Economist and British politician Meghnad Desai is a self-confessed fiscal hawk.
So, the 77-year-old Indian-born member of the UK’s House of Lords would like to see finance minister Arun Jaitley mostly stick to the fiscal deficit glide-path instead of proposing to overspend in the union budget that he will present later today (Feb. 01).
Overall, Desai, an emeritus professor of economics at the London School of Economics, rates Jaitley as a “good caretaker” who hasn’t rocked the boat. And the Indian economy, he adds, is well on its way to recovering from the twin shocks of demonetisation and the goods and services tax (GST).
Edited excerpts from a recent interview with Desai, who last month also released his book on Indian democracy, The Raisina Model:
This is the last full budget before the 2019 elections and there is chatter that the finance minister will throw money into the hinterland. What is your expectation from the budget?
You know, I am a fiscal hawk basically. I don’t like the deficits. I think if you’re going to borrow, borrow cleanly, but don’t just overspend. You can say that we are going to borrow for the following infrastructure schemes—that’s fine. Borrowing for capital spending is fine. I think interest rates are too high…and the Reserve Bank of India is not going to give him (Jaitley) any room… because, quite rightly, he (governor Urjit Patel) says his job is to control inflation; he’s not on the government’s pay-check. So, I think Jaitley will have to keep his current expenditure, current revenue in quite tight control. And then say…we are going to do the following big, big visible borrowing, which we will finance in such and such way over time. Luckily, I think, partly due to inflation during (the previous United Progressive Alliance government) UPA-II, the debt-to-GDP ratio is not as high as it used to be. So, he has a bit of room on borrowing.
How would you rate Jaitley’s performance as finance minister?
I have to sort of confess he’s a friend of mine, so I may be biased. My view is that keeping to the deficit path was extremely important and he kind of slightly deviated a bit last time and he’s going to be back on track. I don’t know how the GST is going to show up in the numbers but the GST experiment was just not smoothly implemented.
I think he has been a good caretaker. I think (P) Chidambaram (the former finance minister) was a good caretaker. Pranab Mukherjee was actually quite destructive…very destructive in the Vodafone case. Nothing like that has happened under Jaitley’s watch…neither too much laxity nor too much dogmatic. And I don’t know whether he was even told about demonetisation…I don’t think he was told about demonetisation. That’s the way Modi operated. But I do seriously believe that this (economic growth slowdown) thing is not a pucca trend. It is just a small deviation and it’ll bounce back—the economy.
Do you have any concern about jobs?
Jobs are a very interesting thing. I’m only concerned about jobs in the fact that I don’t think anybody knows how to do accounting for jobs. I think jobs in the formal sense are not being created…as many as one would like to create them. But what is happening is what we call in the UK the gig economy. There are lot of earning opportunities being created but they are not formal jobs. They are like casual work, they are variable hours…you know somebody asks you to go to this delivery and then there’s the next.
I was talking to some people on the council of economic advisors about the real definition of earnings…how are people earning money, and let’s find out the variety. There’s so much of the service economy now that people are making money in a variety of ways. And if we can find out that, it’ll make a lot of (difference). There is, of course, this great desire for formal jobs in this economy, especially formal public sector jobs are so highly rated that people are willing to pay (a) huge premium on that. But my gut feeling is that unemployment is not as big a problem as it used to be in the ’50s and ’60s. The economy is creating earning opportunities but we just don’t know how to find them.
But there were large numbers of young people across the country who really bought into prime minister Modi’s campaign promise of more jobs which, from whatever we can analyse at least on the formal side, hasn’t materialised. Do you think he will now have to manage expectations going into 2019?
Absolutely. One of the things is that a lot of political understanding of the economy is quite out of date and people think output creates jobs and things like that. That imagination is a manufacturing imagination. In a service economy, which India is now, there are a variety of job situations which are not proper jobs. But as I said, they are earning opportunities. And I think the prime minister himself did not realise when he took to the campaign in 2014 that he could have offered some sort of growth but he couldn’t really necessarily offer jobs. Nobody wants to admit that. Which politicians want to admit that they can’t offer jobs? And what other description would you find for that? And I think there’s a serious problem here that the economy is going to be more and more (a) service economy. And also in a better paid part of the service economy, there’s huge productivity growth.
I’m noticing how fewer people are going into engineering…there are too many engineers in the economy, and there’s not enough jobs for engineers because the economy is doing something different.
In your book you say that Modi is not a radical reformer. But then he goes and pulls something like demonetisation. And he pulls it off six months before THE GST is set to hit the ground…
I think this man has got one big obsession, and that is corruption. He’s totally, irrationally concerned about corruption. And he, like the Rashtriya Swayamsevak Sangh (RSS), thinks that tax evasion or sending money abroad is treason. It’s not a crime, it’s treason—he feels that strongly about it. And so, ever since he came (to power), he’s been going on about bringing black money back and, I think, completely exaggerated how much black money we’ll be able to bring back. But that’s another story. I mean, this is RSS madness.
And so, he took the demonetisation risk because he thought that would be a big thing against corruption. I think what demonetisation did is, it didn’t devalue the (black) money but it made it more visible and he will be able to pursue (it). And so, demonetisation was out of sync. He didn’t even think about the sequencing of the GST. The GST, I think was hurried too much. He could have waited six months before (implementing) the GST.
But he was too excited about it, and I think it was half-baked. They had to pay the price for that. But two big reforms like that, it is just quite amazing. He will have to now give it a rest. There is no reform now, on the other side of 2019. He just can’t afford that. I hope he doesn’t. And if Jaitley manages to keep the deficit numbers on track, keep your fingers crossed.