One of the members of the Prime Minister’s Economic Advisory Council has said that as India approaches the budget “the worst is firmly behind us”, adding that businessmen and entrepreneurs are confident of the future. In the first of a series of interviews on the state of the economy and the steps, the finance minister should take in the budget which will be announced on February 1, Nilesh Shah, Managing Director of Kotak Mahindra Asset Management, spoke at length about five innovative and novel ways the finance minister can raise revenue without increasing taxes so that she can stimulate the economy and still be fiscally prudent and not breach her fiscal deficit guidelines.
In a 43-minute interview to Karan Thapar for The Wire, Nilesh Shah did accept that there are three or four serious challenges that face the economy. First, he said “undoubtedly unemployment is a major concern”, adding that it’s not just increasing jobs that needs to be focussed upon but also income levels.
A second area of concern Nilesh Shah said is the finance sector. Questioned about the RBI’s recent Financial Stability Report which shows NPAs could increase to 13.5% by September 2021 compared to 7.5% a year earlier – and for public sector banks they could increase to 16.2% compared to 9.7% a year earlier – he said “undoubtedly the NPA burden is a cause of concern”. He said “the resolution of NPAs is a real problem” and recommended that the model followed by the US government in handling General Motors should be followed in India. GM was allowed to go bankrupt and then revived over a limited period of time. Nilesh Shah added that even if suspension of the IBC Act was a sensible response eight months ago it now needs to be lifted and the Act brought back into force.
Nilesh Shah also identified specific sectors of the economy that need stimulus and specific measures to help them. These include the MSME sector, which constitutes 30% of GDP, 45% of manufacturing and perhaps employs 12 crore people, as well as the construction sector, which is the second biggest employer in the country. Nilesh Shah also hoped that the two crore Indians who usually travel abroad each year will now be available for the domestic tourism market to tap thus boosting areas like hospitality, hotels and restaurants.
However, Nilesh Shah sounded a note of caution about MSMEs. Whilst conceding they are in “a tough spot” he added “we can’t afford to throw good money after bad”. He said we “need to re-invent MSMEs”. In the interview he gave details of two or three models that could be emulated by other MSMEs as they re-invent themselves.
Speaking about the budget, which will be delivered in just over two weeks, Nilesh Shah said that one of the central thrusts should be “support of the bottom of the pyramid”. He said the government should put more money into NREGA and generally more money into the hands of the poor who always spend everything they get and thus through their consumption boost demand and investment. He spoke about increasing direct benefit transfers but also greater allocations for food security and healthcare.
Speaking about any plans the government might have to increase investment in infrastructure, he advised the government to follow models like Konkan Railway, Delhi Metro and Delhi Airport. These are PPP projects where the private element ensured delivery and also an effective guard against corruption.
Speaking to The Wire about the fact consumption and investment levels today are substantially below per-Covid levels, Nilesh Shah said household investment as a part of gross capital formation reduced by 5% between 2012 and 2020. In 2012 it was 16% of GDP. In 2020 it was down to 11%. We need to make strenuous efforts to increase household investment and he believes that as the construction sector revives this will happen because of the many schemes available to encourage households to invest.
However, the area where Nilesh Shah spoke at particular length is when he identified five ways in which the government in its forthcoming budget could raise revenue without raising taxes.
First, he said, the government should announce a gold amnesty scheme. He said $373 billion of gold has been imported into the country in the last 20 years. If you add to this what has come in by such means as smuggling, the total probably reaches half a trillion. The World Gold Council has estimated that household gold in India could be as much as 25,000 tonnes worth $2 trillion. Much of this is held without being declared. If the government were to announce a gold amnesty scheme making this gold legal it could tap hundreds of billions of dollars. If the Reserve Bank were to buy some of this gold it would add to the bank’s assets and also, perhaps, improve the country’s ratings.
Nilesh Shah’s second suggestion to raise revenue without increasing taxes is a comprehensive policy of strategic divestment of PSUs. Nilesh Shah made clear that he was, in fact, talking about privatisation but advocated what he called the Maruti model. This means the government must reduce its holding to minority stake levels and ensure that good private management takes over. Later, when the share value of the company increases, the government can sell off its minority stake at a sizeable profit.
Nilesh Shah made clear that public sector banks should also be privatised. He added that the view PSUs are family silver needs to be discarded. It’s an hindrance to clear rational thinking.
Third, Nilesh Shah advocated the monetisation of government assets and, in particular, the so-called enemy property that it holds as custodian. He pointed out that 49 years ago the Pakistan government had sold off enemy property it was custodian of whilst the Indian government remains in control of similar property worth 1 lakh crore. This is an asset that should be monetized speedily. He also spoke of monetization of defence land and railway land.
Fourth, Nilesh Shah said the government must legalize betting and gambling. It’s not that Indians do not bet and gamble. IPL betting happens underground and it must be brought above board. Similarly, Indians go to Las Vegas and Macau to gamble. Now opportunities must be provided for them to do so at home. He said this would create jobs as well as an industry that would provide healthy revenue to the exchequer.
Finally, Nilesh Shah said the government must plug tax loopholes. There are several that can be easily plugged and will raise significant revenue.
Asked by The Wire if, as a member of the Prime Minister’s Economic Advisory Council, he had given this advice to the government, Nilesh Shah confirmed that he had adding that he has also given the government papers on these proposals.
The above is a paraphrased precis of Nilesh Shah’s interview to Karan Thapar for The Wire. Although recounted from memory it’s not inaccurate. However, there’s a lot more in the interview than has been covered in this press release. Please see the full interview for a proper understanding of Nilesh Shah’s arguments.
Watch the full interview here
