In what the government could view as a searing critique of the budget, one of India’s most renowned economic commentators has called the budget “nondescript” adding “it’s not what the country needed”.
Speaking specifically and at length about measures announced by the budget to increase employment, Pronab Sen said they will “only scratch the surface – barely”.
Sen also pointed out that – although this was not part of the employment section of the budget speech – measures that have been taken to revive MSMEs will have an impact on employment, although it will be casual employment and not formal employment.
However, how significant and sizeable this impact will be depends upon the attitude of banks, through whom the mudra loans and credit guarantees offered to MSMEs will be sanctioned. The attitude of bank is, therefore, critical.
Again, Sen added that the finance minister probably did not realise that what she has done for MSMEs will increase casual employment (not formal employment). This is a fortuitous happy outcome, he added.
Below is the full text of the interview.
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Karan Thapar: Hello and welcome to a special interview for The Wire. Most people would accept that the budget has recognised that there are serious challenges facing the economy. But the key question is, how effectively has the budget responded to them?
That’s the issue I shall raise today with India’s former chief statistician, the International Growth Centre’s country director and the chairman of the Standing Committee on Statistics, Pronab Sen.
Professor Sen, in each case, let me start with the challenge facing the economy before I come to what the budget proposes to do about it.
At first, unemployment. The Centre for Monitoring the Indian Economy says that the overall unemployment rate in June was 9.1%. For people between the ages of 15 and 19, it was 58%, for people between 20 and 24, it was 46%. In fact, even out of those who are deemed to be employed, a 100 million are said to be unpaid, and that raises the question, what sort of employment is this?
So, let me start with a simple issue: Do we have a crisis of employment on our hands?
Pronab Sen: We have an employment problem for sure. Now whether you term it as a crisis or not depends on where you’re coming from. Let me give you, I think, one point of data which I think would put it into perspective.
You know, we have had a 30-year history of people moving out of agriculture into non-agricultural occupations. And this has been going on, and the proportion of people who are employed in agriculture fell from nearly 70% to 42%. And now, in the last two years, it’s gone back up to 46%. It’s turned around and gone in the opposite direction. And 4% of the labour force is not a small number. I mean, we are talking about roughly somewhere around 20 to 24 million people.
So, people going back to agriculture, it’s really equivalent to unemployment because the land is remaining the same. All that’s happening is that the per-person productivity is just going down. And this is… people are doing this essentially for their own self-respect.
The second data point that I think you should be aware of is that there’s been a huge increase in the number of casual workers. [There’s about] a three percentage point increase there. So, what we are talking about is a situation where regular paid employment is diminishing and employment which is of a distressing sort, whether in agriculture or casual work or in very low-level self-employment, those are going up.
Now that’s not a good sign at all. You want people to come off agriculture; normally what happens is when they come off agriculture, they do go into casual work, so there would be a movement there. Then some of them would move into self-employment, but hopefully more and more of them would go into full-time paid employment.
KT: And that’s not happening.
PS: That has actually declined.
KT: Does the government have clarity on this? Let me explain why I ask. On [July 13], the prime minister citing an RBI document claimed that we’ve created eight crore jobs in the last three to four years. A few days later, however, the economic survey said that we need to create 78.5 lakh jobs a year till 2030.
Can the RBI report be correct, because if we’re actually creating two crore jobs a year, then creating 78 lakh jobs is not a challenge, and yet the economic survey called it a challenge?
PS: It is … well, let’s go over each of these figures carefully.
Firstly, when you say ‘create jobs’, you give the impression that this is something that has happened and the workers have been beneficiaries of it. We haven’t created jobs. What we have done, if you listen to what I just said, is that people are working, but they’re not in jobs. They’re self-employed either in agriculture or in casual work. So those are not job creations – people doing something to survive … this is just pure survival strategies. So, you’re not creating.
But the 80 crore figure is actually correct. So, if you look at what happened and so the period they’re taking is from the pandemic crisis to now, and that’s correct.
KT: But these aren’t jobs.
PS: But these aren’t jobs. These are people who need work and cannot afford to just sit around at home.
KT: Because they’re too poor.
PS: They’re too poor. So, they’re going out trying to do something, but you’re not creating jobs. The economy is not creating jobs.
KT: So when the prime minister or the RBI claims that these eight crore are jobs, they’re not jobs.
PS: They’re not jobs.
