the head of it which is exactly what we have recommended in this bill. And if you actually look at Roy Chaudhury committee's recommendations, they did not recommend any elected members, actually they recommend all the members by selections of ex-officio. What we have done is to have, we have recommended 25 members of which five will be elected and more than half comfortably will be doctors. So, we have certainly, the commission, as we have recommended has a majority of doctors there, but we need to bring them by selection because what has happened is that the same vested interests that today control the Medical Council of India (MCI), they also control the Indian IMA. So it is really same set of leaders who are controlling the two institutions.

And, what we have seen actually is over the decades, I am not even saying years, but over the decades, a deterioration of the medical education. And in particular, you need to bring in the serious scholars of medicine, the serious practitioners, clinicians in medicine to actually guide the educational system in medical profession which is not currently the case because the politicisation is strong. Virtually all of the leading individuals, guiding lights of the profession have pretty much quietly exited from providing any kind of guidance to the medical education system. So I think this is very crucial for the country today.

India Union Budget 2018: What does Finance Minister Arun Jaitley have up his sleeve? Click here for live Budget 2018 news, views and analyses.
First Published on Jan 9, 2018 02:58 pm
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