Solution For Demand Lies In Fiscal Policy: Arun Kumar

With the Union Budget 2020 knocking at the door, noted economist Arun Kumar shares his views exclusively with Outlook Money about the current state of the Indian economy. Excerpts from an interview with Rajat Mishra.

Your analysis of the current state of Indian economy.

So, you know, the current state of the economy is very bad. The rate of growth of the economy has been coming down in the last six quarters now. So, the situation is quite grim. And as I've been saying the rate of growth is not positive any longer, this is negative, given the fact that the unorganised sector has been declining, and that data is not included in our growth data. 

Now, you know, when the economy is declining like this, that is why the business confidence will be down, that's why the consumer confidence is down. And when that business confidence is down, and the capacity utilisation is low, then the investment doesn't start increasing. And if the investment doesn't start increasing, then the rate of growth of the economy goes down further 

What is your rationale behind saying that GDP is actually in negative? 

So, my rationale for saying that is that in the economy, the data that we get for quarterly growth rate is only the organised sector data, the unorganised sector data is not included in that data at all. You know all that is an indication that the economy is going down; especially the unorganised sector is going down. 

RBI has not cut repo rate in December month’s monetary policy meeting. Do you think that this action of not slashing repo rate, keeping in mind the inflation rate is appropriate? 

The problem is that RBI cannot act autonomously. The monetary and fiscal policy had to go together and monetary policy cannot be very effective in the current situation. So, even cutting the repo rate, you know, which has been done five times earlier has not led to an increase in the investment rate in the economy. And the reason is very simple because capacity utilisation is constantly declining and business competence is declining. 

Now, in that situation, the investment will not rise. So, for instance in Germany and Japan, where you had a negative interest rate, you still had a slowdown in the economy because the investment was not taking place, investment was not increasing. So, in India also cutting the rate is not going to help in raising that investment rate at the moment.

But that's the only thing in the hand of the RBI and it is not able to control inflation, because inflation is food inflation and monetary policy cannot control food inflation that has to do with supply-side with the fact that we had a drought to begin with. So, the crop got affected and as a result the food prices increased. 

So, in other words RBI cannot play much of a role except for cutting the interest rate at the moment, but that also will not solve the problem that has to come from the fiscal policy side that we are to increase demand in the economy.

Recently, Arvind Subramanian in collaboration with his colleague at Harvard Kennedy School, Josh Feldman wrote a research paper. The duo stated that the government is grappling with a four-balance sheet problem. Your opinion on the same.

Earlier, there was the twin-balance sheet problem and now four-balance sheet. Given the NBFC crisis as well as the existing NPA system, I think the real issue is demand. The real problem is not just investment, not coming because you know, these are NPAs and there's bad debt and that is taking place.

I think Arvind is missing the point completely when he overlooks the unorganised sector. That has been a problem with all government economists and all IMF and World Bank economists that they only look at the organised sector. They don't look at the unorganised sector. 

So what we needed to do is to increase expenditure in the unorganised sector. So, I don't agree with that analysis coming from IMF and World Bank that you need to do more for the organised sector and completely ignoring the unorganised sector from where this problem is coming from and we need to tackle the demand problem from the unorganised sector, which includes farmers which includes workers in the micro sector, the sector and micro sectors units which are facing huge problem, where the incomes have been lost by 94 per cent of the people working in the unorganised sector, we have to address that and increase their incomes. 

What suggestions you have for the chief economic advisor to the finance minister?

So, that's what I said that the problem began with the unorganised sector which got affected by the GST, which got affected by the demonetisation, so demand revival requires in the unorganised sector, purchasing power should be pumped in there. 

MGNREGA budget should be expanded and doubled, you know then farmers incomes have to be improved by giving more to the farming community, rural infrastructure that has to be improved. 

You know if we do that, then only we are going to see an increase in demand, which will increase capacity with licence and that will lead to an increase in investment. So, the problem has to be tackled at the level of the unorganised sector. And that is where I think the revival has to take place.