KT: They’re just ways of surviving for people who are too poor to actually be unemployed.
PS: That’s exactly right. Okay, and then let’s take the second figure up. The economic survey is saying about eight million jobs a year or employment opportunities a year need to be created. That is actually, I think, an underestimate.
What has been done to get that figure is that you’re assuming, in effect, that the work participation of women remains exactly the same. Now we all know that the work participation of women is very low in India and you really want it to go up. So that alone would take it up closer to ten [million].
And if we are talking about jobs, which is regular paid employment, you’re probably talking about another couple of million to absorb the people who are currently in casual work. So we’re talking about closer to 12 million and so it is a much larger challenge.
KT: So it’s not 7.8 million, it’s closer to 12 million, which is 120 lakh.
PS: That’s right.
KT: Almost double what the economic survey claims.
PS: This is correct.
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KT: Against that background, let’s then come to what steps the budget has taken to try and create jobs. There was a whole slew of measures announced by the finance minister. I’ll come to details in a moment’s time, but let me first ask you your overall impression. If all those measures that she’s talked about were to be implemented, would they make a significant difference?
PS: Well, if we are talking about the measures that she mentioned in the context of employment, no. Those are really scratching the surface and that too barely. There are lots of fairly impressive figures that have been trotted out. But that’s not going to happen.
The part that may work, which she did not talk about as a job creation effort, was the support to MSMEs [micro, small and medium enterprises]. She did talk about support to MSMEs, but as a different category in itself. But if you’re talking about jobs, that probably has far more impact than these palliatives that have been given in the name of job creation.
KT: I’ll come to what she said about MSMEs in a moment’s time, and as she did, I’ll talk about it in the context of MSMEs.
PS: Sure.
KT: Let’s start with what you called palliatives – measures that she claimed were designed to create jobs, which you said are barely scratching the surface. And let’s come to the details.
The government will, first of all, pay one month’s wage to all young people entering the workforce, provided they are registered with the EPFO [Employees’ Provident Fund Organisation], and secondly, it will contribute a Rs 3,000 per person [in] reimbursement to the employer for two years for the employer’s EPFO contribution. And Sitharaman said that this will benefit 210 lakh youth.
The question is, is this sufficient for employers to take on extra additional people? I’m not talking about replacement hiring. I’m talking about new additional people, because only the EPFO contribution is covered, the salary is uncovered, and if companies don’t need people, why would they spend their profit hiring people they don’t need?
PS: This is the point. I don’t think it’s going to persuade … Sure, I mean, you can interpret it as a reduction in the wage rate. So if the wage rate is around, let’s say, Rs 20,000 a month, you’re saying, of that Rs 20,000 – so that’s the cost to company as it were – so you’re saying of that Rs 20,000, I will take away Rs 3,000.
KT: Which is a marginal [inaudible].
PS: Which is … number one, it is marginal. Number two, for what duration?
KT: Only two years.
PS: Only two years. Right. After that, you’re back to square zero. Now the question is, if I take two years’ worth of Rs 3,000 – that’s what … Rs 72,000 – and I amortise over the lifetime of a worker, it comes to a rather ridiculous amount. Now whether companies are going to be persuaded to do this is really questionable.
KT: So you believe that it’s very unlikely that companies will take on additional new staff. They may take on replacement staff when people retire…
PS: They will certainly be recruiting. Every company recruits on a regular basis, and this is just the cherry on the top. They would have recruited them anyway. The question is additionality.
KT: That’s not going to happen.
PS: I doubt if it’s going to happen. If I were an employer, I wouldn’t do it.
KT: The second big scheme is the internship scheme. On top of a one-time payment of Rs 6,000, the government will also pay Rs 5,000 per month per person to the top 500 companies to take interns. These companies can also charge their training costs to the CSR [corporate social responsibility] funds that they otherwise pay. Sitharaman estimates that one crore will benefit over five years.
Now, will the top 500 companies actually take on interns? Some newspaper reports say they have to take on 4,000 each. Will they be prepared to take on that many?
PS: This is correct. They have to take on 4,000 … well, again, let’s start from first principles.
Companies do take interns. Every professional institution in the country, whether it is an IIT or any engineering college, any college that is giving a degree in business administration, any ITI, any skill development, formal institution, they all have internship programs. So they do internships with various companies, big and small, and the top 500, of course, are targets. And they do take interns at various levels, there’s no question about it, and they’ve been doing it all this time.
