I had the opportunity to listen to Mr. Yashwant Sinha, former finance minister of India speaking his mind in a webinar organized by the Cochin Chamber of Commerce on the 20th of November 2021.
He spoke for over an hour and took several questions from the participants. The crux of his delivery is reproduced here with a critical reasoning. He was sharing his wealth of knowledge as to how our country is fairing in the currently, whether the economic policy initiatives pursued by the government are right? How the country should handle fiscal and foreign policy initiatives etc.
He started with the demonetization, which according to him was a very wrong decision. The government expected large sums of sums of black money getting identified in that process, but the actual result was totally the reverse. According to him the money that has come back to RBI is more than the money in circulation. He also stated that due to this unexpected cash inflow, RBI has stopped reporting the figures. He estimates that 110% of the money in circulation was received by the RBI which probably includes Indian rupees employed as legal tender in Bhutan and Nepal.
My logic began to doubt Mr. Sinha’s. I am aware that his opinions are based on his immense hands-on experience in driving a massive economy like India as its finance minister.
Assuming that the Indian economy had 30-40% black component, and if that is true, that percentage of money involved in transactions were never exposed to taxation. Naturally that percentage was lying in the form currency and away from the banking system.
Now when we hear that all that hoarded currencies got back to the banking system, would that not amount to the black portion of the economy getting some form of accountability?
Taking an example of a person who was not showing 30% of his turnover to taxes, might have accumulated lot of wealth and the same would have been kept in the form of cash away from the banking system .Considering the fact that rupees 500 note was the highest denomination at that time and when the same is back to the banking system, would it not mean that demonetization succeeded in bringing the hoarded money back to circulation.
Authorities are available to seek clarification when unusual cash deposits are made to bank accounts. They could scrutinize such whether such large transactions emanated from the current year trade volume or whether the same it is from something which was hoarded or hidden from the limelight of taxation. We should not forget that mechanism are in place to seek clarification if such surge is identified and same does match with inputs/ purchases or capacity of production etc. Naturally in such cases additional taxes and penalties are imposed also.
In the initial days of demonetization, there was markable difference in the way business was conducted. It made everyone into an alert mode and people began to issue trade bills for each and every transaction. Had that mode continued India would have become a banking dependent economy and reliance on currency would have been minimal. Further it would have generated sufficiently large revenue by way of indirect taxation and thereby induced to reduce the income tax rates as envisaged by several economists, especially Mr. Subramanian Swami to mention. It is sad and true that things have gone back to the old style. In that perspective one could argue that demonetization was a failure.
Mr.Sinha also mentioned that introduction of GST was not as what they would have introduced if they were in power. He was mentioning that a single rate of 12% for all transactions would have been an ideal form of GST for the Indian standards and the same would have avoided the confusion or ambiguity still encountered by the suppliers.
I agree to this point, as a little more simplified GST would have been the ideal form for Indian market.
The next point he touched upon was the impact of covid to India’s economy and its slippage from targeted growth rate. Country was registering a growth rate of over 8% consistently during the UPA regime and almost similarly fairing during the first 2 years of NDA-1 , had to witness a negative growth due to covid .According to him this is a global phenomenon and India is not an exception, an unavoidable situation, but the serious question to be considered is how this economy could be put back on its track.
Sinha seems to be a demand side economist. According to Sinha, for any economy to be back on its track, the focus should be on how to influence the demand. He was disagreeing to the freebees being given by the government with the intention of creating demand. According to him freebees could only influence consumption demand which would eventually lead to inflation and inflation is a condition which any economy would want to distance themselves from. Demand should be influenced by spending on capital expenditure.
What Mr.Sinha meant is due to covid impacted lockdown people were sitting at home and since their income was stopped consumption demand was in its lowest level and government’s policy of paying freebees.
Mr.Sinha disagrees putting money in the pockets of people as freebees without any work being done , it would cause revenue deficit to the economy and at the same time trigger inflation. People should earn for their living. I doubt whether he would have said so, had he been in power in an unusual situation like covid we experienced.
Here again my logic doesn’t allow me to agree to the wisdom of Mr. Sinhaji.
Sinhaji was suggesting that in order to influence demand in an economy government should sequence investment demand rather than consumption demand.
When you sequence investment demand it would generate employment and induce economic growth.
