My pre-budget interview in Manorama Malayala

 (Translated from the English version below)

1.  Regarding the slowdown, govt is continuing in the denial mode. What is your assessment about the present situation?

The situation is extremely grim. The January release from the National Statistics Office (NSO) on the advanced estimates of national income suggest a real GDP growth rate of 4.9% for 2019-20, falling from 6.8% in 2018-19, and continuing a downward slide that started in 2016-17. This is the lowest growth rate since 2008-09, the year of the global financial crisis. The nominal GDP growth rate is even more alarming. At 7.5%, it is the lowest since 1978.  As nominal GDP is national income at current prices, it is what matters for tax revenue collection. No wonder the budgetary arithmetic has become very hard with tax revenue collections not only falling short of target but also in absolute terms compared to the previous year (something that has not happened in two decades).

2. How soon can a revival happen? 

That is a matter of speculation – for a country of India’s size and resilience the economy will revive but it is hard to say how soon. With the latest quarterly GDP figures that were released, we now have had six successive quarters when the annual growth rate relative to the same quarter one year ago has been lower than the previous one. If this trend continues next quarter, this would be the longest sequence of dips in the growth rate in successive quarters for the entire period for which quarterly GDP data are available on the RBI website (1996-97). But relaxation of some external constraint could start the revival process sooner rather than later, such as lower oil prices or slowing down of food price inflation or influx of foreign investment due to changes in the global economy.

3. What are the structural reforms needed on the macro and sector-specific sides?

At this moment the biggest priority is a stable policy environment with no further adventurism like we saw with demonetisation and the manner of GST implementation. The controversial NRC and CAA proposals have not helped. Leaving aside the political debate around it, just from a narrow economic point of view, the government should not keep on demanding more and more paperwork and imposing more and more regulations and laws that create an atmosphere of anxiety for citizens, businesses, and corporations. Economic growth in the end must have a foundation of optimism and positive outlook. By definition, investment is a forward-looking activity and even consumption stagnates when people are worried about the future and feel they need to tighten their belts - and creating more bureaucracy and more regulations and an atmosphere of political unrest do not help in this regard. In the medium term, a whole slew of reforms is needed in land, labour and capital (or banking sector) markets as well as the public sector, all geared towards reviving investment and generating employment. The protectionist measures that are being talked about are counter-productive – we need to focus on reviving export demand and not think in terms of providing any further protection to our already heavily protected industries in the name of import substitution.

4. What are your expectations from the budget?

In terms of things to expect from the budget, the fiscal space for doing much is limited given that the central government's budget deficit is likely to be 3.7%-3.8% of GDP, breaching the 3.3% target up to the maximal level of leeway of 0.5 percentage points that exists. If we add the deficits of the central and state governments (another 3%) and consider off-budget borrowing, the overall deficit stands at 8% of GDP.  The exact numbers not being clear, it is difficult to say if a fiscal expansion is feasible, but if there was ever a moment to worry less about inflation targets and focus on reviving aggregate demand, this is it.  At the very least the government has a choice to decide what not to cut or cut less. My sincere hope is that expenditures such as rural infrastructure, MGNREGS, PM Kisan, maternity benefits, pensions, etc. that benefit the majority of the population, whose average consumption levels have fallen according to the NSS expenditure survey that was not officially approved, are not cut.  I am not supportive of the personal income tax cuts or corporate tax cuts that many are proposing. After all, personal income tax revenues constitute around 2.5% of GDP and corporate income taxes around 3.3%, with the rest coming from indirect taxes. Given that those who pay these taxes have a higher saving rate, being more affluent than the average citizen, the demand boost from this is likely to be limited. The government could cut the GST rates to the extent some of the benefits of the lower tax burden on business goes back to consumers in the form of lower prices.