So again, the question is, does this become an additionality? If it’s not an additionality, then it’s not having any effect.
KT: Well, in fact, if it’s not an additionality, all the government is doing is now paying these companies for what they anyway did.
PS: For what they are doing anyway.
KT: So you’re not gaining anything, they are gaining.
PS: So if you look at it that way, whether you look at your first proposal or the second proposal, the company is going to do exactly what it was doing last year, except it gets paid for it. So the profits of the company go up. Whether it makes a dent on [un]employment is moot.
KT: So again, it’s unlikely that there will be an increase in the number of interns. Companies will continue to take interns as they do, but now they’ll have the benefit of being paid for it. They may not be adding to the number of interns.
PS: That is absolutely correct.
KT: There’s a second question. Do these interns actually translate into jobs?
PS: Yes, they do.
KT: …Or do interns remain interns?
PS: No. Why do companies take interns? So what they’re doing is they’re taking people who fill a requirement of the company, so they take a whole bunch of interns, and then from them, they use that as a screening process to pick a subset who they will employ full-time.
KT: So some of these interns will get jobs.
PS: Will get jobs. That’s why companies do it.
KT: But the key question is, we’re still talking about interns that they anyway would be taking.
PS: That’s right.
KT: …Now they’ll be paid to take them. That’s right. Some of those interns will get jobs. But whether there’s an additionality of interns coming in is very doubtful.
PS: Is doubtful, number one. Number two, the real question that we need to ask is, in this process, would there be any skill development? So if you think of the apprenticeship scheme, which has been around for a while now, in the apprenticeship scheme there is skill development, because apprentices are taken essentially for work where you need manual training.
Whether there’s going to be skill development here, I don’t know. So the companies could just take them and say, okay, just wander around, just don’t make a nuisance of yourself.
KT: In which case, the purpose of skill development may not be fulfilled at all.
PS: May not be fulfilled also.
KT: Now so far, we’ve been talking about steps that the budget proposes to try and increase formal employment, either through an internship or by contributing to EPFO.
PS: That’s right.
KT: What about job creation in the informal sector? After all, the informal sector accounts for just about over 80% of all jobs in the country. But the budget is completely silent about job creation in the informal sector. Is that because it failed to do so, or because there’s not much the government can do or the budget can do to encourage the informal sector?
PS: Well, let’s take that 80%. Of that 80%, 46% is in agriculture. It’s 34% which is not in agriculture. Now it would be bizarre if the government said ‘we are going to create jobs in agriculture’. That’s the last thing you want, right? So we really need to look at that 34%. And then ask the question, can the government create jobs there?
Now as I said, most of them are casual workers. They need work. And that work has to come from, even if it is not in the organised sector or the corporate sector, but at least some kind of formal relationship between employer and employee, right? So even if we leave the corporates out, there is a whole class of micro and small enterprises who are the job creators. And that’s what you need to focus on. They are the ones who are going to create jobs.
KT: So what could the government or should the government have done to encourage these small micro companies to take on people?
PS: Well, they have … I mean, so they’re in the budget…
KT: That comes in the MSME sector.
PS: Comes in the MSME sector.
KT: So she’s actually done things to encourage the MSMEs to take on jobs, but she hasn’t done it under the rubric of employment.
PS: No.
KT: Is that because she didn’t understand that this is what it would amount to, or…
PS: I suspect so.
KT: That she didn’t understand?
PS: Yeah.
KT: That is a pretty damning thing to say.
PS: Well, I don’t know, I mean, it depends on what your objectives are. If the objective of talking about employment is to fulfill aspirations, then you don’t talk about the MSMEs. You would talk about the corporates. [But if the] objective is to have productive employment in the country, MSMEs.
KT: Let’s then at this point come to MSMEs. Once again, I’ll start with the state of MSMEs before I come to what the budget has done to help them.
PS: Yes.
KT: Most MSMEs, or many at any rate, were driven to the ground during COVID.
PS: Absolutely.
KT: And several others still remain in the doldrums.
PS: No, the data is very clear.
KT: The data is clear.
PS: The data is there and what it said … in 2015, there were 65 million enterprises. In 2023, there were 56 million.
KT: It’s come down hugely. From 56 to five?
PS: No, from 65 to 56, and then it’s crept up a little bit in the last year. All right? The MSME sector is in trouble. It’s starting to recover. The point is, we need it to recover far more. We need it to go up to maybe 75, 80 million enterprises to be able to give the kind of employment that we need.
