In our growth agenda, the world can’t be just US & Europe: Rakesh Mohan

Days before first Union Budget of Modi 2.0, former Finance Secretary and former RBI Deputy Governor Dr Rakesh Mohan, who was also an Executive Director with the IMF until recently, presented a report on ‘Moving India to a New Growth Trajectory’ for Brookings India. He spoke on a range of issues in an interview with Bijoy Sankar Saikia .

Excerpts:-

When the entire nation is clamouring for jobs, jobs and jobs, you seem to be suggesting "focus on growth, jobs will follow"?
I say, growth, growth, employment and universal basic services. In a very basic sense, I don't know any other way of generating employment unless there is growth. Unless you focus on growth, whether it is in agriculture, industry or services, you can't have employment. You will have to concentrate on stepping up the growth rate in a manner in which there can be greater employment generation; which means employment-oriented growth. We really need to shift our attention on how to generate much higher growth rate in industries that are more labour-intensive.

But one of the best growth phases of our economy also saw an estimated 18 million job loss. How does one explain that conundrum?
I am not sure where you got this 18 million number. I don't accept that number. But what would have been the job growth, had there been zero growth? Secondly, our focus has not been on growth in manufacturing, which is labour-intensive. In this country of 1.3 billion people, only 14 million are employed in the organised sector. In China, that number is 100 million plus. That's the thrust of the entire debate. You cannot get employment growth in this country, unless you really focus on the organised sector, labour-intensive industries.

Your labour-intensive manufacturing growth model obviously is export-focussed, which is also the China model. In a world that is increasingly protectionist, would it work?
If the world to you is Europe and the US, then it won’t. But the world in next 5, 10, 15, 20, 50, 100 years is not going to be the US. The world is going to be China, ASEAN, Latin America, Africa and South Asia. The volumes there will be much larger than the west. The import-GDP ratio of China is much higher than the US; the import-GDP ratio of ASEAN is much higher than the US or Europe. So, the expectation of growth in GDP, in terms of incremental GDP in the world, will be higher in the next 15 years than the past 15 years. The growth in demand for goods imports will be much higher.

In simpler terms, China is 1.4 billion people, we are at 1.3 billion; that's 2.7 billion. ASEAN combined is about a billion now. Along with rest of South Asia, we are 4 billion plus. Projections by ADB and others suggest 5 per cent GDP growth. So if each of these 4 billion plus people buys one shirt extra a year, one pair of extra shoes a year, one extra chair a year; imagine the numbers. There is no shortage of demand. You better be conscious of this.

In your growth model, you visualise a large share for private sector investment in infrastructure, at 50-55 per cent. In the past few years, in almost every infrastructure sector that private sector has invested, they have got into a mess.
Everything is not in a mess. If you look at where we were 50 years ago, and where we stand today, it's utterly wrong to say everything is in a mess. First, you have to recognise, huge improvement has taken place in roads -- whether it's national highways or rural roads. Secondly, look at telecom. Again a huge improvement in terms of everyone now having a cell phone. It's all private sector. There has been a huge improvement in airports; again private sector. Much of the expansion of ports has happened from private sector, because there is a steady stream of revenues. A steady stream of revenues is what the private sector has to have to be able to invest. You have to be clear on what the private sector can do and should do, what they cannot and should not. There may be some policy issues. Power sector has issues; in generation there is a lot of private sector, but there are public policy problems, because we still have a lot of subsidised power consumers. So, it's very clear: unless there is a steady stream of revenues, then private sector can't invest. There is a public policy issue, where tariffs have to be changed, connections have to change, policies have to be changed. In other areas like urban infrastructure, water supply, sanitation, roads; these are public services. Largely, the public sector has to invest there.

You also say replacing Planning Commission with Niti Aayog was an unfortunate move. You actually, make a case for bringing back a plan panel kind of structure.
If you have to focus on a roadmap, there are a lot of public investment functions in terms of coordination and investments; even by the private sector. There are huge inter-connections that take place. For instance, roads have to be connected with ports and airports and logistics parks. Similarly, investment in power has to be coordinated with availability of energy sources, be it coal, petroleum pipeline, ports. These things cannot be done without synchronisation. Therefore, you need to have a coordinating body, which has fund allocation powers. When different ministries are drawing up plans, someone has to coordinate them. That function has been taken away from Niti Aayog.

To my understanding, no country has grown fast without synchronising these efforts. The coordinating body has to be technically competent. What happened with Planning Commission was that it was successively bureaucratised; it needed a complete revamp. This is the opportunity to set up such a competent body which can carry out these functions. It has to be staffed with technically-competent people in every sphere so that it enjoys the respect of all departments.

You say RBI is funding govt borrowing, plus it has also been borrowing to manage liquidity in the system. You are also a member of Jalan Panel. Reading between the lines, are you sort of telling the government to look beyond RBI’s so-called ‘excess’ reserve to recapitalise banks?
In the last seven-eight years, financial savings in the country has come down. In order to understand the problems we are facing in terms of lack of investment and lack of capital in the country, we need to look at why the financial savings have come down. As a consequence of financial savings coming down, RBI had to do a lot of open market operations for the government borrowing programme in 2018-19,, which came to around 70 per cent. That's a reflection of the lack of financial savings in the country. Given the lack of fund supply, it has also become difficult to ensure official transmission of monetary policy.

You also say India’s tax-to-GDP ratio is too low to support the kind of growth we desire. But right now everyone seems to be wanting the FM to cut tax rates to boost demand in the economy and enthuse private sector capex?
I have a clear view. Our tax rates, especially personal income-taxes, are lower than the world average. There is absolutely no need for any cut in personal income-tax rates. The threshold has already been raised effectively to Rs 6.5 lakh ($9,300), which is excessively high at about 4.5 times India's annual per capita income. In the US, where the per capita income is around $50,000, around 30 times that of India, the current income-tax threshold is $13,500. We have to make every citizen understand that we have to contribute to revenue so that the government can provide services. You can't have services coming out of nothing. So, there is absolutely no reason to cut income-tax rate.

Corporate tax is more complicated. But if you take the actual incidence, which is around 24%, it is pretty low. We have zero tax on dividends in the hands of investors. In the US, dividends are taxed in the hands of investors. There are some reports, including one from OECD, which suggest that tax is very high. What they have done is add the dividend distribution tax, as if all the profits are distributed. I don't understand how a skilled technical body like OECD can make such an error to come out with some 44 per cent number. This is factually wrong. Obviously, the tax regime has to be fair, transparent and easy to administer, but you have to look at the revenue kit of the country before looking at tax rates.