Informist, Monday, Jul 15, 2024

--Ajay Chhibber: Govt needs to focus on job creation ecosystem

--CONTEXT: Economist Ajay Chhibber's comments in interview to Informist

--Ajay Chhibber: Govt must lay out 5-yr agenda for job creation

--Ajay Chhibber: High GDP number not enough unless jobs created

--Ajay Chhibber: Govt needs to address land, labour sector issues

--Ajay Chhibber: Consumption patterns changed, need to diversify crops

--Ajay Chhibber: Need supply side measures to address food inflation

--Ajay Chhibber: Just tweaking income tax rate will not boost demand

--Ajay Chhibber: Pvt investment not fiscal spend to create jobs

--Ajay Chhibber: Fiscal consolidation needed to brace for future crisis

By Priyasmita Dutta and Sagar Sen

NEW DELHI – Record capital expenditure and high GDP numbers are not enough, India urgently needs to tackle the issues of unemployment and rural distress, according to noted economist Ajay Chhibber. "It is not the job of the government to create jobs, but it is the job of the government to create an ecosystem that will allow people to invest and hire and create more jobs. Just bearing down on capital expenditure alone will not do it," Chhibber, a distinguished visiting scholar at the Institute of International Economic Policy at George Washington University, told Informist in an interview.

"Just getting high GDP numbers is not enough unless you create more jobs and job creation has to become a bigger focus of the government," Chhibber, who is a non-resident senior fellow at think-tank Atlantic Council, said.

Chhibber said the answer to India's employment problem lies in reforming the labour sector. "Labour is very important because while we think we have done labour reforms, actually all we have done is a cosmetic job of bringing 40-50 labour laws into four categories, but no big reform."

The government should create an ecosystem for better job creation and use the rural job guarantee scheme as a safety net, he said.

"The rural job guarantee scheme is there for desperate times... It is not the solution. It is basically a situation where if you have more of these schemes, it means you have more distress, and you have less productive jobs being created," he said.

The problem with domestic inflation is coming from food, and it originates from the fact that Indian agriculture continues its focus on the same commodities like wheat, rice and sugarcane. "Those (wheat, rice and sugarcane) are the three crops that have grown enormously, and we have more of them than we need," he said.

"This (food inflation) comes from the fact that the demand has moved away from certain types of commodities, and we are continuing to produce more of those commodities and less and less of other items like potatoes, tomatoes, oil seeds. That has to be addressed through more supply side factors. I do not think monetary policy is the solution to that."

"We need a new green revolution. We need Punjab and Haryana and western Uttar Pradesh to get out of wheat and rice and sugarcane and go into higher valued crops to supply growing cities... We can shift wheat and rice to more appropriate areas because right now we are destroying the water table in Punjab and Haryana by growing rice and sugarcane."

According to Chhibber, India's high GDP growth has not translated into consumption demand and the reason for that is the rising inequality and that cannot be resolved by tweaking income tax rates.

"And that (rising inequality) is what you need to address if you want to fix the demand problem. Your economic model is benefiting a few corporates at the top, but they do not feel confident enough to invest because they do not see the demand that should have gone with 7-8% GDP growth. Just tweaking the income tax rate will not do it."

Below are edited excerpts of the interview:

Q. This is the first coalition Budget under the National Democratic Alliance government. What do you think the Budget focus area will be?

A. The election has produced results and the way I interpreted those results is that the people want a change. Particularly, unemployment and rural distress are two big areas that could have had an effect on election outcomes.

The existing growth model of capital expenditure is a good thing, because India is deficient in infrastructure. So in the last 10 years, spending has been good for India, but it is not enough, because it is not just about getting high GDP numbers. A high GDP number is not enough unless you create more jobs and job creation has to become a bigger focus of the government. It is not the job of the government to create jobs, but it is the job of the government to create an ecosystem that will allow people to invest and hire and create more jobs. Just bearing down on capital expenditure alone will not do it. And that does not mean that they need to stop doing capital expenditure on infrastructure. They should continue with that. But, the cost of running that infrastructure, of operating infrastructure or using infrastructure is quite high because of a number of government policies, such as the price of petrol and diesel, and freight costs.