KT: And so that audiences understand how important the MSME sector is to the Indian economy, let me cite a few figures from the economic survey just a couple of days ago. The economic survey says that the MSMEs combined account for 35% of manufacturing and 45% of exports. I also gather that all together, they amount to totally 30% of the economy [and] 40, 42 [or] 43% of employment. So it’s a critical part of our economy.
PS: Absolutely.
KT: And if they’re still not reviving fast enough, that is a critical problem.
PS: Yes.
KT: Let’s then come to what the government did to help the MSMEs. As far as I can tell, there’s a credit guarantee scheme without collateral that’s been offered. And Mudra loans have been enhanced from Rs 10 lakh to Rs 20 lakh. Is that sufficient?
PS: Again, I think it’s not a bad thing … Something I’ve been advocating, in fact, we talked and discussed this sometime back. The credit guarantee I think is a good idea. This was something that was done for working capital earlier. They have extended that concept now to term loans as well. All right? Now that is a good thing because working capital, guaranteeing working capital, has a limitation, which means that you are essentially funding current operations. You are not funding expansion and growth.
Financing term loans is really, or guaranteeing term loans, is you’re financing growth. So I think that’s a good step. The real question, and there’s a question that bothers me, is that if you are doing this, why have you not extended that guarantee to the Mudra scheme? Because the Mudra scheme is about start-ups, whereas what is being guaranteed are for units that already exist. And there’s a difference, and as I said, we need to get at least 10 to 15 million more new units coming in.
KT: That hasn’t been facilitated.
PS: It would … Well, the Mudra loan is for that purpose.
KT: But if it is guaranteed, it will be better.
PS: If it was guaranteed … look, the banks intensely dislike giving Mudra loans.
KT: Because of the lack of guarantee?
PS: Well, it’s also expensive, because these are small ticket loans and the servicing cost of that loan is very high. So banks dislike it intensely. The guarantee would have helped, and it wouldn’t have made much of a dent in the government’s pockets.
KT: So if I understand correctly, what you’re saying, is that the finance minister has taken important steps to help the MSMEs, but because, for example, the Mudra loans are not guaranteed, which they should have been, these steps are insufficient. More could have been done, should have been done.
PS: More could have been done and should have been done, yes.
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KT: Although more hasn’t been done, you still envisage that what has been done will encourage MSMEs to take on more people, even if it’s just casual employment they’re giving.
PS: I am hopeful of that, but I think in order for that to happen, the government will have to sit down and have a serious talk with the banking sector.
KT: About the loans?
PS: About the loans.
KT: In other words, twist their hands to make sure.
PS: Well, you don’t twist … I mean, nudge them, persuade them, tell them it’s in [the] national interest.
KT: So just to sum up where we’ve got. In terms of employment first, the actual steps done to encourage formal employment are unlikely to yield results. As you said, they’re barely scratching the surface.
There are steps that she’s taken that will encourage casual employment on the MSME side. She didn’t include them under the rubric of increasing employment. They come under the MSME side, but nonetheless they will increase casual employment. However, even when it comes to the MSME side, there’s more she could have done to help them which she hasn’t done, and that more would have been guaranteeing the Mudra loans.
PS: That would have helped a lot, because what she has done is for units that already exist. She’d done it first by guaranteeing working capital loans. Now she’s helped it further, helped their growth by guaranteeing term loans. But for start-ups …
KT: There’s nothing there.
PS: There’s nothing there.
KT: And we need those start-ups.
PS: We need those start-ups desperately.
KT: The paradox is that where she has ended up encouraging employment, be it only casual employment, is an area where she didn’t realise she was doing it because she hasn’t focused on it under the rubric of employment. It’s a fortuitous, happy outcome of what she’s doing.
PS: It is a happy outcome, and yeah, I’m quite surprised. This should have been obvious. In fact, I would have started with this and then gone on to the corporate sector. I would have reversed the order.
KT: So this is in fact also a comment on the quality of advisors she has around her who didn’t point out to her, ‘madam, what you’re doing for MSMEs is really where you will be increasing employment. Please shove it under the rubric of employment.’
PS: Well, I wouldn’t want to pass comments on to her advisors.
KT: Okay. Are there other steps that she could have taken, or maybe I should say that she should have taken, that would have better-encouraged employment in the formal sector? That’s where she’s barely scratched the surface. Are there better things she could have done that would have made a bigger difference?
