Stimulate demand, else recovery will be delayed further: Former Finance Secy Subhash Kumar Garg

Former Finance Secretary Subhash Chandra Garg says the Centre hasn’t done enough to boost demand and infrastructure. In an interview to DH’s Annapurna Singh, he also points out the shortcomings in the new farm laws and warns that import bans in the name of self-reliance don’t help.

Q. The RBI has so far been doing the heavy lifting to pull the economy back up. What has the government done to revive demand?

A. The government’s largest contribution to bring the economy back up is rolling back the lockdown. The lockdown sent the economy on the path of deceleration. The May stimulus was humanitarian and was aimed at protecting lives by keeping hunger away. The government has not given any stimulus to boost production and consumption. It should be done as soon as possible. Otherwise, full recovery and getting back on to the growth path will get delayed further. Today’s (October 12) stimulus is too little, too late, to too few people who have not been able to spend even their normal salary earnings. It is unlikely to act as significant demand stimulus.

Q. The government appears to be taking the infrastructure route to boost growth and create jobs, but the poor and the vulnerable need cash urgently.

A. The government has talked about infrastructure but has not done anything extra to boost investment in it. The National Infrastructure Plan, not a really good plan actually, has simply been forgotten. The infrastructure expenditure of most ministries and public sector enterprises are running behind their run rate of last year and budgetary outlays. The policy reforms in the infrastructure sectors have been few, like opening up coal sector, privatisation of passenger train services, privatisation of airports, etc. Even these have not got operationalised. Infrastructure focus and the humanitarian focus on the poor, vulnerable and jobless are not contradictory in nature. Both need to be taken care of. In times like these, if necessary, the government can resort to monetising deficits to undertake both kinds of expenditures.

Q. High frequency indicators like vehicle sales, manufacturing PMI, rail freight traffic and exports have shown recovery.

A. There are a few indicators that show many sectors of the economy getting back close to the performance of last year and some like e-commerce even doing better. However, there are still many indicators which suggest that life is nowhere close to normal in quite a few other sectors. Credit growth is tepid, capital expenditure and new project announcements are negative, several services -- tourism, airlines, entertainment – remain hit; so are discretionary spending and the overall business resumption index.

Q. What is your view on Prime Minister Modi’s pitch for self-reliance and the govt imposing new import curbs?

A. Self-reliance has been the objective of India since Independence. But import bans or tariff walls have never been a successful strategy to promote self-reliance. We have seen this causing us tremendous loss of competitiveness prior to 1990s. Today, when the world markets are facing a supply glut in most goods while services are fast becoming digitalised and deliverable from anywhere in the world, the policies of import bans or high tariff walls to promote Indian industry and services will not really succeed.

Q. Parliament recently passed laws to usher in big changes in the farm sector. Will they help?

A. The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020, has brought about real reform, albeit in a very disruptive manner. It was very much needed as the state governments were not willing to dismantle monopolies of the Agriculture Produce Marketing Committees (APMCs). The best option before the state governments is to abolish mandi tax and convert APMCs into unregulated voluntary markets.

The other two farm reform laws bring about no real reform. The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020, does not really achieve anything. Contract farming has been permitted by many states for the last 10-15 years, but our inability to permit land-leasing and poor contract enforcement have not allowed it to prosper. The new law fails to address these issues.

Q. The objective of the amendments to the Essential Commodities Act has been killed by imposing ban on export of onion even before the ink had dried on the new law.

A. These laws do not take away any protection of farmers. The government must stay firm on the first law and abolish the Essential Commodities Act, which has no place in today’s India.

Q. The Centre and states are in for a showdown on the issue of GST compensation cess. What does your experience in government suggest – should states be paid their dues despite the crunch that the Centre is facing?

A. Compensation for shortfall in 14% compounded annual increase on the VAT collections of the states in the base year was the bedrock of the compromise between the Centre and the states which made it possible to have the GST system in the country. This compensation must definitely be paid to states. The states are facing more acute fiscal crunch than the Centre. The Centre must raise the resources required to pay compensation by monetising the additional deficit on account of compensation requirement.

States carry very bad memories of the then government going back on its word in 2008 and not paying due compensation to the states for shortfall in VAT revenues consequent upon their switching over from the Sales Tax system to VAT system in 2005. The present government is walking into the same trap, which should be avoided at all costs. The states should be paid full GST compensation by the Centre.