Dr Montek Singh Ahluwalia is perhaps best known as Deputy Chairman of India’s Planning Commission during 2004 to 2014, which included the country’s best growth years of 2004 to 2008. However, an even higher contribution of this Oxford trained economist has been his pivotal role in a small team of economists under Finance Minister Dr Manmohan Singh, which was in charge of drafting India’s far-reaching economic liberalization program between 1991 to 1996. Starting his career as the youngest Division Chief at World Bank when he was just 28 years old, Dr Montek Singh went on to become the architect of India’s 11th and 12th Five Year Plans, and could also witness the economy’s deep issues during the tumultuous years of 2009-14 when Global Economic Crisis derailed the Indian economy and caused the NPA crisis which continues to this day. A recipient of Padma Vibhushan, he is also the author of BACKSTAGE: The Story Behind India’s High Growth Years. John Antony, Editor, Seasonal Magazine recently conducted an interview and interactive session with Dr Montek Singh Ahluwalia.
While our economy is grasping for breath in the middle of the crisis this pandemic has cast us into, the voices of the ones who saved us earlier, should be listened to with fervour. In this extensive interview, Dr Montek Singh Ahluwalia, the Former Deputy Chairman of the Planning Commission and one of the most experienced economists in the country, shares his insights on measures to revive the economy and other pressing problems in these changing times.
On being asked about the possibility of going back to “India’s high growth years” mentioned in his recent book, he emphasizes the need to get the GDP up and going towards a target of at least 6.5% before being ambitious of a growth rate around 7.5%. He also points out that the huge export demand in those years will be absent now.
On fiscal deficits, he remarks that the government should be allowed to expand beyond the specifications in the rulebook because besides the need to increase the demand in the economy, the fall in tax revenue should also be accounted for. India has an urgent need for high quality infrastructure. To finance that without hurting the fiscal deficit he said that the government should leverage on untapped tax revenue by setting up an independent committee to look into tax reforms now and accept its proposals in the next budget. We should take lessons “from the book of 1991 reforms,” he says.
In respect to the Centre’s provision for the States he endorsed the request of Punjab’s Chief Minister that States should be provided a Covid Grant and the Finance Committee report due this October should be pushed to the next year. This is given that states have little leeway as GST practically took away all its taxing capacity.
On the looming migrant crisis he shed light towards understanding the situation that led to the crisis in the first place such as the lack of a general social safety net in contrast to providing special entitlements to migrants alone.
Most importantly he emphasized the need to understand the ambiguity of the situation and difficulty for anyone to make strong recommendations now because, “This is an absolutely unprecedented situation for the whole world. We don’t have easy rule books that have rules that are tried and tested.”
In conversation with Dr. Montek Singh Ahluwalia, former Deputy Chairman of India’s Planning Commission:
Q: India went into the lockdown believing that it will limit the virus threat. But nowadays we hear that the lockdown was more for ramping up the health infrastructure. Do you think this has been achieved as infection rates and deaths are spiking in red zones as well as in some orange zones?
A: Let me preface my comments with three points, which I think we should all keep in mind when we look at the current scenario. First is that this is an absolutely unprecedented situation for the whole world. We don’t easily have a rule book that is tried and tested. So we got to keep that in mind. Second, we’re not the only country affected. So there’s a lot of experience elsewhere. So whatever we say about things are working or not working in India, we want to keep in mind what’s happening in other countries. And the third is actually even today, there are huge uncertainties. So whatever I say, please keep in mind, that these are some overarching limitations within which you have to look at these comments.
Now, let me come to your specific question. I mean, I know that there was an impression given that somehow if we would have been in a lockdown for 21 days, then we would be able to overcome coronavirus. I think there was a comparison made, Mahabarath took 18 days, and this is going to take 21 days. I think the role of a lockdown always was to flatten the infection curve and stretch out the period during which infections build up, which gave you a little more time to build up the health infrastructure.