PS: You see, the point is, as far as the formal sector is concerned, one of the things we have to recognise is that corporate India is becoming more and more capital-intensive by the day. So the kind of technologies that are being adopted are really labour-replacing technologies. So the question that we should be asking ourselves is … why is this happening? Are we in a situation where labour is overpriced, and/or capital is underpriced, so that companies have an incentive to use more capital than labour?
KT: What’s your answer to your question?
PS: I think capital is underpriced.
KT: Taxing it more?
PS: No. Changing the interest rate structure.
KT: Increase interest rates?
PS: At the moment, if you look at the yield curve, which is the interest rate … from short-term loans, let’s say 90-day loans, to let’s say 20-year loans. So different interest rates, and that’s called the yield curve. Today, the difference between the interest rate on a 90-day loan and let’s say a ten-year loan is only 0.8%.
KT: It should be a lot more.
PS: It should be closer to 2.5%.
KT: That would make capital more expensive, and people therefore more willing to take on labour.
PS: What you’ve done now … because remember, 90-day loans are working capital loans. That is what companies take to pay their workers.
KT: Those should be cheaper.
PS: Those should be cheaper. So you should bring that, the lower end down, and the upper end up.
KT: Could she have played around with interest rates in the way you’re suggesting?
PS: Of course. This is entirely within the provenance of the finance ministry.
KT: And she failed to do so?
PS: I don’t think it even cropped up. I…
KT: You mean it didn’t even occur to her?
PS: It doesn’t seem to. I couldn’t find it in the economic survey. I don’t know whether I missed it.
KT: This is the flip side of what we talked about, casual employment increasing through MSMEs. She didn’t realise it was going to happen, but it was a happy outcome. This is something she could have done, but it never occurred to her to do it.
PS: Yes. And the interesting part of it is that while we think, when we think of interest rates, we think of the Reserve Bank. It’s the Reserve Bank that drives monetary policy and so on. But the fact of the matter is that the yield curve, which is the structure of interest rates, is entirely the domain of the finance ministry.
KT: And so there were things she could have done that would have more successfully encouraged the formal sector to consider increasing employment, which is never…
PS: Using less capital, means you could have released more capital for growth in the economy.
KT: And that didn’t occur to her to do.
PS: I don’t know.
KT: Well, I’ll pause there for a moment and let it sink into the audience. Because where she succeeded in creating casual employment in the MSME sector, she didn’t realise she was, it’s a happy outcome. Where she could have acted to encourage the formal sector to take on more people, it didn’t occur to her to do it.
PS: Yes.
KT: That is a very interesting comment on the ability of our finance minister and certainly on her thinking and her understanding of the economy. But I’ll leave it there. I won’t go further.
KT: Let me come instead to the second challenge facing the economy, which in a sense the budget also tried to tackle. First of all, let’s talk about the challenge. It’s a private sector investment. As The Economist magazine said in January, it has been sluggish during Modi’s time in office right through the ten years he’s been there.
PS: That’s correct.
KT: And even the economic survey, which says that companies are swimming at excess profits, admits that they’re reluctant to invest because consumption and demand are low.
PS: This is correct.
KT: So let me begin by asking you, how serious is the situation with regard to private sector investment?
PS: It’s a serious problem. You know, Karan, in any strongly growing economy, what you should expect is a very close relationship between GDP growth and consumption growth. Historically again, particularly in the high growth periods post-1991, we’ve always had a situation where consumption growth would be somewhere between half a percentage point to a [maximum of] one percentage point below the growth rate of GDP. At the moment, it is four percentage points below. That’s a huge gap.
So, what you’re getting is GDP growing at 7.8% or whatever it is. You’ve got consumption growing at only 4%. Right? The point is this is not sustainable because ultimately whatever is produced has been consumed or invested.
KT: And you don’t have the demand…
PS: You don’t have the demand to do it. So sooner or later, in fact, we are there now, so if you look at what’s happening to corporate balance sheets, the topline growth has slowed down dramatically.
KT: Because they can’t sell.
PS: Demand is not growing fast enough.
KT: Has she taken any effective set of measures to improve consumption and demand? I imagine she’s hoping that whenever her steps to increase employment yield results, demand and consumption will automatically improve. But since her steps to improve employment are unlikely to yield results, the impact on consumption and demand is unlikely to be great.
