Do you think the current growth momentum, at around 7%, can be sustained till 2030 without a significant boost to demand and consumption?
What happens to India in the aggregate is a function of what is happening at the level of states. The Indian government is really a sigma of state GSDP [gross state domestic product] apart from things like defence, railways and national highways. A lot of states today are performing far below potential, there is a lot of slack.
The growth drivers have to be consumption and private investments. One of the problems of saying anything about the Indian economy is that there are time lags in data. But my reading is investments and consumption are showing signs of recovery. I am reasonably confident that in the next five years, we will have a growth rate of 7%.
Do you not think it is time for India to lower income taxes and remove exemptions to boost consumption?
Whenever I try to reduce taxes to boost consumption, I am doing two different things: firstly, I am creating discretion because I am not reducing it across the board, so there are distortions; and secondly, all resources have opportunity costs—this means whenever I am cutting taxes, I cannot spend that money on something else.
Broadly speaking, there are multiplier effects from cutting taxes, increasing revenue expenditure and capital expenditure. The multiplier effects, theoretically as well as empirically, are greater for capital expenditure, lower for revenue expenditure and lowest for cutting taxes. One reason why I think we have done relatively well post-Covid and lockdown compared to some countries in the West is because we have not cut taxes.
We need reforms on direct taxes. The reforms are, as you rightly said, the removal of all exemptions. Even today, there are two channels. One channel is with fewer exemptions and [the] other with exemptions for both personal income tax and corporate. The trouble today is not too many people have opted for the fewer exemptions channel. So, the challenge in the new budget will be to incentivise this.
I see no reason why taxes for those availing exemptions should go down.
What do you have to say about the argument put forward by southern states that they are being fleeced by the Centre just to fund the eastern belt?
I think the South versus North issue is grossly simplified. In economic terms, it is not a South versus North issue. Particularly, if it is Tamil Nadu, it is more a political issue.
The economic issue is [that] there are two channels of funding available from the Union government. One is through the finance commission, which has two kinds of things: First is, how much of the divisible pool are the states getting in the aggregate, and second is, how it is distributed among states.
As far as the debate is concerned, it is more around the 14th Finance Commission. Has the Union government deviated from its commitments? It has not. In fact, the 14th Finance Commission suggested a dramatic increase from 37% to 42%.
So there, I do not see what the argument is.
We should scrutinise what state governments are spending on and what they have done with the recommendations of the state finance commissions. If we ask them, then we will discover that the reason state governments are in a mess despite GST revenue having been good for them is because they are spending on the short term rather than long term.
The issue of unemployment is once again being discussed. Why are we not able to create sufficient jobs, especially for the youth, even after growing at this rate?
I would begin with a clear admission that the quality of our data on labour employment leaves a lot to be desired. If the quality of the data is not good enough, then every researcher tries to make assumptions.
Let us not argue that no jobs are being created and recognise something which is not recognised quite often—that the rate of population growth in India has dropped to about 0.8%. It is no longer 1.3% or 1.5%. The number of children in the 0 to 15 age group has declined since 2019, not only as a share, but in absolute numbers.
If you look up an old record of the former Planning Commission, whether of the S.P. Gupta Committee or the Montek Singh Ahluwalia committee, and you say we need to create 10–12 million jobs a year, then that is wrong. We do not need that many. How many jobs do we need to create a year? But I am guessing about 8 million. Growing at 7%, are we creating 8 million jobs a year, is that my claim?
No. But to say we are creating zero jobs is also not correct. I think we are creating 4–5 million jobs a year, but we should be creating about 8 [million]. The employment elasticity of growth has declined. It has not declined since 2014, it has been declining since 1999–2000. It has been continuously declining down the years.
So, it is a fact that not enough jobs are being created. But I should also say this: I do not think it is an all-India issue, because you will find states in India where they are saying we do not get people.
But would we not be creating many more jobs had the micro, small and medium enterprises (MSME) sector not been affected the way it was by the pandemic and reforms like GST and demonetisation?
Maybe yes, maybe no. The average MSME employs 1.5 people. It includes the services sector. There are large MSMEs—about 25,000 of them—and then there are the smaller ones. If the MSMEs are in bad shape because they cannot survive after becoming part of GST, it is too bad. If MSMEs were producing sub-standard and fake drugs in garages and if we are now insisting on good manufacturing practices for which they have to close down, then again, too bad.
We know MSMEs have not been doing too well, and I agree that they are in labour-intensive sectors. But the key question is what the competitive advantage of MSMEs are. Unless we answer that and define what MSMEs are, I do not think it leads to any policy conclusion. We recognise that there are economies of scale, if not in production, certainly in distribution. So, what is it that the MSMEs bring to the market?