So now the question arises, did it flatten the curve? But the short answer is we suddenly had relatively few infections during the lockdown period. We don’t have the counter comparison, what it would have been without the lockdown. And I think there is a problem that you know, we’re not doing enough testing. So there are big questions about what is actually the rate of infection even today. But the real issue is assuming that some flattening during the lockdown took place, did we actually succeed in building up health infrastructure? Now, I don’t have the information on that. I don’t think the information on how much was built up was made public. This would require details on what did the central and the state governments do? I think we do know that some steps were taken, that some equipment was procured. Some additional beds were arranged that exactly what they were, I really don’t know. So we’re not in a position, I think firmly to say that during this two week period, this is what we actually did, in terms of strengthening the hospital facilities. And suddenly we’re not in a position to say, well, this was enough. Because to say the latter, that it was enough, you have to have some model on what the infection rate would be and I have not seen any estimates. Now, this is all to be put into the general cover that there is huge uncertainty. I mean, all these epidemiological models are very approximate, and models borrowed from one country may or may not apply in India. So, I don’t know whether that’s a good answer to your question. But that’s the way I see it. It certainly wasn’t meant to put an end to the virus. The only thing it could have been meant for is to stretch out the nature of build-up of infection, in order to allow the health infrastructure to be built.
Q: You had recently opined that hand holding the weaker section of the society is an even more pressing issue than reviving the economy back to growth. Can these two objectives be also synergetic?
A: They clearly have to be synergetic. The reason I said what I did was that it was quite clear that the lockdown was going to have a very negative effect on growth. I mean, after all, the red zones count for almost half the GDP, and the lockdown was virtually complete in the red zones. And so for the first two months, production in the red zone would have collapsed. It did collapse. The government has not actually given an estimate of what will be the negative effect on GDP. Although I think the Governor of the RBI has said that GDP growth will be negative. In my view, we should be expecting maybe 5% decline in GDP this year compared to the previous year. Now, having said that, it’s not going to be a 5% decline evenly for everybody. I mean the negative impact is going to be concentrated in certain sectors and in certain states.
Especially as far as groups of people are concerned, the poor, those who are employed in the informal sector and even those who are contractual employees in the so called formal sector, they experience a huge job loss because if companies are experiencing a big decline in production, they obviously layoff labour, especially contract labour, who are not technically their own employees. So the problem really is that you have a massive negative effect on the income of the poor. You’re seeing in these huge migrations that are taking place, people going back from urban areas back to the rural areas. Now, to my mind, I mean, that is a human tragedy. Definitely we should be doing more to provide a basic income support for this group.
But at the same time, we do have to make the economy recover, because if the economy remains totally depressed, then the problem will spread beyond the poor, and even affect the middle classes or the higher income groups. Now, of course, you know, higher income groups also lose income, but that doesn’t affect the essentials for living like food and essentials. They have a lot of margin. I’m talking about the bottom 30-40% of the population, which doesn’t actually have a margin. And they’re the ones that are most hit. And I think that we need to do more for them for sure.
Q: What are your views on RBI, helping the government to monetize higher deficits than targeted on the grounds that this is an exceptional crisis and an exceptional year? Will it cause any serious issues like a run on the rupee as critics point out?
A: Well, actually, let’s take a step back before the issue of monetization of the deficit as it is just one part of the story. I think the first thing we need to do is to be clear, what is it that will cause the recovery to take place? I want to digress a little. I expect that you can see a massive negative growth in the first quarter. And you know, even though by the end of June, it may be said that the lockdown is now being relaxed. The truth of the matter is that it will take the economy a certain amount of time to get back to normal. So I certainly don’t expect to see a recovery to normal in the second quarter. So really, between now and September, we’re going to have a significantly depressed level of GDP. From that depressed level, yes, the second half of the year, you may see an improvement.
Now the issue is, first of all, what can the government do to counteract this? Well, first thing is that you’ve got to put an end to a lockdown. Because if the lockdown is in place, then essentially you’re not allowing supply to increase, maybe if you believe that you have to control infections and so on, but then you must be willing to take that cost. But you should be clear that, unless we can actually get rid of the lockdown, there’s not going to be much recovery.
So what are the things you can now do? Well, I think that you know, we’ve had a massive reduction in demand, partly because people have lost income. And partly also because you know, export demand is very low, the global economy is very low. So if you want to get the economy back to something like normal, you have to act on the demand side to stimulate the economy once you started relaxing on the supply side, that’s where the fiscal deficit issue comes in. I mean, clearly, the government can always spend more. If private spending has gone down, that will increase the fiscal deficit. That’s not the only thing that’s going to increase the fiscal deficit, fiscal deficit is also going to increase because the fall in income and output has led to a huge fall in tax revenues. So you’re going to have a loss of tax revenues. I don’t think you’re going to get much privatization revenue this year. You’re going to also have some increase in expenditure.