PS: Well, as I said, that’s not necessarily true. If the MSME sector does revive and they start generating employment and therefore incomes, yes, consumption will revive.
KT: But once again a sector she didn’t realise could create employment will also be the sector that improves demand and consumption.
PS: Because employment and consumption are totally linked, they’re very closely linked.
KT: But she should have been focusing more on improving demand and consumption.
PS: Yes.
KT: And she hasn’t done that.
PS: Not really.
KT: What she has done is to announce a series of steps that she believes, and I am underlining the words she believes, could improve and boost private sector investment. The angel tax has been abolished.
PS: Which is, I think, a good thing, by the way.
KT: Tax on foreign companies has been reduced from 40% to 35%. Government capex as announced in the interim budget will be Rs 11.11 lakh crore, which is 3.4% of GDP. And then there’s Rs 1.48 lakh crore to be spent on education, employment and skilling; Rs 1.52 lakh crore on agriculture and allied services; and Rs 2.66 lakh crore for rural development. And side by side, the government is also committed to building three crore houses, over I imagine, a fiver-year period. Will all this collectively revive and encourage private investment?
PS: Well, this is the traditional economist’s prescription for reviving demand. Which is public investment should go up. She has done that, the government has increased public investment, and the problem is private investment is not responding.
KT: And hasn’t been for a while.
PS: And hasn’t been for a while. And the question the government needs to ask is why not? What is it that’s holding up private investment? That is the question that has to be asked first and then, depending upon the answer, you formulate policies.
KT: Is the answer lack of demand, lack of consumption?
PS: The answer is not clear. It can range from many things. So far … again, let’s split the economy up into corporates and the MSMEs. As far as the MSMEs are concerned, their problems were different, their problems were they were being hammered, a lot of them had closed down, they were not getting bank loans, they were in trouble. So, you know, you couldn’t expect any investment growth from them.
The corporates, on the other hand, had the funds, they had the markets available to them, they could invest and they did invest. Not that they didn’t invest. So if you look at the corporate numbers, you see a situation where despite fairly, very strong, topline growth, the capacity utilisation continues to hang around 75%. So it is not that they are not investing, but they are investing just enough rather than going the whole hog. So the question is why not?
KT: What’s your answer?
PS: My answer is they do not have the confidence that the demand will sustain long enough for them to recoup their investments. So they are making the investments for the demand they see. So, it will give credible evidence that demand will grow more strongly.
KT: They are only investing for 4% increases in demand…
PS: [4% to 5%], yeah.
KT: Not the 7% and 8%…
PS: Not the 7% and 8% that we need.
KT: Tell me, how much of an impact on demand and consumption will what she’s done for the MSMEs have? As you said they will now be encouraged to take on more casual labor, they have better guarantees, although the Mudra loans are not guaranteed. How much of an impact will the improvement of the MSME sector have on consumption and demand in the economy as a whole?
PS: I don’t know, I really don’t know. A lot depends on how the banks work. What she’s done for the MSME sector, I think is not bad at all, it’s really quite good. Mudra would have helped.
The point is that she should recognise that the banking sector isn’t enamoured of giving loans to MSMEs. They do it kicking and screaming because they have to meet the requirements that the RBI sets on them for priority sector lending, and even there, they fudge by actually just giving more money to favoured MSMEs, like the MSMEs who’ve been with them for a long time and have a track record, rather than creating new activities. So really, the attitude of the bankers is going to drive the success of these programs.
KT: So the extent to whatever she’s done for the MSME sector is actually going to improve consumption and demand depends upon how bankers respond to MSMEs?
PS: Yeah, to MSMEs and the guarantees that are being provided.
KT: Can the RBI lean on bankers to ensure that they respond adequately or is that unlikely?
PS: I’m not sure; I’m sure they can, the RBI does have…
KT: But will they?
PS: The question is will they. And what kind of monitoring will they be able to do, to be able to do so?
KT: So, we have a very interesting situation and I am pausing deliberately to take stock because I think it is important for the audience.
What she has done in terms of formal sector employment is barely scratching the surface, it is going to be pretty close to negligible, there will be an impact on casual employment because of the MSMEs, but how much, depends on how bankers respond to the MSMEs, that in turn can be determined by the RBI, they have the power, but will they exercise the power?
And so there is a whole series of question marks whether this budget will actually be successful in tackling the problems that it has recognised.
