Kolkata, January 30 

As the Finance Minister Nirmala Sitharaman gets ready to present the Union Budget for probably the most critical phase of the economy, Dr Amit Mitra, a seasoned economist-turned-politician and currently Principal Chief Advisor (Cabinet rank) to the Chief Minister and Finance Department, Government of West Bengal, feels that “there is no readymade formula to tackle stagflation which is policy induced…the Union Finance Minister is facing the challenges of unemployment (both in formal and informal sector) and high inflation”. “Credit demand is not picking up because there is no excess demand. If there is no excess demand there will be no appetite for investment,” said Mitra, who was previously the Finance, Commerce & Industries Minister of West Bengal. 

The way forward for the Union Finance Minister is to own up the mistake of adopting Ronald Reagan’s supply-side policy, and move from there to massive demand stimulation. “Look at short term and medium term by giving money in the hands of people and start repairing the supply chain,” he told BusinessLine

Excerpts: 

Q

What are the challenges before the Union Finance Minister Nirmala Sitharaman and her team as she sets out to present the Budget? 

India is confronted with one of the biggest challenges which no other country has today. It is the challenge of simultaneous inflation and unemployment. The unemployment rate in the country is close to 8 per cent. In December there are an estimated 30 million people in the country who are unemployed, and this is leaving aside the informal sector. The unemployment rate is also growing at 10.5 per cent. Normally, when you face unemployment, then you stimulate the economy, but the high inflation makes that difficult. The WPI is 13.5 per cent and CPI is 5.6 per cent and 6 per cent is the danger mark.

No country in this world is in this state of stagflation, and there is no off-the-cuff remedy for stagflation. After demonetisation a reasonably stable growth of 8 per cent began to plummet and within seven months came the unprepared announcement of GST. This was then followed by Covid. So, there is no readymade formula to tackle stagflation, which is policy-induced. 

When Covid hit the world then all countries stimulated demand by putting money into the hands of common people. But we (India) were looking at supply-side solution. However, in West Bengal, we put money in the hands of people, and that is why the State grew by 1.2 per cent while the rest of India had a negative of 7.7 per cent. Instead of following the Keynesian theory, they (Union Government) cut corporate taxes, expecting them (companies) to invest when there was no demand. There were unfulfilled capacities due to poor demand. The capacity utilisation was close to 60 per cent. So, the 10 per cent reduction in corporate tax went into their books as profit; there has been highest corporate profit induced by wrong policy and corporate profits of listed companies are soaring due to wrong policy. 

Q

According to you there is a world of ‘have’ and ‘have not’ now? 

On one hand you have crores of unemployed, high inflation and in the middle of that high corporate profit, which are policy-induced. This will lead to greater inequality. The salaried unemployment is high at around 1.3 crore. There is no appetite for investment as there is no demand. Investment level has fallen as a percentage of GDP from 31.3 per cent in 2013-14 to 27 per cent in 2021. If you look at capital formation as a percentage of GDP, we have not caught up with the pre-Covid GDP level of ₹20.35 lakh crore and we are at ₹19.74-lakh crore now. 

The debt to GDP ratio of Centre and States put together is close to 74 per cent, which is huge. Now much of this is being pushed to States. The debt GDP ratio of States, which stood at 21.69 per cent in 2014-15, has increased to 26.63 per cent in 2021. This, in effect, is not only debt GDP crisis, but it is being pushed onto the States. The Central government is borrowing from Reserve Bank of India’s special window and passing it on to States back-to-back, instead of giving it from their own funds. For West Bengal alone the borrowing stood at ₹4,431 crore in FY21. During the period April-November 2021, this has increased to ₹6,425 crore. 

Look at the GST compensation, it is also not being paid to the States. In 2021, close to ₹2,080 crore worth of GST compensation was not paid to West Bengal. The borrowing limit of States is at 3 per cent of GDP, down from the earlier limit of 4 per cent. So, on one hand the FRBM limit is at 3 per cent of GDP, and on the other hand you are pushing more debt into the hands of the States, because they do not want it to show on their fiscal deficit as the credit rating may fall. 

Also, the household spending is below the 2019 level. It had fallen to 9.3 per cent in 2020. Savings rate has fallen from 23 per cent of GDP in 2012 to 18 per cent in 2019. Now, what the US has done is they have given $2,500-3,000 cash in hand to families, so in October-December 2021 they grew by 7 per cent. UK, Germany and other countries have taken similar measures of stimulating the demand. All economies are following demand stimulation. Ronald Reagan cut taxes for correction in business cycle, but now being faced with a pandemic the Union Government is cutting taxes when there is no demand. In this situation created by wrong policies, instead of adopting the Keynesian theory, you are going in for Ronald Reagan supply-side policy. 

Q

How will the Finance Minister handle the paradox in the economy as underlined by you? The Union Government has come out with PLI schemes? 

The most dangerous part is that the supply chain is broken. Nearly 60 per cent of manufacturing is in informal sector, the MSME segment – it is critical to bring them back in system and improve the supply chain. 

On PLI the answer is simple. Measuring productivity is an economists’ conundrum, Measuring productivity is difficult, and without measuring productivity how can you give incentives. 

Q

What is the solution to boost growth? 

The Union Finance Ministry has to come and own up the mistake of adopting Ronald Reagan supply-side policy and move from there to massive demand stimulation. Look at short and medium term by giving money in the hands of people and start repairing the supply chain. Infrastructure takes time to be built and it cannot happen in a month or two. You have to structure yourself in terms of spending to address unemployment rates and address supply side issues. 

In the forthcoming Budget you have to first admit that you have followed wrong policies and give up business cycle correction policy. They have to look at MSME, small informal sector to correct supply chain, otherwise it will be defying the Phillips curve. Either the Budget should be a tectonic shift or it will be a carry-on Budget tinkering with existing policies. 

Q

How is West Bengal holding on? How does cash in the hands of people work? 

West Bengal has had 1.2 per cent growth in GDP. One example of supply-side measure taken by the Mamata Banerjee government is that we reduced stamp duty by 2 per cent and circle rates by 10 per cent; this immediately helped the bounce back of real estate sector, which is a labour-intensive industry. As regards cash in the hands of people, we are doing this for essentially collapsed systems of economy to survive. You have consumer spending it creates demand and then supply side takes over – it is a counter shock. 

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