Although the package of 20 lakh crores doesn’t have very much of direct increase in expenditure beyond what was already in the budget, I’ve seen some estimates. And the direct fiscal stimulus is only about 1% of GDP, some people think that’s actually much lower than most other countries are doing. So the question that comes up is, should the government be doing a bigger stimulus on demand and living with a higher fiscal deficit? My view is that it is an exceptional situation. People will understand that the fiscal deficit, you can’t apply the rules to the fiscal deficit that you would apply normally. So for the current year, you have to allow the fiscal deficit to expand.
And then the next question is, how do you finance that? My view is that the debate on direct monetization of the fiscal deficit is a little bit irrelevant. I mean, in the sense that the RBI can so to speak, support this borrowing, even if it doesn’t directly buy government bonds in the primary. They can buy in the secondary market, they can sort of transfer some of the accumulated reserves, which is the same thing as monetization. The short answer, therefore, is that this year, whether the RBI monetizes or doesn’t monetize is less critical than what’s the size of the fiscal deficit that you can tolerate. And I think indirect monetization is going to take place. And there’s nothing wrong with it.That doesn’t mean that this is not a problem. Because after all, if our capacity to produce GDP is permanently impacted, then we cannot expect that we will maintain everybody’s income and consumption at last year’s level. But if what we’re saying is that it has been impacted this year and let’s say from next year onwards, we are going to get back to some sort of reasonable norm, then what the rating agencies need to do is if your fiscal deficit is going through the roof this year – it will go through the roof – what are you going to do about it next year? Is it going to continue in that way?
Here you have a problem because we don’t have a very good reputation for maintaining our promises about bringing the fiscal deficit down in future years. This government and also the previous governments kind of failed to keep up those promises. But you know what is past is past. You would have to put across a credible picture that although the fiscal deficit is higher this year, we really want to bring it down next year. If that picture is credible, then I think rating agencies will understand that this year is not the one to watch out. The thing to watch out is are we going to do what we say we’re going to do for next year. On this line I personally think the government would be much better off coming clean on this issue and saying, look for a variety of reasons, the fiscal deficit is going to be much higher. But we promise you, we’re going to bring it down and this is what we’re going to do to bring it down.’
I don’t think they’ve taken that line today. For example, there’s a lot of talk that we’re going to borrow, maybe 2% of GDP more. That’s not going to be enough because the decline in tax revenues alone will take up that space. So we’re going to have more fiscal deficit increase than is currently being accepted. If the RBI refuses to monetize it, it just means that interest rates will shoot up. Because I don’t think that a huge fiscal deficit can be easily financed by bringing in money from outside because money coming in from outside will look at the macro situation. I personally think that the RBI should not object to indirect monetization deficit. And that’s what’s going to happen in due course.
Q: The lingering images from this crisis have all been of the migrant laborers. Do you think this could have been better managed by allowing them a fixed time to get to their native places before imposing the lockdown?
A: Well, you know, it’s as I have always said, there’s no rulebook. Whoever organized the lockdown didn’t really have a rulebook that they could go to, but that doesn’t mean we should not in retrospect try to see what could have been done better. Certainly, I think that we could have given a warning. There was no merit whatsoever in imposing the lockdown suddenly. In Bangladesh, they gave four days warning, in South Africa, four or three. In an environment where people are away from home, and when a lockdown is going to prevent people from moving, it makes sense to give a warning. The idea of warning is that it enables people to decide what they can do and those that really have to get back home can do so. So I think that could have been done a lot better. I also feel that if we had made clear clear what the consequences of a spread of infection would be, it will be less of a panic than what we have seen. It wasn’t clear – what would be the consequences of getting infected? The idea that if you got infected, you would be quarantined in some government facility would be enough to send people back home anyway. You know what our impression of government facilities are. So I think yes, it should have been much better managed. But it’s hard to prove that, you know, in the absence of precedent, these kind of things happen.
Q: Now, with the reverse migration having taken place, do you think that will be a major roadblock in getting the economy to work again?