PS: This is true of all budgets. There are always question marks, because the budget is only a financing provision. There is a whole institutional setup that needs to make any budget effective. The real question that I think you should be asking [is], are these institutions up to it?
KT: And what is your answer?
PS: I don’t know. I frankly don’t know.
KT: So that is another question mark?
PS: Yes. Because institutions have… are no longer the institutions I used to know.
KT: So, in so far as employment is one of the critical problems facing the country, and I’ll say it’s particularly worrying to the audience because it affects ordinary people who want jobs and can’t get them and therefore continue to languish in deprivation and poverty.
In so far as employment is concerned, there won’t be a really meaningful difference in terms of formal employment, probably no difference at all. There will be some difference in terms of casual employment, but how much depends on the attitude of banks. So, the problem of unemployment is not really going to be ameliorated very much; a little bit on the casual side, but that’s about it.
PS: It could be a lot for all we know.
KT: Depending upon the banks?
PS: Everything depends on how the system works.
KT: So we just don’t know what the impact on employment be how successful it will be?
PS: Yeah, because, you know, there are no verities that we can go by. There were at one time.
KT: In other words, we have to hope the system, i.e. the banks, to the needs and concerns of MSMEs. And only if she’d guaranteed the Mudra loans, it would have helped hugely.
PS: I think it would have helped.
KT: Finally, let’s come to what the finance minister has called next generation reforms – they were part of her nine priorities. She has promised a comprehensive review of income tax, simplification of GST, an economic policy framework, capital and entrepreneurship-related reforms, simplification of FDI and overseas investment, and better ease of doing business.
But do you get the feeling that all of these are promises for the future, they are not actual deliverables?
PS: Well, frankly there is… in that list you just read out, there is nothing that I haven’t heard before.
KT: So, this is old wine being repeated?
PS: Yeah, so, are these next generation reforms? Because these are essentially issues that have been discussed right since this government started, and I could not find anything new in it.
KT: So, the very terminology is slightly mistaken, because if you have been discussing these reforms for ten years, they can hardly be next-generation reforms.
PS: That’s right, I mean, sure, you had the land reforms and agricultural reforms – these were the next-generation reforms.
KT: And these didn’t happen.
PS: They are nowhere on that list.
KT: No, absolutely not. And the interesting thing about this list is it is a list of promises of what she will do, some in six months, some in two years, some longer, but they are not actually things she has done, they are only promises to do.
PS: This is right, yeah.
KT: I have come right to the end of this interview and I have deliberately left my last question to the end, now I think it’s time to ask it.
What is your overall impression of the budget as a whole? I have got an idea of what you think in terms of what she has done about employment, what she has done about private investment, what she has done about MSMEs, and where, in all three areas, what she has done is insufficient and she should have and could have done more. But what is your overall impression of the budget as a whole?
PS: It’s a nondescript budget.
KT: Nondescript? Why do you say that?
PS: Because there is nothing there that identifies an issue and works towards solving it or addressing it. So you have that list, and as I said, some of that list are issues that need to be addressed, some of them are just catchphrases. But it’s a nondescript budget in the sense that it’s not significantly different from what we have seen in the immediate past.
The one good thing I think, which I compliment the finance minister for, is that she is sticking to the path of fiscal rectitude. I think that is desirable and it should be done. Whether or not… and she is getting a lot of accolades for increasing the capital expenditure of the government significantly.
Now whether the kind of capital expenditure that are being made are the kinds we need, is again a moot question. But let’s give her credit for that. This was true of last year’s budget as well, both of the points.
KT: Two very interesting things emerge out of what you have said about the budget. There is not very much there that identifies the problem and there isn’t very much that there that seeks to identify the solution. Does that suggest not enough analytical thinking has gone into it?
PS: You know, this is the thing. Budget-making is a process that is so intense, you don’t have time for analytical thinking. The finance ministry doesn’t have time for that. This is the job of the line ministries. Analytical thinking happens over … it takes three, four years to be able to figure out, in your particular area, what the nature of the problem is.
KT: And you are saying that hasn’t been happening?
PS: I see no evidence. I am sure it’s happening …
KT: But there’s no evidence.
PS: There’s no evidence of it in the budget. So that are we in a situation where the ministry’s analysis is not being effectively conveyed, and I suspect that is what’s happening. There’s just too little time to do that.
