Poor Arun Jaitley is under attack from all sides. Many economists of all hues are asking for a fiscal stimulus for the Indian economy. The facts are clear. Since the time Narendra Modi became prime minister and Jaitley the finance minister, i.e. 2014-15, economic growth has steadily gone down – from around 8% to between 5.7 and 6.5%, according to various estimates. BJP MP Subramanian Swamy, normally a supporter of the Modi government, has come out with scathing criticism of Jaitley’s economic policies. The unkindest cut has come from Yashwant Sinha, a finance minister in the first NDA government and, at least formally, a senior advisor to the BJP as a member of its ‘marg darshak mandal’.
The space for fiscal stimulus is there. The economy has been hit by inflation but this has nothing to do with the overheating of the economy but is caused by a spike in foodgrain and vegetable prices. The continual inflow of foreign portfolio and direct investment has led to the rupee’s overvaluation and is hurting India’s exports. So an increase in the fiscal deficit can lead to the rupee finding its proper level and boosting India’s exports. Moreover, the banks are awash with excess liquidity and are finding it difficult to find profitable investments. The decline in GDP growth is leading to an increase in the non-performing assets of banks and is posing a threat to the security of the entire banking sector.
Modi’s ‘Make in India’ slogan has been a flop. As former finance minister P. Chidambaram has pointed out, the rate of growth of manufacturing has slumped in recent years and major large-scale industries have created only around one lakh jobs, a nanodrop in an ocean of joblessness. Credit growth to both organised manufacturing industries and small-scale and medium industries – which are the principal creators of jobs – has been negative. Declining interest rates have not been enough to spur gross capital formation, which has also declined. As Keynes argued, fiscal stimulus is absolutely necessary to stimulate an essentially depressed capitalist economy.
Yaswant Sinha can claim some credit for a better performance than Jaitley because it was under his regime that India witnessed some of the highest rates of growth in its history. India’s GDP growth rose from 3.99% in 2002-03 to 8.06% in 2003-04, to 9.57% in 2006-07 – the highest rate ever recorded – before declining to 9.32% in 2007-08 and 6.72% in 2008-09. The Congress received some of the lingering benefits since GDP growth again rose to 8.59% in 2009-10.
Sinha utilised two major instruments to raise the GDP growth rate. First, he abolished the long-term capital gains tax, India being one of the few countries to do so. He ignored the advice of think-tanks like the National Institute of Public Finance and Policy because it reduced the narrow tax base further. Secondly, he recognised Mauritius as a legitimate tax haven. If an Indian company claimed to have invested in a joint venture with a Mauritian entity, it would escape by paying a rate of tax of 10% instead of the 30% or more tax to which it would have been subjected. Thus a company could export its profit to Mauritius, bring it back and invest in the Indian stock market and get away without paying any tax on its crores of rupees of profits. There was really no monitoring authority to check whether the Mauritian joint venture was only a postal address or whether there was a real Mauritian entity to have a joint venture with.
Sinha went further. Disregarding the protest of the Reserve Bank of India, he allowed Participatory Notes of unknown provenance to be operated in the stock market. However, while through these devices Sinha raised the rate of growth in the economy, he further encouraged the mercantile short-termism of Indian companies. Many companies found it much more profitable to be punters in the stock market than invest in long-gestation projects. By contrast, the industrial revolution was effected by engaging in innovative and risky projects. Indian companies still depend on land, minerals and cheap labour, and in the case of IT companies on low-value-added services. Some of the leading manufacturing countries such as Japan, South Korea and Taiwan have practically no mineral resources whatever and have some of the highest real wages in the world. Yet they sell their cars, computers, telecommunication equipment, electronic goods to the advanced capitalist countries as well as poor developing countries including India.
In order to put the economy on a trajectory of sustained growth, what we need is a large fiscal stimulus package. The components of that package will include the restoration of subsidies on farmers, a massive increase in public expenditure on health care and education and infrastructure projects that will link remote villages to state and national highways rather than confining such expenditure to the so-called quadrilateral linkages. It is also necessary to bring back targeted lending by banks. These targets will include lending to farmers, large, small and marginal, and small-scale and medium industries. GST has already yielded a bonanza in public revenues. If the government really catches hold of tax and loan defaulters, there can be a large increase in loan repayments to banks and tax revenues for the government without breaching the deficit target so beloved of the government.
Amiya Kumar Bagchi is a distinguished economist whose books include The Political Economy of Underdevelopment, Private Investment in India 1900-1939 and Colonialism and the Indian Economy.