British Asia News Network (WD/SL) London
London, Sep 20: Lord Meghnad J Desai, popularly known as Baron Desai, the India-born British MP and economist who represents the Labour party in the UK, speaking exclusively to British Asia News Network (A day before the announcement of corporate tax cut) in the Parliament premises in London, has said that India's current GDP of 5% is not bad when compared to other countries and especially in the light of the current economic slowdown worldwide.
A widely respected, outspoken economist who keeps a close tab on Indian economy and politics, Baron Desai however feels that India's Prime Minister Narendra Modi is not paying enough attention to improving the country's economy. He advises Finance Minister Nirmala Sitharaman to listen to the people's problems, and accept the problems plaguing the country's economy instead of being in denial mode.
When asked if the Indian economy was in a totally dismal shape, he said, "The good news is that India is so used to a 7% GDP that when it comes down to 5%, it feels like a disaster.
"In India, I have been looking at the numbers, and I must say that no economy grows at the same rate year after year, cycle after cycle. The question is, when something is going bad, is it a trend? That is, will it keep going down or is it a cycle that reverses? It has been going up and down in the last couple of years, there is no consistency. Right now, people are uncertain as to what is going on. I think two things are happening. First of all, shoppers and owners of shops and the market have learned that GST can be avoided. To that extent, the recorded consumer expenditure, especially regarding small items, is misleading. To some extent there is a downtrend in consumer expenditure because the non-bank financial sector has collapsed and the banking sector has always had problems of non-performing assets. The cost borrowing in India is higher than normal because credit market is not working.
"The BJP government came to power with a large mandate in 2014. In a rush to restructure the banking sector, it came up with a new insolvency law, and a bankruptcy code was set up. Like a lot of you have read, the new code has been crippled by an average procedure. No debtor is fulfilling the creditors' demands. And these are well-known big companies who have big debts. Basically these guys borrowed lots of money under a kind of political understanding that they won't have to repay! Some are willing to sell other assets. India is no longer a low-income country. It is a middle-income country and it has to clean up its credit market. I think BJP has no commitment to state ownership, may be some of its members do. But I think they don't have any legacy of socialism - believing in the state, I mean. They used to talk of being a merchants' party, so go back to being one.
"I mean they should privatise all the nationalised banks. Fifty years of bank nationalisation has not done anything great. Nationalisation increases the rate of saving, but private banks would have done that by creating facilities. We don't need state-owned banks.
"I think deep structural reforms are necessary for the longer run, and in the shorter run, the cost of credit has to be low. Something has to happen now. People know that the government is serious about the longer run. Modi 2.0 has been mainly focussed on politics and culture, and that's not bad, but they seem to have taken their eye off the economy," Desai says.
"Obviously our new Finance Minister had to learn the rules too soon. She has been a Defence Minister, but being a Finance Minister is more difficult, and especially succeeding Arun Jaitley, who was the absolute master of economics. Finance ministries are very much run by the bureaucracy. If you go back and look at the first budget speech that Jaitley made, it is quite clear and there is no ambiguity. But after that, whenever something happened that they (government) did not want to admit, they chose to ignore. So it is with the downward trend of growth. And then think of BJP and all the antagonism towards foreign capital. BJP is as bad as the Congress which used to be against foreign capital. They wanted foreign capital, but then they put a tax on foreign investments.
"But never before did we have the budget corrected two to three times in such a short time. I mean, that undermines her (Sitharaman's) confidence, even if it is the right thing to do. You know, if you made a mistake, don't defend it. Correct it. But if you correct it once, don't go on correcting - that creates much more than just a bad signal," he added.
"I would rather say global recession was a very big issue that led to the slowdown. We forget how well the economy performed between 1998 and 2008. It was the golden period of global macroeconomics. When the recession hit, I think the UPA did manage to nullify its impact, but then got into trouble.
"If people really have to compare India with China, for example, India is either the fastest or the second-fastest growing economy. You know, 5% GDP is not a bad number, question is how soon it will go back up. It's very hard to know. My recommendation is, basically right now, we need to use bonds. Bond use is negative right now. You know, in global markets, there's money desperately looking for some place to grow in, and India is a good bet for growth.
"India should do what Argentina did but not very well. And the borrowing costs should not be very high," says Baron Desai.
"I am reading his book. Yeah, he's just come out with a book. This man is seriously a good economist. Yeah. If he had not been in politics, he could have been a strong contender for a top financial post. But then he got entangled in Mandir, Mathura politics etc. He is the senior-most BJP MP now. He entered the parliament in 1974, he fought against Emergency, and he was teaching at Harvard. I mean, he has something special. But he should be taken more seriously than this. He knows what he is talking about, although you may not like it.
"I remember during 2014 election, one of his ideas was abolishing the income tax. It is not an absurd idea. Nicholas Carlo proposed it in the 1950s. I would say that given all the examples of tax terrorism, do away with income tax, cancel all the pending cases. You know, you should tax people when they're enjoying themselves. So consumption taxes are always better than income taxes. You should not be punished for working hard. Especially from the environmental point of view, I would rather tax people for consuming resources which need preserving."
"It is a fact that the car industry is in trouble. That is partly a cycle, and partly the situation with car industries everywhere in the world.
"The finance minister is right, but she didn't put it well. Millennials as a whole new generation are much more aware of climate change. The previous generations were waiting for the government to do something about climate change, or follow the other governments.
"But millennials show that they will change their habits. This is what millennial Gandhians say: 'we will change our behaviour to achieve bigger goals'.
"I have not owned a car for 54 years in London. I take a bus or taxi to reach my work or go elsewhere, this was another big change. And a car depreciates every month. If you buy a car, in a month's time, you have 30% depreciation. So the new generation knows that hiring, like renting, is a much better business, and the same goes for housing. This is not that new, but this is a new consumer. And this consumer is going to be the change. And this consumer says, 'I only want to rent or ride, I dont think I want to own'."
He adds, "In future, the demand for cars will trend downwards. Major car makers are either shutting down their units or firing employees. Electric cars are the reason for this to some extent. In the long run, India is not going to such a big car industry."
"She has to show that she is on top of her game, not make any silly statements, in fact not make any statements except in the parliament, and not hold press conferences. Nirmala Sitharaman is a smart person, she has a lot of ability. When she got this portfolio I was pleased. But I think it's partly the Prime Minister also who has to be blamed, as he is not paying any attention to the economy. In India, actually, unless PM Modi says something, nobody is going to believe anything. On all topics, only the Prime Minister has any kind of say. He has created such a situation," Lord Desai says.
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