Dr. M Govinda Rao was a member of the 14th Finance Commission and of the Economic Advisory Council to the Prime Minister Mr. Manmohan Singh.
He has been a consultant to the World Bank, International Monetary Fund, Asian Development Bank, and the United Nations Development Programme (UNDP).
Mr. Govinda has exuded his keen knowledge throughout the interview. His perception on current economic scenario is extraordinary. He also pointed out structural reforms and regulations to combat the existing fiasco. This interview will give you glimpse on internal working structure of the “Finance Commission” and “Economic Advisory Board”.
Q. You have been the member of 14th Finance Commission and the member of the Economic Advisory Council to the Prime Minister Dr. Manmohan Singh. Being in the decision-making board, could you share your experience of working there and suggest any changes in the working structure, if any?
I was in the Economic Advisory Council from 2004 to 2013. It is an honorary position. The Council has a Chairman and comprises 3 to 4 members. The Chairman’s is a permanent position. The members used to go there whenever there were meetings or there were tasks to be done. The Council used to bring out 2 documents every year, Outlook of Indian Economy and Review of Indian Economy, where basic economic policy issues were highlighted. I used to draft the chapter on government finance. The Chairman was very active with the policies because he was the one attending most meetings with the Prime Minister. The Prime Minister used to seek suggestions concerning specific issues. Ultimately, the activeness of the Economic Advisory Council depended on the Prime Minister. At the end of the day, policy making is a political question and the PM has to take a call on that. I don’t know how it’s working now but it is an Advisory Council and should be taken as such.
What can be done better? Well, every government wants recommendations that would help their party in some way. So, it is advisable to not have political appointments of Chairman and Members. In the past many political personalities have been the Chairman.
As far as membership of the Finance Commission is concerned it is not a political appointment. It depends upon the expertise of the person. The Financial Commission Act lays down qualification required for appointing the Chairman and Members and the appointment is done by the President of India. The Finance Commission by and large is seen with respect. It makes detailed assessment of the finances of the center and states and makes recommendations on devolution and grants of funds from the Center to the States. The recommendation of the Finance Commission was more than just a recommendation. It has done a reasonable job in India.
Q. Recently, India has entered into a technical recession, but the stock market is moving in the opposite trend. What according to you has led to this aberration?
There are 2 parts to this answer-
A. Slowdown in the economy was happening even before the pandemic. Between 2018-19 first quarter and 2019-20 last quarter, the Investment GDP Ratio has declined from 30% to 26%. And Growth Rate decelerated from 8% to 3.1%. Covid-19 has worsened the situation. We need to look at temporary as well as structural factors that are impeding growth. after the relaxation of the lockdown the structural factors will still remain, and it is important to address them to move into a higher growth trajectory.
B. One thing we have noticed for a long period of time is that savings of households has increased significantly. It is because of the lockdown as well as precautionary motive; you don’t know what happens tomorrow. It is not the poorest of the poor who saves, but propensity to save is higher in the middle class and upper-middle class. At the same time, interest rates are brought down significantly. The RBI has brought down the interest rate. So, people are looking for alternate sources of investment. A lot of households’ savings are diverted to the stock market. And since the market is doing well, investment keeps coming in. So, non- availability of high interest yielding securities in the financial market have motivated people to go towards the stock market.
Q. Government is optimistic of our future growth; taking into consideration the GST revenue collected in October was higher than that a year ago. Does it really bode well for India or is it the result of pent up demand in the economy?
Now you see, higher GST collections bode well for India anyway. Whether it is because of pent up demand in the economy or is it due to the economic recovery or is it due to something else, we have to see. It is premature to say that the increase is going to sustain. Let me take in one by one.
Pent up demand is not a satisfactory explanation because relaxations have been happening since July/August. And people have been engaging in activities since then. So, such high revenue collections cannot be due to only pent up demand.
It cannot be a sign of economic recovery too because a number of sectors are still not open yet. For example, airlines industry, hospitality sector and construction activities. However, fast moving goods are seeing traction.
My own explanation is somewhat different. From October this year, GST policy makers have mandated that people with more than 500 Cr turnover will have to issue e-invoices. Now when we do the e-invoices you are immediately able to capture what the input tax credit is. The number of people with turnover of more than 500cr is not very large but their turnover and tax paid are significant. So far, technology platform has not been firmed up and annual returns have also not been submitted. Thus, there is no way of monitoring genuineness of input tax credit claimed. This has given rise to fake invoices being issued. Thus, a large company formed a small company for issuing fake invoices and the process went on. The requirement of e-invoices checks input tax credit to the large taxpayers and from January, the threshold for compulsory e-invoicing has ben brought down to Rs. 100 Crore. I suspect, besides other factors, introduction of e-invoicing was an important reason for higher revenue collections and this could sustain in the coming months as well.
