Brookings India Chairman Vikram Singh Mehta speaks to journalist Karan Thapar on whether the Finance Minister should be cautious or bold in this year’s Fiscal Budget.
How has demonetisation been viewed by foreign investors? Has it made India a more inviting destination or has it raised concerns and made them perhaps pause and think once again?
Demonetisation has introduced a major element of uncertainty to planning for investment. There is no real sense yet of the full impact of demonetisation; we all speculate but we don’t really know whether the downturn that we have seen in the last few weeks would indeed recover quickly or would it be a long-drawn process. Foreign investors are however not driven by this short-term measure, they’re looking at other steps as determinants of their interest here and as far as India is concerned it is still seen as a major market, especially in view of the fact that China has seen a significant slowdown in economic growth. But demonetisation has introduced uncertainty, and uncertainty is not healthy for planning.
Almost every single company that I have spoken to has faced a significant downturn in the demand for its products, but I’m not in the business, and if others [on this panel] are optimistic about the speed of recovery then I’m not going to challenge them, but certainly there has been a decline in consumption and economic growth, whether it’s 1 per cent or 0.5 per cent, whether that’s going to be annualised over the year to make a severe dent on our economic growth is another issue, but clearly the Finance Minister is looking to present a budget against the backdrop of uncertainty.
There is a certain measure of debate taking place on how the investment in infrastructure, which everyone wants the government to do, should be financed…
Disinvestment is certainly one of several measures the government will have to take to raise funding for infrastructure investment. The politics of disinvestment are complex, some companies are going to be easy to disinvest, many others have vested interests that prevent it from happening, and we have a long history of effort on this issue. But it should definitely be on the government’s agenda, and if it does not succeed in large measure to raise the funds through disinvestment, it will certainly not have the funds or the resources to kickstart public expenditure and investment.
But this is only one measure; we have a very narrow tax base, so clearly the government has to broaden the tax base.
There is a larger issue here and that is the whole investment environment and how do we make the environment more attractive to bring both domestic and international investment into the country. We have an opportunity now, as I said earlier, because China is falling off the edge at the moment, vis a vis other countries, but at the same time there is this huge Trumpian countervailing pressure where Trump is forcing American companies to invest only in America and so the globalisation model has been appended.
We have to recognise that in order to attract investment we have to leapfrog past some of the obstacles that have prevented companies from creating competitive world-class organisations and enterprise in this country, whether it’s the Ease of Doing Business, whether it’s the cost of actually establishing the right investments here, but the fact is we will have to focus on those systemic, structural issues if we really want to accelerate investment.
The Business Standard says that a second area where the Finance Minister needs to concentrate his attention is to encourage a rebound in consumption. What do you think the Finance Minister needs to do to encourage people to spend?
It’s all to do with incentivising consumption through additional public investment and expenditure, it’s through the creation of jobs, it’s through the simplification and rationalisation of taxes, it’s through the implementation of the GST. We have to ensure that there is a connection between what the government is doing and what are the aspirations of the people. People need to feel that they are secure, their earnings are secure and that they can spend without fear of any backlash. At the end of the day, I think the private sector is not going to be investing because there is overcapacity, the credit market is dried up right now, the banks are still facing huge non-performing assets, the international market is slowing down; everything really rests on how the government is going to actually increase public investment. That’s where the focus is, that will then generate jobs, that will then eventually lead to increase in consumption.
Would you agree with the line of thinking that we need to move away from a manufacturing approach to one that is service and cyber space connected?
I would. I’m not sure that I would completely debunk the idea of manufacturing. I think within the manufacturing sector the small- and medium-scale enterprise are hugely labour-intensive and these are the companies that need to be encouraged. The tax structure has to be simple and rational, and the credit structure needs to be encouraging so that people put their money and invest, but let’s connect the dots, because we’re not just going to be able to solve our labour problems through the service sector. We need to actually create a manufacturing hub. I go back to my theme, which is here we have an opportunity to create a manufacturing hub because our competitor companies are no longer seen as attractive as they were, so in order for us to do that we have to sort out the structural issues and create a cost-competitive operating environment and that I think is going to be crucial if we’re going to address the issue of joblessness in our country.
We have to also understand the issue of rural-urban migration. We have to make sure that we actually create enough incentives so as to be able to invest in the rural and semi-rural areas so that people don’t migrate into urban cities and put the kind of pressure that they have started putting on our urban metropolises.
Do you believe post-demonetisation, post-Trump and post what is happening in the global markets that this is the moment for Mr Jaitley to be bold or to be careful and cautious?
I think this is a moment for him to be bold. This is an opportunity for him to grasp. I do believe that we must not ignore the immense opportunities that arrive from Trump adopting a protectionist approach, the global economy slowing down, China’s economy also slowing down. This is the time when we need to accept that we still have a vibrant economy and we could attract a disproportionate amount of investment if we only address some of these issues that we have talked about today, in particular the issue of Ease of Doing Business and within that frame address two-three very major issues like land acquisition, regulation, the availability of critical infrastructure for businesses so that the entry hurdles for new business is reduced or is lower.
Like other products of the Brookings Institution India Center, this article is intended to contribute to discussion and stimulate debate on important issues. The views are of the author(s). Brookings India does not have any institutional views.