New Delhi: India can grow in double digits in the post-Covid decade but needs to do a bit more on the reforms front, like privatisation of state-owned firms, trade liberalisation and further relaxation in labour laws, former NITI Aayog vice-chairman Arvind Panagariya said.
Speaking to ThePrint in an interview, Panagariya noted the average growth over the last decade, highlighting the role of reforms.
“The pieces of the puzzle are in place. India ought to grow in double digits in the post-Covid decade. With limited reforms, we had grown at 7-8 per cent. If you take the average growth from 2003-04 to 2019-20, the average growth is 7 per cent plus,” he said.
“We can add another 2-3 percentage points to it with the reforms that have been done and just a little bit more… India’s prospects in the post-Covid decades are excellent,” he said.
Liberalising trade and further changes in labour laws by states were “doable” missing pieces in the reforms, said Panagariya, who is a professor of economics at Columbia University in the US.
“It is an ironclad law that if you import less, you export less,” he said. “Simple average of tariffs on industrial goods has gone up from 12 per cent to 14 per cent over the years. We need to bring it down to 10 per cent,” he said.
Panagariya also advocated changes to labour laws by the states to encourage large firms in labour-intensive sectors such as textiles and footwear. He said the changes to the central labour laws had permitted firms with up to 300 workers to lay off staff, higher than the earlier limit of 100 workers.
“When states implement these changes, hope that they raise this limit to 10,000 or 15,000 or suspend the provision for a few years,” he said. “We lack large enterprises in labour-intensive sectors. We need to create good jobs for lesser skilled workers.”
‘Covid cess not a good idea’
A Covid cess is reported to be one of the options being considered by the Narendra Modi government as part of the Union Budget 2021-22, to be presented on 1 February, to garner revenues.
Panagariya, however, said levying a Covid cess would not be a good idea.
“It distorts the tax system. Let’s keep the tax system as clean as possible,” he said, adding that levying a tax is “anti-stimulus”.
Panagariya instead favoured cleaning up the personal income tax by doing away with exemptions and rationalising the tax rates.
Demand stimulus has a good chance of working
With the vaccine coverage gradually increasing, workers will now start to return to their workplaces, Panagariya said, adding that a demand stimulus now has a good chance of working.
“I think we are now at a stage where workers are returning to their workplaces. So a supply response becomes possible. A demand stimulus has a good chance of working now. In the past, when people were not mobile at all, even if you made income available to households, they could not go out to spend,” he said.
Panagariya said an income transfer can only work if it is targeted at the bottom 30-40 per cent of the population and should be a substantial sum.
“If a fiscal deficit has to be raised a bit… I would still stay between 1-2 percentage points of GDP in extra expenditure compared to what we would have done absent Covid,” he said.
But he pointed out front-loading expenditure could be enough to bring the economy back to pre-Covid levels and an additional stimulus may not be required.
He suggested measures like payment of goods and services tax dues to states, reimbursement of refunds to taxpayers, timely payment of dues to companies from government departments and transferring PM-Kisan payments to farmers in one go instead of three tranches.
On need for a separate disinvestment ministry
Panagariya also favoured a separate disinvestment ministry whose performance is judged by the amount it is able to raise through stake sales.
“Public sector enterprises have been identified and a green signal has been given by the cabinet. In many cases, government ownership is less than 60 per cent and these firms listed on stock markets. All the bureaucracy has to do is sell off 10 per cent or less and then give charge of the management to the private sector,” he said.
“We need to reinvent the disinvestment ministry that was successfully deployed by (then prime minister) Atal Bihari Vajpayee in early 2000s. When a ministry is going to be judged by how much it will raise in disinvestment, maybe it will become proactive,” he added.
He pointed out that the Modi government’s intent has been to privatise since 2016, but there has been hardly any traction over four years hence.
“I used to be very optimistic that we will see disinvestments happening (in 2016). Since then, four years have passed and nothing has happened. That has left me less optimistic,” he said, adding that the hold-up is at the bureaucratic level.
On recapitalisation of banks and bad bank
Recapitalisation of state-owned banks is “inescapable” and it ought to be done sooner rather than later, Panagariya said.
“The tendency is always to wait till the credit growth collapses. I have seen that movie played out before,” he said, adding that overcapitalisation will not hurt banks but undercapitalisation can lead to a decline in growth rate.
Panagariya also did not support the idea of a bad bank as the Insolvency and Bankruptcy Code can help banks in resolving their bad debts.
“I had proposed a bad bank in 2015 but then I changed my mind. We could not put together an infrastructure investment fund in two years. I am sceptical that we can move fast enough to create a bad bank. There is no real need for a bad bank right now. Now we have the IBC and there is a process that can be used,” he said.
‘Flexibility on farm reforms is good’
Asked about the Modi government’s offer to farmers to put on hold the new farm laws for about 18 months, Panagariya, who has been an advocate of farm reforms, said it is good that the government is showing this flexibility. However, he said most farmers do not oppose the farm reforms.
“At the end of the day, we live in a democracy and political compromises have to be done. I welcome that the government is showing this flexibility. Not every reform can happen on the day it is announced. These reforms would have taken time to be implemented,” he said.