Q. Total stimulus package provided by the Centre and Reserve Bank of India now stands at a whopping Rs. 29.87 lakh crore. Will the impact created by the package justify the amount?
You know every government wants to show that they have given large stimuluses. But when the fiscal policy in the past years did not conserve the fiscal space, there are problems in providing the stimulus. Of course, the RBI has been proactive in reducing the policy rate, extending regulatory forbearance, providing liquidity and restructuring loans.
The most important stimulus they can and should give is to disburse the pending bills and tax refunds. It seems the pending bills and refunds from the government could be as high as Rs. 3-4 lakh Crore.
Secondly, this is the time to loosen the purse strings and substantially increase public expenditure on infrastructure, financed substantially by monetizing the assets.
The third thing that needs to be done is to dilute the ownership of public sector banks and use the funds to recapitalize them. There are talks about privatizing some banks. You should not miss the opportunity given by and crisis to undertake reforms.
I’ll not say that the stimulus that’s been provided is niggardly, but a lot more needs to be done.
Q. There have been a lot of talks about the government’s relief packages. Have they really stimulated economic recovery? If not, what measures according to you should be initiated at this time when the economy sits at the cusp of unbridled unemployment?
See, you need to understand the Government cannot provide employment. It has to create a conducive environment for the private sector to create employment opportunities, particularly in labor intensive industries. Now, obviously opening up the economy is necessary because travel, tourism and cultural sectors are still closed and they are labor intensive sectors.
Another important thing is structural reforms. The government has made some regulations in land acquisition and labor reforms. There’s one bigger problem in the system. We all keep talking about encouraging and protecting MSME. Small is no longer beautiful. Over 99.3 per cent of MSMEs are micro enterprises with less than 10 workers. They do not have the capability to standardize their products and are not competitive. It is important that the small should become medium which in turn should become large over time and the structure of incentives should be geared towards that.
The changes in the industrial disputes act is helpful and so are the changes in the definition of micro, small and medium enterprises. This is the time for removing extra protection that you give to smaller industries. Recently there was a news saying 12% Provident Fund would be provided to new employees. However, it is 24% for the smaller industries and 12% for the larger industries. You can see the difference.
Q. You have always talked about the need for India to have a Fiscal Council. What is your rationale behind this idea?
You might state that The Fiscal Responsibility Act is already in place and the Centre has been conforming to that. However, there has been a lot of obfuscation in the budgets and the true deficits are not transparent. The Comptroller and Auditor General of India admits that the government has been shifting targets, changing definitions, not achieving the targets and resorting to off budget borrowings. t. If you look at the budget invariably, the revenue projections are not really projections, but, targets. This gives rise to tax terrorism within the system. You give a wrong target to the collectors and they end up making exaggerated claims.
Furthermore, poor marksmanship adversely impacts on the fiscal management. Pending bills are the biggest problem. The Food Corporation of India is allowed to borrow money from provident fund authorities and the government will pay back the loan, thus giving rise to off-budget borrowing. This renders the numbers shown in the budget meaningless.
In many countries, the parliament sets up an independent fiscal institution to monitor the rule based fiscal policy by the government. In the US, this is called the Congressional Budget Office, and in many other countries Parliamentary Budget Offices or Fiscal councils is set up.
The Fiscal Council is appointed by the parliament and will report to the parliament. They mainly focus on evaluating the budget forecasts concurrently, estimate the value of liabilities of the announcements made from time to time in numeric terms, and monitor the conduct of fiscal policy to enforce adherence to the targets. They give reports to the Parliament. In the prevailing situation, in order to ensure credibility, there is a need for an independent fiscal council. When markets fail, governments intervene. What do we do when the governments fail? We need to have institutions and systems to ensure checks and balances against failure.
Q. What advice would you like to give to the finance and economic enthusiasts of St. Xavier’s College, Kolkata?
Opportunities are immense. When the economy is in crisis, there is a lot of work to do. The growth story of India is merely beginning, and the financial markets are yet to bloom. All of us have significant roles to play. You have a plethora of opportunities before you. It is a vast interconnected world, and you have a great future, so long as you are willing to work hard.
The opinions expressed in this article are personal views of the interviewee.
Interview by: Devansh Modi & Vinayak Agarwal