Raghuram Rajan | Budget 2022: Key issue before Budget is to maintain market confidence: Raghuram Rajan

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“I would see the Budget document not so much as raising tariff A and providing subsidy B but really a document which says this is the path we choose over the next five years and every year we update it a little but that path, that vision seems relatively constant,” says Raghuram Rajan, Former RBI Governor & Prof of Finance, University of Chicago Booth School of Business.

With the Budget 2022-23 just around the corner, how do you think the government should approach the Budget, we have done exceptionally well on the revenue front and so despite the shortfall in disinvestment, because of the increase in GDP nominal value, maybe the fiscal deficit is likely to remain within that 6-7% range? What kind of deficit should the government target for the next fiscal?
The key issue is to maintain the confidence of the markets, of the general public and that means rolling out a framework. One cannot say this is going to be what we do this year and we will figure out what we do next year and so on. If we do want to spend more in a particular year, we have to give a pathway for how to get back on track, a pathway which seems credible, so that the markets have some notion that we are not going to be profligate.

We talked earlier about certain areas which need attention simply because of the K-shape that Dr Subbarao, whom I respect tremendously, talked about. That said there is also a need to some extent of supporting demand and the clearest and least sort of targeted way is infrastructure which we need and infrastructure is done both by the Centre but the states. It is important to ensure that the states are doing what they can there because that will be important for creating some of the low end jobs which are desperately needed but also creating demand for domestic steel, for copper, cement etc, etc.

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It is quite important to have infrastructure well funded, to have some of the support programmes like MNREGA etc well funded and to think about targeting the areas that are doing quite badly right now but need support going forward.

The other big thing that I would argue for in the Budget is a new vision. We are still stuck in trying to make incremental moves and sometimes in the wrong direction relative to the vision of the past but what we have learnt from the pandemic is that global services offer us a new area where we can expand significantly. Relying on our strengths, we already do well in a variety of global services but what about telemedicine, tele lawyering, edutech? These are areas where we need to look at and say what do those industries need in terms of government support? It is not funding, it is often better rules on data protection which meet the standards of the European Union and allows us to export services to the European Union.

These are things we should be thinking about and they are not trade agreements. Stop talking about just manufacturing or agriculture, talk about services which is our big area. What will it take to expand our services to ensure that a consultant in Bangalore can provide consultancy services in Chicago? That is a vision we need but we are still stuck in the past and that past is getting harder and harder. Manufacturing-led growth, which is what a PLI production linked incentives seems to be focussed on, is something that is getting more and more difficult simply because everybody has woken up to the fact that China was there and what China did and nobody is going to accept a new China. We need to change this sense of being stuck in the past.

We keep hearing this case for more structural reforms but look at what happened when the government did try to do structural reforms. Whether it is farm laws or labour, the government in a democracy like ours is caught between a rock and a hard place and is forced to backtrack. So what can one really do?
I think the idea is to be democratic, to talk to people, to bring together states with the Centre and then devise a plan. It is much harder and requires far more action by far more people at the Centre which then means expanding the sphere of governance from the PMO to a broader set of people. My sense is we can do more, we should do more, some of it can still be done by the Centre and nobody cares about laws governing services. That is something the Centre can do without mass agitation, but it should do it thoughtfully.

Similarly, on areas affecting a lot of people, talk to more people, get people on board. It is tough. Nobody is minimising the problem but with a government of this kind of power in the ability to enact legislation, it behoves it to actually talk to people and get it through. That is the lesson from the farm laws. There may be a lot of good things in it but if you have not sold it more widely and there are some bad things, given what some states want, you have to accommodate their interests.

It is give and take and if you can manage that, there is no reason why you cannot move forward. So, I think it just requires far more sort of consultation than we have seen. Every time the government has to show that they are consulting and understanding how things have changed in the recent past and adopt the policy accordingly.

If you were to advise the government whether as chief economic advisor or as Reserve Bank of India governor, what would be your top three priority areas?
The government has plenty of good advisors and do not need me to give advice. I certainly would not ignore the side of the economy which is doing badly. It is tempting to look at the stock market and say there are no problems but in fact if you do not, if you ignore the hurting part, we have longer term problems. So we need to worry about that tremendously.

If there is a resource constraint, think about enhancing the pace of the asset sales, not just companies but also potentially surplus land etc. Those can be beneficial for the economy and can be put to better use but those are things that we need to think about. I would move away from raising tariffs and so on.

In fact, we should be thinking about pulling off or bringing down some of what we have done but that debate will continue in India more broadly. I would like to see a vision of what it is that we are trying to do, where it is that we are trying to go. And my sense is that any kind of vision that emphasises our strengths will include the fact that we are a democratic country with rule of law, with a judicial system that can go against the government, those are our strengths and will be the way we build our new economy.

I would like to see an articulation of some of that rather than a blind aping of the way that China went or some east Asian countries did. We are not those countries and we do not have the ability to go in the direction that they went. The Budget, whatever it is worth, is the central statement by the government and there is a chance for the government to make a statement that shows that it has thought about where are going and has a sense of how that can be made possible and try and emphasise what our view is on a variety of issues, including foreign investors, including privatisation and so on.

I would see the Budget document not so much as raising tariff A and providing subsidy B but really a document which says this is the path we choose over the next five years and every year we update it a little but that path, that vision seems relatively constant.

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Source: The Economic Times
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