India will not find it easier to cut itself off from the Chinese economy as China remains an important trading partner and unfortunately, an important part of India’s competitiveness, NITI Aayog vice chairman Suman Bery said in an interview with Yogima Seth & Vinay Pandey. Edited excerpts:One of the big thrust of the budget is job creation for youth. Is the fiscal support for the job schemes enough to propel employment creation?
The aspiration of youth is to be in better paying jobs which means higher productivity jobs. India being such a vast and varied labour market, there is much to be done to match skills and opportunities. The estimate that only 50% of graduates are immediately employable creates a case for intervention and hence the cash-linked employment incentive schemes in the budget.By giving youth cash incentives, you will encourage them to invest in themselves. At the same time the budget is also incentivising the employer, assisting them to expand employment. As this takes off, I think money will not be a problem.
The fiscal consolidation has been sharper than expected. Do you think it should have been a bit less to support growth?
I think it is both substantive and symbolic. The desired transfer of leadership from government-led capex to private sector-led capex would be easier if bond rates come down as a result of lower government borrowing. The symbolic aspect in this budget, is to establish credibility. The FM has provided guidance about what would happen after we reach the fiscal deficit of 4.5%, namely that it will be based on declining ratio of debt to GDP. In time that could have an impact on our sovereign credit rating. So net, I think the gains via these two channels outweigh the Keynesian effect of sharp fiscal consolidation.
The budget is banking heavily on states for reforms related to land and labor. Do you think it is doable given the current political scenario?
These are both state subjects. Investors look for a better investment climate. If they find a more benign environment in one state over another then they will gravitate towards that. I think the primary mechanism and role of the centre is to nudge states in that direction. I agree that both agriculture and labor reforms, as they were framed, are politically difficult. In this budget, the focus in a lot of places is also on technology. Policies, of course, matter and matter hugely.
Do you think there is a case for easing Chinese investments in India as has been talked about in the survey?
I doubt we will find it easier to cut ourselves off from the Chinese economy than the Americans are finding. The challenge is to provide more clarity to our relationships with China. China remains an important trading partner and unfortunately, an important part of our competitiveness, particularly as we get into green technologies. As we create domestic capacity, we need to figure out whether you are creating capabilities that can follow the technology curve. If you cannot track all that’s happening in terms of scale, then you are trapping yourself into obsolete technology. It is important to maintain competitive pressure while developing domestic capacity. We should not be satisfied to be a backwater in terms of technology. A lot depends on domestic competition, openness.
Every budget has a couple of flash points. In this one, obviously, it’s capital gains tax . What is your sense of it?
The Budget gave away revenue to the middle class, as part of the review of the change in the deductions, and it had to be made up somewhere. So they made it up from the capital gains tax. Whether capital gains should be taxed at all has already been a topic in economics. I think that it is one way of making the tax system slightly more progressive, if you know the benefits or who will be hurt or affected by the rise. Assessment shows most of the people who will be affected are probably in the 30% income bracket.
Is there a case for us to differentiate between the more volatile part of inflation and core inflation?
To anchor inflation expectations, the target has to be one that reflects the lived reality of the average citizen and in India this reflects prices of food and fuel. This does not prevent the Monetary Policy Committee (MPC) from choosing another indicator to set the policy rate. This is done by the US Federal Reserve for example. answer even from the most erudite economists. Some will say you cannot, some will say, yes, you can through indirect suppression of demand, when you suppress demand, food demand is also suppressed. But in a country, like India, do you want to suppress food demand because there is inflation? If you don’t want to do it, then what do you do, then you have a PDS. We already have a PDS. We have free food. Is that fully reflected in our measurement of food inflation? Probably not. So probably, there’s an overestimation.
The aspiration of youth is to be in better paying jobs which means higher productivity jobs. India being such a vast and varied labour market, there is much to be done to match skills and opportunities. The estimate that only 50% of graduates are immediately employable creates a case for intervention and hence the cash-linked employment incentive schemes in the budget.By giving youth cash incentives, you will encourage them to invest in themselves. At the same time the budget is also incentivising the employer, assisting them to expand employment. As this takes off, I think money will not be a problem.
The fiscal consolidation has been sharper than expected. Do you think it should have been a bit less to support growth?
I think it is both substantive and symbolic. The desired transfer of leadership from government-led capex to private sector-led capex would be easier if bond rates come down as a result of lower government borrowing. The symbolic aspect in this budget, is to establish credibility. The FM has provided guidance about what would happen after we reach the fiscal deficit of 4.5%, namely that it will be based on declining ratio of debt to GDP. In time that could have an impact on our sovereign credit rating. So net, I think the gains via these two channels outweigh the Keynesian effect of sharp fiscal consolidation.
The budget is banking heavily on states for reforms related to land and labor. Do you think it is doable given the current political scenario?
These are both state subjects. Investors look for a better investment climate. If they find a more benign environment in one state over another then they will gravitate towards that. I think the primary mechanism and role of the centre is to nudge states in that direction. I agree that both agriculture and labor reforms, as they were framed, are politically difficult. In this budget, the focus in a lot of places is also on technology. Policies, of course, matter and matter hugely.
Do you think there is a case for easing Chinese investments in India as has been talked about in the survey?
I doubt we will find it easier to cut ourselves off from the Chinese economy than the Americans are finding. The challenge is to provide more clarity to our relationships with China. China remains an important trading partner and unfortunately, an important part of our competitiveness, particularly as we get into green technologies. As we create domestic capacity, we need to figure out whether you are creating capabilities that can follow the technology curve. If you cannot track all that’s happening in terms of scale, then you are trapping yourself into obsolete technology. It is important to maintain competitive pressure while developing domestic capacity. We should not be satisfied to be a backwater in terms of technology. A lot depends on domestic competition, openness.
Every budget has a couple of flash points. In this one, obviously, it’s capital gains tax . What is your sense of it?
The Budget gave away revenue to the middle class, as part of the review of the change in the deductions, and it had to be made up somewhere. So they made it up from the capital gains tax. Whether capital gains should be taxed at all has already been a topic in economics. I think that it is one way of making the tax system slightly more progressive, if you know the benefits or who will be hurt or affected by the rise. Assessment shows most of the people who will be affected are probably in the 30% income bracket.
Is there a case for us to differentiate between the more volatile part of inflation and core inflation?
To anchor inflation expectations, the target has to be one that reflects the lived reality of the average citizen and in India this reflects prices of food and fuel. This does not prevent the Monetary Policy Committee (MPC) from choosing another indicator to set the policy rate. This is done by the US Federal Reserve for example. answer even from the most erudite economists. Some will say you cannot, some will say, yes, you can through indirect suppression of demand, when you suppress demand, food demand is also suppressed. But in a country, like India, do you want to suppress food demand because there is inflation? If you don’t want to do it, then what do you do, then you have a PDS. We already have a PDS. We have free food. Is that fully reflected in our measurement of food inflation? Probably not. So probably, there’s an overestimation.