I believe this theory is not suitable for a condition like covid, were the supply was limited due to lockdown and majority were passing days without any income.
Mr.Sinha further mentioned that the country must always balance their revenue budget, meaning we shouldn’t borrow for Daily lives . if we do so, the question is how we pay it back? Focus should be to work and earn for the living.
Spending money for subsistence through borrowing will never be a good economic policy. He is reluctantly favor of a deficit budget as far as capital account is concerned. Here also Mr.Sinha is also very conservative and would want to limit the deficit to 2% to 3% of GDP.
As a previous Finance Minister of India he believes that government must balance its capital account and thereby avoid as much as possible from borrowing to fund the budget deficit in the capital account. Why he says so is if the government is going to absorb excess reserves from the financial sources (banks and other financial institutions) there will be very little left for the private sector to fund their requirements. This will negative for Indian economy as the private sector is the largest contributor to the GDP. He further believes that demand triggered by government would tend bankers to choose the best asset option before them to lend. It also would increase the cost of borrowing of the private sector.
The above fear expressed by Mr. Sinha is very true as I had experienced the same in State of Qatar during the period of 1985 to 1996 .During that period ,government was drawing on their current account with all Doha based banks to settle government bills.
The rate applied for the government borrowing was almost 2.5%above the average cost of funds of financial institution. Managements of Banks were comfortable in taking this sovereign risk before them by welcoming government drawings. This situation has caused choice lending to the private sector and that to at a higher rate.
It is the basic wisdom that higher the cost of finance, inflation trigger is certain. I therefore totally agree with former finance minister Mr. Sinha that all governments must think of balancing their budget unless they are so certain about the future cash flow they envisage would be sufficient to meet the repayment obligations . Inter-generation equity must always given consideration. It is unfair to burden the coming generation with huge debt burden.
In the Qatar example I narrated above , they had been borrowing for capital investment government .
The policy of borrowing for infrastructural investment by government of Qatar was in fact a decision made with sufficient economic analysis.
They were aware that huge revenue expected from the north dome natural gas projects would justify the current borrowing.
Talking about the government of India’s projection of achieving a 5 trillion economy by 2022 , he said it was an achievable target then , had subsequent governments achieved similar growth rates.
Mr.Sinha also touched upon the MSME which is the biggest contributor of employment and GDP. Prior to covid MSME’s were contributing around 52% of GDP and now the same has broken down to 35%.He was suggesting that focus should be given to improve this sector.
At this juncture we must appreciate government of India for coming out with the required amendments in the insolvency bankruptcy code 2016 wherein a corporate debtor undergoing a corporate insolvency resolution process/liquidation process, the suspended directors /erstwhile promoters are protected from disqualification from regaining control of the corporate debtor. Section.240 A was inserted for this specific purpose in view.
Mr. Sinha also found criticism in the way Modi government came up with several new legislations through ordinance route, according to him forming of parliamentary committee/subject committee would give immense opportunity to hear the views of all stake holders and thereby forge the most appropriate legislations.
Another interesting topic Mr.Sinha touched upon was whether or not personal friendship which are publicly expressed by national leaders will influence their foreign policy. He then specifically mentioned the friendship of Mr. Donald Trump with our prime minister and prior to that with Mr. Barrak Obama. He then sarcastically mentioned that a designer suit will not improve such relations. The same was innuendo for PM Modi’s controversial Modi Suit. Mr. Sinha then said when he was the foreign minister he always maintained his relationship with his counterparts on a first names basis, and he strongly believes that personal friendship is never a catalyst when international policy dealt with.
I believe it is safe to disagree with him. An ideal friendship would always be an impetus rather than absolute formal relationship. Human factor can never be totally avoided.
He was asked specifically on India China relationship. According to him China is the most difficult country and they are attuned to land grabbing. Showing our strength and power to retaliate, if required at the 3488 km actual line of control is what China would understand. There is a huge difference between a conflict with China and a conflict with Pakistan. In case of a conflict with Pakistan religious color would over surface the actual issues and the same also get hyped media attention. Whereas if a similar situation happens with China, most of the time details are brushed aside. Our preparedness to compact Chinese aggression is only what China would understand rather than any diplomatic dialogues. He concluded by saying that we must build a better and stronger army and a strong economy is a sine quo non for a strong army.
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