Subramanian Swamy

[The author is a MP nominated by the President to the Rajya Sabha in recognition for his eminence as an Economist. He is a former Union Cabinet Minister for Commerce & Law, and Professor of Economics]

The 2019-20 Budget presented to Parliament today is full of promises, or of objectives, but little said in the Budget or Finance Minister‘s Speech on the economic priorities, the strategy for achieving the objectives, and the measures for mobilization of resources.

This year the Budget Session will not see the Annual Economic Survey placed on the Table of Parliament, for no disclosed reason. Hence a complete statistical analysis based on government-collected data is not possible as of now of the Budget proposal.

But according to available statistical indices,the Indian economy is on the edge of falling into a serious crisis. Government now admits that revised data show a sharp fall in GDP growth rate from 8.2 % in 2016-17 to 7.1% in 2017-18. We do not have data for 2018-19 to discern if the decline in GDP growth will continue, and any proposal how the growth rate will be higher in 2019-20 due to Budget proposals.

Another indicator of a crisis is the admission in the Budget that the loans to be taken by the Government in this Budget will almost be equal to the amount to be repaid as past loans taken. In other words we are on the verge of a Debt crisis—which is dangerous. Nor is there any concrete proposal in the Budget for liquidating the NPAs burden on public sector banks.

What then needs to included in the Budget today to obviate the looming crisis? First let us understand the economic compulsions,and the reality of today’s economic situation assessed from the following facts:

[i] Indian economy needs to grow at and average of 10+ percent per year for the next 10 years to achieve full and adequate employment, to decimate poverty, and for India’s GDP to overtake China’s GDP, and thus pave the way to stabilize world economy by forming a global economic triumvirate of India with US and China.

The growth rate of the Indian economy as measured by GDP has fluctuated around 7% per year overthe last five financial years 2014-15 to 2018-19.

This growth rate is insufficient to reduce unemployment, leave alone create full employment and drastically cut the poverty in the country.For that we need today for GDP to grow at 10+ % annual growth rate for the next decade.

Hence we must chart out a policy to accelerate our growth rate to 10+% per years for the next decade.

[ii]To raise GDP growth rate to more than 10+% rate the rate of investment has to rise to 38% of GDP from the present 29%. Of this, household saving is the bulk of India’s national investment at 80% of total investment.

But since 2016 household saving has dropped from a high of 34% of GDP on 2014 to 28% of GDP in 2018 mainly due to the poorly implemented Demonetization.Household saving has to be incentivized[such as by abolition of personal Income Tax] to rise back to 33% of GDP.We are witnessing today how much happiness there is due to a small waiver of income tax by proposing to raise the tax limit bar to above Rs.5 lakhs.

Non-household saving is today about 5% of GDP.  For fixed deposits in banks, the rate of interest should not be less than 9% and this will boost institutional saving in fixed deposits.

Since the growth rate in GDP is calculated as equal to the rate of total investment [as a ratio of GDP] divided by the productivity coefficient of capital [called capital-output ratio presently at inefficient high of 4.0], therefore to achieve 10+% growth rate in GDP, a household saving rate of 34% of GDP, a non-household saving rate of 5% of GDP, and a capital output ratio at not more than 3.9 is necessary.

That is, if the rate of investment is 39% and productivity [capital-output] ratio is 3.9, then GDP growth rate is 39 divided by 3.9, which equals 10%. Thus higher the productivity in the use of capital [i.e., lower is the capital output ratio], higher is the GDP growth rate for the same level of investment.

The decline in the level of household saving thus causes a decline in the GDP growth rate and it is this we must address in a Budget, but have not seriously.

[iii]Since end-2016 there werecertain economic measures but badly managed in implementation by the Ministry of Finance,thus causing a set back to the economy.Principally, these measures were:  (a)Demonetisation (b)Goods & Services Tax[ GST ]   (c) Bankruptcy Code

[iv]The Ministry of Finance has brutally cut allocations year after year of the investments in infrastructure despite the urgent need for such infrastructure. This there is an improvement but not enough.

       The economy however needs about $1 trillion investment in infrastructure to render “Make in India” a reality, but the actual investment in sanctioned projects in valued is even less in real terms than the amount invested in pre-2014 years.

[v] The manufacturing sector,especially MSME which provides the bulk of the employment for the skilled and semi-skilled in the labour force,has been growing at abysmally low rates between 2% to 5%. For this the interest rates on loans to MSME should not be more than 9%. At present MSME are lucky if loans can be got for less than 14%.

[vi] India’s agricultural products are among the cheapest in the world, and despite a low yield per hectare, we are not able to increase the yield to its potential maximum and thereby at least double the production and export the agricultural products abroad commensurately.

Consequently, agriculture as sector is the largest employer of India’s manpower is grossly under-performing. Measures such as doubling incomes by doles or writing off debts are ad hoc and not long term or structural. Problems will thus recur.

[vii] When crude oil prices had steeply fallen over the four years since 2014, and despite the dollar value of the rupee had till mid 2018 had been steady around Rs.65/$, nevertheless both exports and imports, declined over the three years 2014-17.There today to claim to have reduced CAD in the Balance of Payments Accounts is trivial.

Now today in 2019 the Indian economy is facing a 180 degree adverse situation: a rise in the Re/$ rate to 75, and crude oil prices rising in $ per barrel. This is causing massive crunch on our foreign exchange reserves.

        To seriously address these seven priority problems, it essential to implement a new menu of measures to uplift,(a) by dramatic incentives for the household expectation and sentiment to save, (b) lowering the cost of capital via reducing the prime lending interest rates of banks to 9%, by shifting to a fixed exchange rate regime of Rs 50 per $ for the FY 19 and then gradually lowering the exchange rate for subsequent years, by abolishing Participatory Notes while invoking the UN Resolution of 2005 to bring back black money of about $1 trillion abroad held illegally, and printing rupee notes to fully finance basic infrastructure projects while keeping concerns about fiscal deficit ratio in the cold storage.

Thus the present possibility of an economic crash should thus galvanize us to review honestly the way wehave governed and donethe business of governing, and then rise to new heights by appropriate change in policy, and thereafterachieve higher growth rates of 10+ percent annual growth in GDP with structural changes..

The BJP government also needs to give an alternative ideological thrust to economic policy rather than trying to improve on the past failed UPA economic policies, as presently being done. In particular:

[a]The individual has to be persuaded by the government by incentives and not by coercion. Of course, the state should make no promise to the people without specifying the sacrifice required to be made by the people to make it happen.

[b] India can make rapid economic progress to become a developed country only through a globally competitive economy which requires assured access to the markets and technological innovations of the United States and some of its allies such as Israel. This has concomitant political obligations which must be accepted as essential.