KT: The second conclusion that emerges from what you said, when you call this a nondescript budget, is that it’s not the budget the country needs when it faces such critical economic problems.
PS: No, I don’t think it is.
KT: In other words, it’s failed us.
PS: Well, not entirely. As I said, there are bright spots in it, and as of now, we can only wait and hope. It could turn out to be brilliant.
KT: But it’s not the budget the country needed?
PS: I think what the country needed was … As I said, the budget itself is nondescript. It’s not a bad budget, right, but neither is it a good budget. What the country needed was I think a clear articulation of what is the nature of the problem, what is it that we need to address and face upfront. That is not articulated. And unless you articulate the problems and the issues, it’s unlikely you will be able to address them.
KT: Tell me this, when a budget fails to articulate the problems and therefore fails to articulate the solutions, does it suggest that the government hasn’t fully recognised those problems, is that why it’s not articulated, or is it in denial?
PS: You know, this is the thing, if you look at the overall macroeconomic data, they look very good. Now if the government says look, these numbers are fantastic, and we don’t really need to do anything, then what you will get is business as usual.
KT: But if you look under the bonnet of the car…
PS: The point is, if you looked at simply one data point, which is what’s happening to consumption, and then start asking the question, why is consumption low? Because income growth among the poorer sections of society is low. Why are they low? Because they don’t have jobs. Why aren’t there jobs? Because the MSMEs are dead. A whole string of issues emerges from that one single data point.
KT: But that isn’t happening.
PS: That’s the question I’m asking.
KT: That process of analytic…
PS: It may as well have happened. Because if you look at what I said, much of it reflected in those nine points that you brought up. I do not know.
KT: In a sense what you are saying echoes what Rathin Roy said in a very recent article for the Business Standard. He says the Indian economy is like a car, while it’s running and you’re sitting in the car, the macro features are all fine, it’s tickety-boo. Open the bonnet, and you suddenly discover there are a whole lot of serious problems, but while the bonnet is shut you aren’t aware of them and when you open the bonnet, you can’t miss them.
And much the same is true of what the government has done, it has gone by the macro reality, which seems okay, but when you dig deeper, as you did, you suddenly discover there…
PS: Well I think even from the macro, just that 4% growth of consumption should have been ringing alarm bells.
KT: And the fact that it didn’t is deeply worrying, isn’t it?
PS: Nobody even talks about it.
KT: That’s what I mean. It’s deeply worrying that the finance minister, the finance ministry, and all her advisers haven’t had alarm bells ringing just because of that 1.4% gap in consumption versus GDP.
PS: Yeah.
KT: That leads me to the conclusion that their expertise must be lacking.
PS: I have no reason to believe so. I don’t think there’s any change in the expertise within the bureaucracy.
KT: So then this is denial.
PS: It could well be.
KT: It could well be? My very last question, and in a way it’s very apt now. The finance minister began her speech by saying that globally, the world faced uncertainties, but India, she said, was a shining exception. Is India really a shining exception?
PS: In one sense, yes; in another sense, no. We recovered from the crisis very rapidly. And again, I may be parroting, what really saved our economy was the speed at which consumption bounced back after being severely compressed during 2021. And it was that consumption demand that gave rise to this very rapid recovery.
To give the government credit, they increased government expenditure significantly, but they didn’t go overboard with the fiscal deficit as a lot of other countries did. I think that was very sensible, the timing was good, so we did certain things right, and in a sense our recovery was excellent.
The problem comes after that. The problem comes really in 2021-2022, when we didn’t have a national lockdown, when the pandemic was going across the country, different states were locking down at different points in time, and that was what affected the MSMEs really badly. There was no succour from the government at all. They were just left to their own devices. That was when the problem began.
KT: And after that problem began, failure to tackle it has compounded it.
PS: Well, failure to recognise it … because the corporate sector came back very quickly and filled up a lot of those things.
KT: And the MSME sector did not. And that was not recognised.
PS: And that was not recognised, whose cost we are paying today.
KT: This is why we have that [four percentage point] gap between consumption and GDP. And this is why the failure of the government to recognise and respond to it is deeply distressing, because it means that the problems of the economy are not being tackled.
PS: At the moment.
KT: At the moment.
PS: Let us hope they are.
KT: Which is why you say this is not the budget we needed.
PS: Yeah.
KT: Professor Sen, thank you very much indeed.
PS: You’re welcome.
Transcribed by Shreyasee Sen.
