What are the takeaways from the Gujarat polls for reforms and business?
This acceptance of the GST (goods and services tax) by the Gujarat trading and business community including powerlooms, gems and jewellery and diamonds in Surat is a huge signal.
Demonetisation had also impacted these businesses. It is a signal that both those steps, which have greatly formalised the economy and will reduce the dualism in the economy, have found greater acceptance. Once your economy gets increasingly formalised, then you get the basis for integrating in global and regional value chains. As long as you are local and not formal and as long as your competitive margins were only equal to the tax you avoided, you could not be in an international regime.
As a result, our SMEs (small and medium enterprises) are not part of any value chain. That change towards a more formal economy will be a massive one and I think that will also help in some sense our export sector and export earnings as we go forward. The second big thing for me is that the focus has to be on employment because the young of the country are dissatisfied with what they have got. They may not be unemployed but are not happy as what they have is not meeting their aspirations.
Gujarat poll has also thrown up rural sector stress as an issue. Can anything be done without being populist?
We have formulated 10 pilot agriculture projects after talking to SFAC (Small Farmers’ Agri-Business Consortium), Nabard (National Bank for Agriculture and Rural Development) and the finance ministry in agro-climatic zones. We have figured out that given the fragmentation of our land and given the continued sentimental attachment of major parts of the peasantry with land, what you have to do is to create some sort of farmers’ cooperative through a social entrepreneur.
So, FPOs (farm producer organisations) are very good but there is no agent to drive them forward. If these FPOs could get an agent—which is the 10 pilot projects that I am creating in 10 agro-climatic zones—then you can say shift your FPO member from wheat to turmeric. They then also sort and grade turmeric, which is then handed over to a company which will take turmeric extract and feed the turmeric trend in the US today. From what you were growing earlier, which is dependent on MSP (minimum support price) and mandi, to now selling turmeric extract in which the farmer is a part of that entire value chain.
Moreover, you can do it in two seasons. In 2018, you could create these 10 pilot projects and then scale it up all over and this is the modernisation we need in agriculture. In a model in which you actually move from traditional crops and go into high-value crops and make your farmers get into sync with the changing consumption pattern, which is moving away from cereals to higher-value crops. All of this is not so long term but what it needs is a little bit of thinking through and actually just replication for some huge success stories all over the country. If you really get your extension services back to change these Krishi Vikas Kendras through social entrepreneurs who will not do it only for maximising profits but also benefit farmers as they can work on their farm and their equity can be the land that they offer. So, it’s a workable model.
Budget is going to be pulling in multiple directions. How do you see that playing out and where do you think fiscal consolidation goals can be reset?
Public spending or fiscal deficit has to be a countercyclical tool and if you agree to that, if you accept that borrowing for productivity enhancement is not the same thing as borrowing for booze, then why should you get hung up on it? Didn’t the Europeans do this after 2008? So why are we so self-flagellating?
My argument is that if fiscal deficit is raised and bond yields rise, though it is not necessary and depends on the economic growth, and if RBI raised the repo, then it is not necessary that lending will also go up. Today, repo rate is 6% and lending is 11%. If the former becomes 6.25%, it is not necessary that the latter becomes 12% though this has been the trend so far. Commercial banks use the excuse of a rate hike to hike up their lending rates more than what they have incurred. Why can’t commercial banks absorb some of these as after demonetisation they have got Rs 3-4 lakh crore of deposits, which is pretty much free money? Financial savings are rising, ratio of financial savings, household savings are rising. If that doesn’t rise and, therefore, if cost of capital doesn’t rise, if growth of the economy picks up, there is no tradeoff. Finally, if there is a tradeoff with growth and employment on one side and fiscal deficit on the other, what should we be doing? Should you only look at the credit rating agencies who have never obliged? So why should you be sticking to it?
Is it partly because we’re focussed on FDI that so much attention is being given to macroeconomic stability?
FDI (foreign direct investment) is only 3% of our total investment. If we take the total investment in the economy at 30% of Rs 2 trillion, then it is $600 billion. Our policy is too much focussed on getting brownie points from foreign observers and not giving enough to our own needs, which at the moment must be employment, exports and agriculture. You will have to lay the foundation of sustained growth and then your saving on your transfer incomes. JAM (Jan Dhan-Aadhaar-mobile) has helped you save Rs 70,000-80,000 crore.
Where has that gone and why has that not impacted the fiscal deficit? Go for disinvestments, extend JAM to fertilisers. There are other ways to skin this cat, maintain fiscal balance. In any case, bringing revenue deficit to zero is far more important than fiscal deficit.
You have said exports are a priority, but the strengthening rupee is a worry.
I do not buy the argument that the rupee is over depreciated. My view is that we as a government including the RBI must assure our businesses that the rupee will not appreciate for the next five years to improve the export orientation of our economy. Our exports are still residual, which won’t work. In not a single sector do we have a substantial share in exports.
If interest rates don’t fall, is it possible to expand interest subvention scheme?
This can be true only for select sectors. Can do it for housing inventory by creating an escrow account from which builders can get money at lower interest rate to complete pending projects and hand over to the buyers. Under RERA (Real Estate (Regulation and Development) Act), you can send them to jail but that will not help. Interest subvention cannot be across the board and has to be monitored carefully.
One fix suggested for agriculture is higher MSP. What is your view?
It doesn’t work as that just keeps farmers again in the same commodity production from which you want to take them out.
Job creation is a big issue. How can the government deliver on that?
You’ll need to generate good quality employment which will come from organised retail, exports, tourism and not from mom & pop stores and agriculture. Lot of work has been done in Mudra (Micro Units Development and Refinance Agency). Loans by banks to the priority sector was Rs 60,000 crore in FY15. Next year, after Mudra came into being, it was Rs 1.22 lakh crore. Next year it went up to Rs 1.6 lakh crore. While some loans are also consumption loans, Mudra loans will not create the jobs our people are demanding. Theywould rather get formal sector jobs.