A: I think that will be a roadblock, even in the sense that when people move, there are some fixed costs to movement. And there’s also a huge uncertainty about moving back. I’m pretty sure that migrants will ultimately come back. But right now, nobody’s quite sure. When the relaxation proceeds, if the infection rate shoots up, what is the government going to do? I mean, are they going to reimpose a lockdown? As long as there is a fear that, you might get caught in a second lock down people are not likely to move back easily. So I think we have a problem in the sense that you may have people who want to move back, but they will not move back suddenly. And therefore, the return to normalcy in terms of getting your labor force back will be more problematic than people think.
Q: Many economists, including Dr Abhijit Banerjee have affirmed that this is the perfect time to implement a Universal Basic Income of Rs 1000 or Rs 500 per month for all Indians and that without such a measure, India is set to go into a deep crisis. Does India have that kind of money and is it possible?
A: Well, you know, as a general rule, I am not in favour of making permanent institutional changes to deal with what is a current crisis. No doubt that the current crisis is a serious crisis. If you take a look at all the different instruments we have for providing more income to the poor, we can do a lot more than what we are doing already. Whether there is a case for a universal basic income is a longer term reform. Everybody who has argued for a universal basic income has said that if you get rid of all the useless subsidies you have and convert it into a universal basic income, the country will be better off. I’m not sure that the universal basic income in other words, as an income that everybody would be entitled to, is really the answer. Remember that almost no country has it. So to my mind, a poor country that has fiscal problems committing itself to a universal basic income without abolishing any subsidies. I don’t think it makes sense.
I do think that if you make a list of the 10 or 20 different schemes that you already have, each one of them is leaky. Now, these are targeted schemes. They do not reach out to middle income or taxpayers – they’re only meant for the poor. Yes, there are leakages. Some people who really aren’t eligible benefit while some people who are poor don’t benefit. But in the middle of a crisis, I am not convinced that we should be making what is actually a structural change for the future. That is something we should think about when we go back to a normal situation.
You cannot be sure about when that will be. Remember, if we go down by 5% GDP in the current year, by next March, some degree of normalcy on this will have restored on the health. When I say normalcy, I don’t mean that there will be no infection but people have got used to it. So from that level onwards, you may get a rebound. Instead of a minus 5%, this year the economy may grow at 5% compared to the current year, but that’ll only take you back to where the GDP was in 2019-20. That means in the year 2021- 22, the GDP will only go back to where it was in 2019-20. So 5% growth next year should not be counted as a sort of a return to high growth’ as it is only a recovery to a more normal production.
The real test is what happens in 2022-23. And that is really going to be difficult. I mean, can we get back to the sort of higher growth rates that we’ve had in the past and we have had periods when we grew over 8 percent. We’ve had a longer period when we flew in about seven and a half percent, then it slowed down. I would say as of now, the longer term growth potential for India is lower anyway because the global growth potential is lower. So the world is entering into a somewhat different set of policy configurations, a lot of the openness and the globalization that encouraged more efficient developing countries to expand their markets will not be available. We probably won’t be able to do a 7.5% but could be 6.5%. Now on present prospects, I’m not even sure if we can do that. So our job right now should be to work out what is needed to get the economy at least to grow at 6.5% in 2022- 23. And there are many things we have to do to make sure that happens.
Q: What are your views on the Rs. 20 lakh crore package announced by the government? Is it really a stimulus or will at least some parts of it work like a stimulus?
A: We will first have to decide what the definition of stimulus is. If your definition of stimulus is that additional expenditure beyond the level that was already built into the budget is what you call stimulus, then the stimulus in this package is much less than 20 lakh crore. Almost all of the 20 lakh crore is a prediction of credit that will be given to the banks based on liquidity that’s been injected by the RBI and some credit guarantees schemes to businesses. Now, expanding credit for businesses is a good thing. From that point of view, I would complement the Reserve Bank of India. On the liquidity side, they have done what is necessary. But that by itself does not ensure recovery. I mean if businesses are broke, not making money, not facing any demand and losing cash you will end up giving a lot of credit. This is just going to lead to a debt service budget, which it can’t sustain, and it’ll default on these loans. The fact that the credit is guaranteed by the government is a comfort to the banks but that doesn’t necessarily contribute to reviving the economy. So I think that the credit is good, but I don’t call it a stimulus.
What we need for the stimulus is a much broader set of measures that would get the economy back on track. And I think a lot of that has to do with stimulating demand. A lot of that has to do with restoring trust that private investment can pick up. Improving the ease of doing business and implementing many of the reforms that have been talked about now for several years but have not actually been implemented. Now the government has mentioned some of them, and let’s see whether they’re able to do it or not.