Finance minister had said in an event in February that the government will focus on second generation reforms - the labour market, the land market, capital market - and she had added digital public infrastructure, where India is already doing well. Labour is very important because while we think we have done labour reforms, actually all we have done is a cosmetic job of bringing 40-50 labour laws into four categories, but no big reform. What the central government has done simply is to say to the states we will allow you to have a little bit more labour flexibility. That is where I think the answer to our employment problem lies. Our most abundant resource is labour, and we are using it very badly. We are not employing most of our people. In particular, women's labour force participation remains quite low, even if they claim that there has been some increase recently.

We have to give labour flexibility. Why don't people hire more labour? They don't hire more labour because of the labour laws. They are so complicated.

It is not a Budget issue, but it is a five-year agenda for this government. What sort of reforms do we need to do to get us to a more sustainable environment? Land is another very big issue because we have very low floor area ratios. Generally, across the country, we are using too much land in our cities. We are not going vertical, we are spreading. It is a very inefficient urbanisation that we embarked upon. The other issue is that, because there are no jobs, all these people are stuck in agriculture.

They (government) keep saying employment is rising, but employment is rising because people have no jobs so they go and work on farms. And farms are getting smaller and smaller and then the farms get less and less productive. So try and lay out an agenda for the next five years of how you will create this ecosystem and different incentives and reforms for more employment creation and more investment by the private sector.

Q. What do you think the government can do in the Budget to address rural distress?

A. I do not think they can do much in the Budget because they have already announced the minimum support prices for this crop season. They will have to finance that out of this (2024-25) Budget. All the surveys show first that the farmers really prefer to actually get out of agriculture, and certainly have their children out of agriculture. They also want more direct income transfers, not MSP.

The government can take up the report that its own minister had produced--Shanta Kumar report--about five or six years ago. That report shows a clear vision of getting out of this cycle of wheat and rice and sugarcane because those are the three crops that have grown enormously, and we have more of them than we need. Consumption patterns have changed. India needs more oilseeds, more pulses, more vegetables, more fruits and the current system perpetuates that old style of agriculture. So it is solving the problems which we had 50 years ago.

We need a new green revolution. We need Punjab and Haryana and western Uttar Pradesh to get out of wheat and rice and sugarcane and go into higher valued crops to supply growing cities--fruits, vegetables, oil seeds etc. We can shift wheat and rice to more appropriate areas because right now we are destroying the water table in Punjab and Haryana by growing rice and sugarcane.

They have to have a five-year plan to show the farmers the way forward, that the government will give more money through the PM-KISAN programme and start reducing all these other subsidies like free electricity, MSP, pesticide, fertiliser subsidies. Because fertiliser subsidies also lead to very inappropriate mixes of fertiliser.

But for this Budget alone, they are stuck. But over the next two to three years, they have to lay out a different vision for the farmers and then get a buy-in from those farmers and have more discussions rather than trying to ram three bills through parliament like they tried to do last time. They made the farmers very suspicious of their intentions. The Shanta Kumar committee has laid out a much better vision for the future.

Q. Is there a case for the government to increase the allocation of the rural job guarantee scheme and do you think there is a scope that a similar plan can be announced for the urban side?

A. The rural job guarantee scheme is there for desperate times. You go to the rural guarantee programme only because you are desperate, there is nothing else that is available to you. It is much better that you focus on how we create the ecosystem for better job creation, and you can keep the rural job guarantee scheme as a safety net. Distress means more demand for employment guarantees, so by itself, having more employment guarantee schemes is actually a sign of more distress. Rather, you create a sustainable ecosystem for job creation. You can expand it to the urban areas. Maybe you can build some municipal infrastructure using that, but it is a palliative and will not get us to a 'Viksit Bharat'. It is not the solution. It is basically a situation where if you have more of these schemes, it means you have more distress, and you have less productive jobs being created.

