January 17, 2020
States owed huge sums of money; economy in stagflation: Dr Amit Mitra
Excerpts of the interview of West Bengal Finance Minister Dr Amit Mitra with Sreenivasan Jain on Executive Decision, NDTV – January 16, 2020
Sreenivasan Jain: What do you make of where the economy is at the moment? Do you see any signs of any turnaround or are things pretty grim?
Dr Amit Mitra: I think not only are things pretty grim, I think it’s a situation where we see a growth recession. We also are beginning to see, knocking at the door, stagflation, which I’ll explain later. Just take a look at the GDP growth. You will find consistent decline after the hara-kiri committed in the demonetisation. They’ve been called surgical strikes – they are not surgical strikes, they are hara-kiri.
What happened is you had a nice economy with 8% growth, 8.2% growth, suddenly come demonetisation, thoughtless bravado, and growth falls to 7.2%, to 6.8%, and this year, to 5%. But it’s not that only. Core industries like coal, steel, cement had a negative 5.8% growth rate in October 2019, steel is negative 3.7%. And what troubles me the most is MSME, the credit outstanding has fallen to negative 1.42% growth in October. And exports? The same story, negative 4.2%.
Sreenivasan Jain: You had said that stagflation is knocking at the door, a term that is consistently coming into use to describe where we are with the economy. In simple terms, if you could explain what that means.
Dr Amit Mitra: Normally what happens is, when you have stagnation, it is not accompanied by inflation, because inflation means a lot of activity, a lot of excess demand. So the two don’t go hand-in-hand. Unemployment and inflation don’t go hand-in-hand. When there is a lot of activity during inflation, unemployment is low. So stagnation and unemployment as against inflation. First time in the history of India we have stagflation – stagnation and inflation, which happened in America in the 1970s.
Sreenivasan Jain: Do you think the government is on the top of this whole unfolding problem of the economy? Do you think Nirmala Sitharaman looks like she’s in charge, or not?
Dr Amit Mitra: What worries me is first there is denial – for months and months you’ve got denial from the Government, that is dangerous. First admit your disease, then look for possible medicines. No disease, we are all ok. Even just a few days ago I heard the Honourable Prime Minister saying that the Indian economy is in a robust state, don’t worry at all. First accept. Now the acceptance is sinking in because negatives after negatives after negatives in every kind of data are beginning to show up. Now the question is, what is it that they are thinking? I’ll give you an example. There is acute corruption in the economy that people are not talking about. Rs 44,000 crore defrauded under GST – the Minister of State for Finance said it in a reply to the Rajya Sabha. In the same way, suspicious transactions, according to the Ministry of Finance, has gone up by 1,400 times. So accompanying stagflation is acute form of corruption that people are not talking about.
Sreenivasan Jain: you said that the Government is only now coming into an acceptance of the problem. What would you say to the Government’s arguments that, loo, we have been proactive, we have been taking measures, perhaps the most dramatic of which was the huge cut in corporate taxes. Is that working, and if it’s not working, why not?
Dr Amit Mitra: Let me tell you, corporate tax cut produced one ting – corporate profits have gone up by 11%. So you cut the tax by 10%, their profits gone up by 11%. The question is, are they investing? Rs 6 lakh crore are lying in the books of larger corporate uninvested. So what is interesting is, you cut the corporate tax, but you don’t put money in the hands of the people. if they invested, they would ask for machines, plant, equipment, which in turn will bring money and employment and bring money to the hands of the common people. They are not doing that. They are sitting on the money because they do not have confidence. Let me tell you, in 1881, there was an economist, Alfred Marshall, who said that the problem is lack of confidence, the devil is in the lack of confidence. So the investors don’t have any confidence. They are being chased by the Government with multiple investigations. So where’s the investment?
Sreenivasan Jain: I wanted to ask you, why are they not investing, are they afraid, is there a fear of being victimised?
Dr Amit Mitra: I think there are several reasons. When the GDP plummets to 5%, people do not have money in their hands to demand consumer goods. You know the recent study by Dr Subramanian, who used to be the chief economic advisor, and his colleague from Harvard. I was very surprised to read that intense paper which probably nobody is reading. The index of industrial production for consumer goods has declined significantly and, what is interesting, it is comparable only to 1991-92. In 1991 you had a crisis. Then the index of industrial production for capital goods is only comparable to 1991. So what we are worried about is, they are not investing because they do not have confidence, leading to low growth situation and lack of demand, then there avery worried about – one industrialist from Kolkata who has a Rs 20,000 crore turnover told me one day that he has 31 cases against him by the ED. So naturally he ends up doing advertising on some channels, because he’s completely mowed in.
Sreenivasan Jain: The slowdown is all over the country. How is it impacting you in West Bengal?
Dr Amit Mitra: Well, I am very pleased to say that the growth rate of West Bengal, in 2018-19, under Mamata Banerjee’s chief ministership, is, the Government of India’s data says, 12.58%. Now this year, when the growth rate has fallen to 5% on the all-India level, I bet that we’ll have double digit growth.
Sreenivasan Jain: So you are number one. AP, Bihar, Telangana come after you. Tell us in simple terms what you are doing that is allowing you to grow in the middle of a slowdown?
Dr Amit Mitra: First of all, strategically, the capital expenditure of the government increased by 11 times – that means, asset-creating expenditure, which your listeners will understand, kicks in the Keynesian multiplier. So plan expenditure, capital expenditure – so the Government is doing stimulation that works towards putting money into the hands of people generating demand.