Q: You are heading Punjab’s Advisory Council for strategies to come out of this crisis along with Dr. Manmohan Singh. Are Punjab’s current issues comparable to other states? Do you think the Center needs to do more for the states as they have been the ones on the front line fighting this crisis?
A: Let me clarify on this. The Chief Minister asked me to head a group of experts to advise Punjab on what he calls the medium and longer-term strategies once the Covid crisis is overcome. Dr Manmohan Singh is advising him separately & is not part of my group. I’m sure that he is giving a lot of advice to the Chief Minister. We have not yet submitted our report. So it’s a bit preliminary for me. But we are going to look at what Punjab needs to do.
Is Punjab in a similar situation to other states? Well, you know, all states are different. Punjab, for a long time, used to be the number one state in the country in terms of per capita income. And you know, for the last 10 years, it’s been slowly losing ground in the state. Frankly, I think Punjab’s long term objective should be not to get back to the performance that it had before the COVID crisis because that performance was causing Punjab to slip. Punjab’s objective should be to get back to grow faster than the rest of India, if we can. We’re kind of trying to raise the sort of issues that are relevant for Punjab to achieve that objective.
Should the Centre do more for the States? Certainly. Most of the expenditures that governments have to undertake are expenditures that are done by state governments: health, education and also social benefits of various kinds and so on. Whereas most of the revenue actually goes to the Centre. Then of course, there is a Finance Commission mechanism for sharing the divisible pool of taxes with the states. One, the Central revenue is going to be much less than was projected. When the state’s budgets were formulated, the central government projected a growth rate of GDP of something close to 7% in real terms. It’s going to end up being minus five, I think. So this means that the revenue that was projected, and on which shares were decided for the states is going to be much less than it was earlier expected. So the question arises, should the Centre compensate the states for the shortfall? You know, I think the Centre could do that if it was willing to increase its own fiscal deficit. But what the Centre has done is that they’ve said, well, we’ll let you borrow. They’ve done that. So whereas earlier, the state’s deficit was capped at 3% of GDP. Now it’s been capped at 5% of GDP. So the states are allowed to borrow more. But you know, the states have very high debt obligations. If you’re denying states the direct revenue grounds that would have come from the Center and simply being allowed to borrow? That’s not an equivalent compensation. So I think that is a little unfair.
The Chief Minister of Punjab had said in a letter that he wrote to the Prime Minister that the Central government should give a COVID-19 grant to the states to compensate for the revenue loss. And actually to tell the finance commission, which is supposed to submit its report for the next five year period this October, to go back to its calculations, recommend what additional ground should be given, raise that money through borrowing, give the grant and postpone the longer term Finance Commission’s Five Year-recommendation one year later. I think this is important. The second thing you have to remember is that the GST, which we all think conceptually is a good tax, takes away taxation capacity from the states. They no longer have what used to be a state’s tax and it cannot now be increased by the states it can only be increased by the GST council. I think the shortfalls in the GST revenue was huge. So really the states don’t have the sort of leeway to make up revenue. And that’s why they need more assistance.
Q: Based on your book, ‘Backstage: Story Behind India’s High Growth Years’, and as an architect of the response in those days, do you think India can ever go back to such a high growth period again? What would be the imperatives for that to happen?
A: Well, that’s a tough question because you know right now, our big challenge is how to get back to the GDP of 2019-20. Because we’re going to be 5% below that this year. And even if we grow by 5%, next year, we’ll still be back at 2019-20. However, there’s no doubt that as said in my book, the UPA was in power for 10 years of which the first seven of those years were outstanding. The last three of those years was when the growth slowed down, still positive, but it slowed down. Now if you look at those first seven years, the growth rate will always ascent. We were all very enthusiastic about it and positive. And then the growth slowed down. I mean, some slowing down was unavoidable. The economy grew at 7.6%. It’s never done that before. But that was a period when the global economy except in the last couple of those years was actually doing very well.