Q. Do you think that the government should be more aggressive in inflation management and if at all, there is scope to give budgetary relief to cool inflation?

A. I think the Reserve Bank of India has done a pretty good job. Governor Shaktikanta Das has applied the flexible part of inflation targeting quite well, and I think he has managed to navigate the period through the pandemic without damaging growth in a very practical manner.

The problem with inflation is coming from food inflation. This comes from the fact that the demand has moved away from certain types of commodities, and we are continuing to produce more of those commodities and less and less of other items like potatoes, tomatoes, oil seeds. That has to be addressed through more supply side factors. I do not think monetary policy is the solution to that.

Q. There is a lot of buzz about the government tweaking income tax rates in the upcoming Budget? Do you think any relief in income tax will help with consumption?

A. Tweaking the income tax a little bit here and there only makes a small difference. The real issue is why is demand so low? It is because income inequality has gone up so much. The GDP growth has not translated into consumption demand. And the reason for that is rising inequality. And that is what you need to address if you want to fix the demand problem. Your economic model is benefiting a few corporates at the top, but they do not feel confident enough to invest because they do not see the demand that should have gone with 7-8% GDP growth. Just tweaking the income tax rate will not do it.

Q. The government has repeatedly said that they will bring the fiscal deficit to 4.5% of GDP by 2025-26 (Apr-Mar). Do you think this has borne fruit for overall economic growth?

A. I think that the fiscal deficit, if you take the consolidated combined fiscal deficit of the states and the Centre, is one of the highest in the world. I think going forward, India needs more private investment. That is where jobs would come from, not by having more fiscal spending. Other than the Maharatnas, all the others should be privatised and that will generate about $350 bln.

The government should not have these yearly targets of disinvestment which they have been trying to do, and they fail every time. Find a way to monetise these and use it for more public infrastructure, health, education and social infrastructure. So they should set up a 5- to 10-year plan of privatisation and say this money should not be going back into the Budget. This money should go to the National Investment and Infrastructure Fund and then be leveraged with either foreign money or other private money. You can double or triple its value. So $300 bln can become a trillion dollars in investment.

Q. Now that we have a true coalition government without the BJP getting the clear majority, do you think that it would be slightly difficult for them to push through any of these major privatisation or strategic sales?

A. No, I do not think so. I do not think Chandrababu Naidu or Nitish Kumar are against this kind of privatisation. It is not like you are in a coalition with the Communist Party of India or the Communist Party of India (Marxist). I do not see that as a problem. They may have to allocate some money to each of them because they will make demands on the government, but that is manageable.

Q. There have been demands for special financial packages from Bihar and Andhra Pradesh. How do you think this may impact how other states view cooperative federalism?

A. That is a big challenge politically. Maybe they will not call them special packages. Maybe they will find some other way to do it without it appearing like you are breaking the norms for a more cooperative federal system. I am sure there are ways to handle it. We also have an ongoing Finance Commission, so they can also look at this as part of the Finance Commission recommendations.

One important issue is that more money needs to go to local governments. Local governments in India have very little money and that does not have to come out of the central pool, it has to come out of the state pool.

Q. Should there be a relook at the general government debt to GDP percentage and is there a scope for the government to amend the Fiscal Responsibility and Budget Management Act now that there is a much clearer fiscal consolidation path ahead of us?

A. No. They have flouted the original Act, but they have justified it on the grounds of an emergency situation that came during the pandemic. They have basically delayed the glide path.

Now I think India's debt GDP ratio is hovering close to 80-90% when you take the total. They need to start going back to the 60?cause in a few years we will have some other emergency like a pandemic. We had the global financial crisis, then we had the pandemic. So, when times are good, goods and services tax revenue has stabilised, and you have the option of privatisation...you should try to do more fiscal consolidation to prepare yourself for crisis that will inevitably come. End

Edited by Ashish Shirke

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