Secondly, you will be interested to know that banks in West Bengal under the state-level banking committee which I guide is lending Rs 70,000 crores to small and medium enterprises in one year! You know that 93 per cent of employment in India is in small and medium informal and unorganised sectors. I had given them a target of 38,000 crores three years ago, they achieved 44,000. Last year, I gave the banks a target of 50,000, they achieved 55,000. And this year, in the middle of this slowdown, half of 70,000 crores has already been lent out. That creates employment, which brings money into the hands of the people. All our markets, malls, bazaars are full.
On the other side, there has been a huge investment in infrastructure: 27,000km of roads in the villages. Imagine the multiplier effect, the spin of the common people in their hands.
The third strategy is, in case people don’t know, TCS employs 45,000 people in West bengal today. Another 15,000 will be employed and we will become a bigger TCS employer than Bengaluru!
Sreenivasan Jain: Many of the things you are talking about – the fact that you are doing efficient lending, infrastructural investment…some would say that the govt at the centre was encouraging that. But it doesn’t seem to be helping revive the economy. So as we approach the budget, what do you think Nirmala Sitaraman should be considering? Should we just spend our way out of the crisis?
Dr Amit Mitra: I want to first say that stagflation, when it happens, economists don’t have any tools to handle it. This govt doesn’t consult many people. If they did, they would have found out there are no tools available to handle stagflation. Look at US in 1970s and you’ll know the whole thing.I feel terrible for her. Her headroom for increasing expenditure is extremely low. The govt is not able to pay states compensation for GST, which is constitutionally mandatory. So where is her headroom? Corporate taxes have fallen, so where does she get the money? Ok, she can print money or she can borrow, which will lead to further inflation. I feel very disturbed – she has been put in a corner.
Sreenivasan Jain: If you were in the hotseat as finance minister, what would you do?
Dr Amit Mitra: I would not be sitting in the hotseat because I would not have allowed this thing to happen. But if I were to do something, I have no headroom, so I cannot pump more money into the economy. RBI has lowered interest rates five times. Has it led to more investment? That hasn’t happened, so unfortunately, she has been put in a box by this thoughtless govt. She has no escape route in terms of the economy. I feel very sorry for her.
Sreenivasan Jain: At the same time, states are owed about Rs 40,000 crores – don’t know how much WB’s share in that is…
Dr Amit Mitra: Bengal is about Rs 2,500 crores only in GST shortfall. And another Rs 37,000 crores the centre has not paid Bengal. Our Chief Minister handed that paper to the Prime Minister.
Sreenivasan Jain: When you came out of the recent meeting of the GST Council, you were quoted as saying that in a presentation made in the council, the govt effectively said that after february, they do not have the money to pay you. Is that right?
Dr Amit Mitra: It was an absolutely shocking presentation. And I said there was Rs 44,000 crores of fraud because of the defective GST. You created fake companies, fake transactions and you created input taxation – the entire chain is fake. How can you pay when there is 44,000 crore deficit? In February, the central govt will be in serious doldrums, struggling to make payments. States have given up all their taxes – input tax, 27 major taxes we’ve given up. Why? For the world’s biggest tax reform called GST.
Sreenivasan Jain: But can you tell me what can be done?
Dr Amit Mitra: I’m afraid the table is empty. You have to put money into the hands of the people to stimulate demand. There are many ways of doing it. We are the No.1 state in the country in terms of implementing 100 days work scheme. That puts money into the hands of the people. A more efficient govt; stop corruption. You are in a Catch 22 situation – no additional financial resources without risking inflation; reduction of interest rate with no effect; banking sector is broken. And what worries me most is that this is not a slowdown; this is not just a growth recession. I think there is evidence in more research. The last time we were in this situation was in 1991. Even in 2001-02 the growth rate was close to what it is today. But then the four fundamental parameters were strong, according to Dr Subramanian. His research was absolutely valid. When you ask me what should she do, there’s no room.
Sreenivasan Jain: Would you say that states like yours which are in opposition are fuelling a confrontation of another kind? Two states have said they would not implement the NPR.
Dr Amit Mitra: Let me give you a bigger picture. Why our state is doing so has a deeper reason. There was Kashmir 370, now we hear that the Ram Temple will be built in four months reaching to the skies, then this particular kind of census which has questions never been asked before, and then you have people thrown out of the country. Where? Into the Arabian Sea? Bay of Bengal? It’s all lined up, why? Because this govt feels that they have won the elections, not on the economy, not on reforms, but in a hypernationalism, the underlying process of which you must understand. If you can stoke the divisiveness among the people, you can win. And once you taste this, it’s very difficult to go away.
Sreenivasan Jain: Is there one area where the previous or present Modi govt has done something that is praiseworthy?
Dr Amit Mitra: One good idea was looking at the farm sector, and assuming that they can allocate some resources there. Also in terms of the bank lending formula to entrepreneurs. One of the flagship projects, however, only 20 per cent of the money given by banks was used by entrepreneurs for business. The rest has gone elsewhere. A good intention badly implemented because of the “headline grabbing” approach. In insurance, we are sharing a 40:60 per cent, but we suddenly realise that the receipts being given have a picture of the Prime Minister. Is this federalism?
Sreenivasan Jain: Dr Mitra, thank you very much for talking with us.