So can we go back to 7.6%? It all depends on how determined we are to fix our own problems because India has a lot of unutilized potential. There will be productivity gain if India does the reforms that are necessary. The real question is: are we willing to do those reforms? Do we know what those reforms are? And is there a political consensus? Now, I would certainly say that, you know, in the medium term, in order not to be unrealistic, we should set a target of trying to get back in the year 2022-23. Trying to get back to somewhere between 6.5% and 7% in 2022-23. I think if we do that, that’d be a pretty good start, then we can see how we can go from there.
Q: Would you agree to the fact that the Finance Ministry faces a conflict of interest when allocating funds to various ministries since they are also responsible for maintaining the fiscal deficit? Moreover, without financial authority to disburse funds does the NITI AAYOG run the risk of losing its credibility?
A: My understanding is that NITI Aayog doesn’t play any role in financial allocation. So, I don’t see how their credibility is involved. In the old days, the Planning Commission was the institution that discussed with every ministry, what is needed in terms of expenditure. And then the Planning Commission would discuss with the Finance Ministry, about how much money is available. And the two together would advise the Prime Minister who would make the final decision. I think that process no longer exists because the NITI Aayog does not get involved in financial allocation. So this whole issue is somehow decided now between the Finance Ministry and the Prime Minister’s Office so I have no idea how that actually functions.
When you say conflict of interest, governments should manage conflicts of interest whether you do it through one mechanism or another. All governments are faced with conflicting objectives. The sign of a successful government is that you give weightage to those objectives and take a correct decision. I don’t think I view the Finance Ministry’s job as simply controlling the fiscal deficit. I mean, after all in certain circumstances the real job of the Finance Ministry is to determine what is the optimum fiscal deficit. Optimal fiscal deficit is not a balance. So there’s a real question, what do they regard today as the optimum fiscal deficit? Personally, I feel they should come out and say so. At present no one has. And I think if somebody were to bring up that case, this is what you think this would be, then we can have a debate on it.
Due to the pandemic, there is an absence of much actual data and quarterly GDP estimates are based on more assumptions than ordinarily used. The provisional estimate of Q4 growth rate is of 3.1% released by the Ministry of Statistics. Do you consider it as an overestimation like many others and is it in the continuation of the data quality issues regularly faced by the NSSO or specific to the current pandemic situation?
I think I’m sure that the pandemic has made life more difficult. I don’t know how they’re handling it, but you should accept that. However, I think on the data side, we do have a problem. I mentioned this in Backstage, India’s statistical system had a very high reputation for being independent of the government and providing the best estimate that is possible of GDP. And I think that over the last several years that independence has gone down. It looks increasingly, as many people have criticized, that the data are held back. If it is not suitable, or if it doesn’t present a positive picture, it is a disaster. This is like trying to treat a patient after breaking the thermometer. So you really can’t measure the temperature. I don’t know what the data will be later. But you know, if you look at the revisions that have been made quarter by quarter, to the Indian GDP in the last several quarters, every two quarters later, the previous two quarters GDP is lower. Whether that will continue or not, we have to see.
Questions from the Participants:
Next two questions are from Dr Madhukar Angur, Founder Chancellor, Alliance University, Bengaluru:
Q: With this pandemic well, a lot of sectors have been affected. One of which has been education. How do you see this pandemic unraveling itself in terms of the future of education across all levels? We are moving towards different modes for delivering education like online or distributed ones, how do you perceive this to affect our education system?
A: I think I’m not knowledgeable enough in this field. But I talk to people in this field and I think universities abroad are thinking very hard. They have really never got away from the bricks and mortar campus style of education and there’s a lot of socio cultural preferences or baggage associated with it. Kids go for three years. They need to be in a campus. The campus must be attractive and all of those things. On the other hand you have technology allowing us to exchange thoughts with your teacher without any of this. People have been saying that top universities will have to change. But you know the pandemic will only make that more so.
One of the problems is that, even after we declared that the pandemic is over, there will be a resistance towards gathering together in large crowds. These fears, once they’re created, are very difficult to get over. Once you have a vaccine and a cure and if all get vaccinated so that they don’t feel too vulnerable this won’t be a problem. That may take a couple of years to get the vaccine identified. Getting coverage will take even longer. I think all kinds of new methods of education will be experimented. Not just an issue of new methods of education, it also affects the reach of a university. I mean the number of people that can be taught through this method and how the best lectures can reach out to people. Well, it’s a revolution and I honestly, don’t know what the impact would be.
