Govt should pay attention to declining incomes, demand: Congress leader P Chidambaram

Former finance minister P Chidambaram says that the government must pay attention to, and help prop up, consumption demand in the forthcoming Budget. But he is not in favour of cutting income tax, instead he suggests that indirect taxes should be cut. Chidambaram, one of India’s longest-serving finance ministers and credited with the ‘Dream Budget’ of 1997, says that the government has not consulted the Opposition on the economy, a pointer to how the Modi government’s politics is hurting its ability to draw ideas and wisdom from those who have been there and done that before.

Economic growth is at a 6-year low and inflation at a 6-year high. Are we heading for stagflation?

The spike in Consumer Price Index (CPI) inflation is due to the rise in prices of food articles, especially vegetables. This is largely seasonal. It will correct itself. Core inflation is still low, but the problem with low core inflation is that it means, demand is low. That is a cause for worry.

Can the Budget do something to curb rising prices, especially of essential commodities?

The prices of vegetables and fruits are determined by seasonal factors. Government has little control over their prices. The Budget has little influence on them. The Budget can only address issues of investment and infrastructure. It can also address issues of technology, productivity and storage.

Higher and uncertain global crude oil prices are posing a problem again. How can government address that?

Low crude oil prices for many years lulled the government into complacency. No steps were taken to moderate consumption. If crude oil prices rise, we will pay a price. The government has no option but to import oil, raise prices and pass on the burden to the people. It will add to the inflationary pressure. The alternative is to cut taxes and keep prices at the same level, but this government, already under strain from revenue shortfall, will not do that.

All macro-economic numbers are down at the moment. The three engines of growth -- private consumption, private investment and exports -- are all down. Where should the Finance Minister start repairing?

I am not competent to advise the Finance Minister. She has not sought our suggestions. She has not engaged the Opposition parties in a discussion. When I was FM, I used the forum of the Consultative Committee to seek suggestions on the Budget from MPs, including from Opposition MPs. I do not think the FM has done that.

What steps in the Budget can help reverse the trend of falling exports?

This government has shown utter incompetence on issues relating to foreign trade. They are believers in protectionism and are prisoners of the domestic trading lobbies. They have increased import duties across the board forgetting the dictum that import duties are a tax on exports. I have read the current Foreign Trade Policy. Many of the pre-1991 controls have found their way back into the book. The old gobbledygook has replaced plain English. For five successive months, imports have recorded negative growth over the previous year; for eight successive months, exports have recorded negative growth over the previous year. The commerce ministry has been an utter failure.

The last Economic Survey said we must move from consumption-led economy to investment-led, on the lines of China. Will that work for India?

Consumption is a key driver of growth in India. Most of our goods and services are not exportable. Hence, we cannot neglect consumption and rely solely on investment. Consumption is sluggish because there is less money in the hands of the people. Rural incomes have declined, rural wages are stagnant, hence rural consumption has taken a big hit. Government should have paid attention to falling consumption.

The economy was recovering in the final months of the UPA-2 government and was moving along well until three years ago. Why is it now, as many say, in the ICU? Where did the Modi government err?

The reasons are the big mistakes — demonetisation, flawed and hurriedly implemented GST, lack of credit, rush to Insolvency and Bankruptcy Code, tax terrorism, excessive powers to investigating agencies, and suspicion of business.

Tax collections have dropped. But is the GST doing comparatively well, collection-wise, given that it is a new regime?

GST is a flawed law. Its implementation was worse. Input tax credit and refund is the heart of GST. The refund mechanism is complex and a deterrent to the honest taxpayer. GST collections are not satisfactory. It is hurting the states.

Unemployment is at a 45-year high and household spending at a 40-year low. What can government do to create demand in this situation? Why are supply-side measures not working?

I decline to answer questions amounting to advising the Finance Minister. The government has denied that there is an unemployment problem. Supply-side measures will not work when the problem is on the demand side.

What are the two things the FM should announce in the Budget to lift the economy immediately?

Again, I will answer the question only if the government seeks our suggestions.

What should the government do on the direct taxes front? There are those arguing for an income tax cut and there are those arguing against it.

I do not think this is the right time to cut direct taxes. We should cut indirect taxes.