If I were running a university or responsible for a university, I would put a lot of high level input into thinking how it’s going to change, but most importantly what I’m going to look at is what others are doing. I mean, as I said in the beginning ours is not the only country facing this problem. I think our universities should be better informed about what’s happening elsewhere. What is MIT doing? What is Harvard doing or Princeton doing? Part of the problem is that most of the big universities have a high remuneration for the top professors which you recover by a high fees from the students. This may no longer be feasible. Funds are drying up, government funds are drying up. My guess is that in India the regulatory system should encourage innovation and competition.
For instance, if you are running a private university, you’re allowed to do online education or distant learning but only within the state where you are accredited. You are not allowed to do it in another state. Technically, if you are established in Bengaluru, and you have excellence, and somebody from Punjab wants to get educated, they should be allowed to do that. There is no reason why these antiquated antediluvian regulation and license permit raj should exist. These are very difficult to change. But I think these are issues that should be taken up and changed.
Q:Recently in education we have focused a lot more on research and dissemination of knowledge. Universities worldwide have also been focusing on this for decades. However, the unemployment rate, for instance in the United States right now is alarming. Even what we have seen in India is disheartening. When we look at the organizations, their workforce has three constituents: a critical genius component, a specific skill component and an easy to fill component. The easy to fill component had the most amount of workers being laid off. In this scenario, should universities be focusing on developing the specific skill component?
A: I genuinely agree with the proposition. First of all the case for short term questions derives if nothing else, from the fact that the old style of education models that you get educated between the ages of eighteen and twenty one and after that you don’t learn anything and just go to a job and keep learning there is no longer true. People are going to switch occupations, I mean there is still a case for a basic degree.
But people will have to learn to keep acquiring skills. And you know we underestimate, what this means. My grandson is ten years old and he knows more about my IPhone than I do. Clearly I am not adequately educated to use this technology so we need to have a lot more of that. I mean universities need to do that. My feeling is that that universities will respond quickly if demand for employability surfaces. What I am not very sure about is leaving the universities particularly the public sector universities to determine what the right skill is. Because there are huge vested interest in declaring certain skill are important once they exist. So I think we need to create flexibility where different kinds of skills are taught and we leave it to the market to determine who is going to take what courses.
Next question is from Dr Sudhakar Rao, Director – Branding, ICFAI Group:
Q: In 2011, the census states that there are about 45 crore migrant labourers in the country. Almost a decade since then we don’t know how many migrant labourers are there. As an Economist, how do you suggest that we can make an estimate of the number of migrant labourers existing in an area so that subsequent administrative action is based on this data?
A: I know in Punjab for example, similar problems of not knowing how many migrant workers are there. But we first need to step back and analyse why the migrant crisis has arisen. For example, between two workers who does an identical work in a factory in the city, one comes from a rural area 30 miles away and another comes from a rural area from a different state a 100 miles away. The first person is not a migrant and the second one is. What is the entitlement we are really thinking of? Are you going to have different entitlements if you are a migrant and if you are not a migrant? Or, should you be having uniform entitlements and then stretch out the relevant social safety net across the board? Focusing on migrants alone is like they are not citizens of India. It is evident in case of larger states. If a person migrates from East Uttar Pradesh to Noida, which is next door to Delhi, you are not considered a migrant under the census definition because he is still in his own state.
What we need to be clear about is why the migrant workers suddenly uprooted themselves. Obviously, there was either a lack of trust in something or a feeling that their rights will not be protected. If we had established a situation of trust and they would have stayed where they were then the question would be how we look after them. That is a relevant question. Whether someone is sick or not sick. Did they feel that if they fall sick in an urban area, in a state that they don’t come from they might simply be not looked after? Whereas if they go back to their state they will be looked after.
I think we have a major problem of a lack of a social safety net. But that is there for both migrants and non-migrants. We certainly need to strengthen that basic social safety net. It is probably true that a migrant whose family home is hundreds of miles away feels more insecure for any given social safety net than a person whose family is only fifteen miles away. But you can’t have a system where you are getting special privileges because you are a migrant, which another worker in the same company doesn’t get.
Next question is from Ms. Sucharita Saha, a management student at IIM, Ahmedabad:
Q: The economic recovery will depend on the steps that are taken after the lockdown is lifted. India has imposed one of the strictest lockdowns in the world. How would you predict the recovery of countries that has imposed a strict lockdown vis-a-vis countries that have not?
A: Calculation by a group in Oxford does suggest that we have had a very strict lockdown. But we need to ask ourselves, was it imposed that strictly? So if we were to adjust the provisions of the lockdown to how it was implemented, I doubt it was very strict.
Second, a lot of research that has been done shows that there is no relation between the strictness of the lockdown and the beneficial effect. There are countries in Europe that have been very strict and counties that have not been. A lot depends on whether the habit of individuals achieves social distancing. Let me give you an example, if 50% of Mumbaikars live in slums with 8-9 people in a room. A lockdown means you can’t go out and you stay in the room with another 8-9 people. This is very different from what a lockdown does in Germany where you are restricted to a house where you are effectively practicing social distancing because there are much fewer people. So I am not sure if anyone thought what this strict lockdown would mean in practice and for that reason it may not have led to the effect that you expect.
Now, lockdowns means you cannot go to work. Factories are told you can start, provided you maintain social distancing. But many of our factories are so crowded and it is virtually impossible to maintain social distance unless you can cut the workforce to 30-40%. So what are we going to do in that dimension also becomes important.
When we talk about a recovery, I still do not have an estimate from the government. They cannot make an assessment of the fiscal deficit without estimating the growth rate. So there is a huge question mark on those things. I stated that the GDP should grow by 6.5% because once we get back to normal we cannot get to a GDP over 7% quickly. So we need to try for a 6.5% growth at least. What would it take? One, it is very clear and everyone is in agreement that India needs a lot more high quality and more efficient infrastructure. Infrastructure is expensive. Who is going to produce this expensive infrastructure? The government has a program which says that we are going to have a national investment pipeline and some numbers have been given. The numbers assume a certain amount will come from the private sector, a certain amount from the states and a certain amount from the Central government. This projection of investment is not tied up with other projections which would be made consistent with the overall fiscal deficit. For example, if we are going to end up with a fiscal deficit of 6% of GDP and we want to get it back to 3% of GDP in two or three year, we need to have a turnaround of 3% of GDP just for the fiscal deficit to get back to square one. If in addition to that we want to invest in the infrastructure, adding to the fiscal deficit, then the turnaround needed is more, say 5% of GDP. Where is that going to come from? In my view, some of that will come from cutting wasteful expenditure. Then we should create public support for cutting wasteful expenditure and what is that. Most of it has to come from much better tax revenue. In my view, that is an untapped resource.
Many studies have shown that given India’s per capita income we should be raising an extra 4 to 5% of GDP. So something is wrong with our tax system. It is not just the rates of tax but it’s the method of administration .GST is an example; a wonderful idea but got messed up in implementation. I have said in different contexts that we should take some lessons from the book of 1991 reforms, which I also talk about in my book Backstage: The Story Behind India’s High Growth Years. In 1991 the government set up an expert committee headed by Raja Chelliah, including some of the tax experts in the country to lay out a framework of tax reform. I think we need to do that now. This cannot be done in secret within the government. One cannot expect the current Finance ministry which is responsible for GST to come up with reforms. It is not human to say I am sorry I got that wrong. They will probably say that this was actually right but a little thing has caused a problem. We need a fresh look. We need an outside look, an expert look and let the expert report be made public. Set up a committee of non-political experts, draft a report and let the government say that in the next budget we will do everything that the report says.
Let me give a small example. Most businessmen say that the worst thing about working in India is the unpredictability and the unreasonableness of the tax assessments. Our tax rules are so vague and can be interpreted anyway you like. The present position I saw is that if the economy is going down we won’t be able to raise the tax revenues that we are talking about. The department of revenue sent an instruction to all tax assessment officers that your tax target remains the same. This means each of these officers are supposed to achieve a 13% increase in taxes as the budget mentions, even though the GDP is going to be much lower and therefore you expect a cut in taxes. Obviously what they are going to do is make unreasonably high demands. You can’t blame these officials when they are clearly instructed from authorities. What makes it worse is that no tax official is punished if the taxes they levied are ultimately shot down through the appeals process. They are only held responsible for what they levy. Many businessmen say that compared to other countries dealing with our tax authorities is hugely difficult. You cannot blame the tax authority if you do not have realistic tax assessments mechanisms.
(Interview by: John Antony, Editor, Seasonal Magazine | Host: Carl Jaison, Features Editor)