NEW DELHI: Yashwant Sinha, who quit the bureaucracy in 1984 to join politics, has served twice as finance minister—first briefly in the early 1990s in the Chandrashekhar government and later in the Atal Bihari Vajpayee government that took office in 1998.
The interim budget Sinha presented in 1991-92 made an honest admission of the crisis India’s pre-reform economy was in and promised to take a holistic approach to address it. The full budget for the year presented later in the year by Sinha’s successor Manmohan Singh took the task forward.
In an interview, Sinha outlines the policy interventions that are needed now to address the challenges being faced by the economy. Edited excerpts:
What are the challenges the economy is facing today?
Bad debt of banks is a legacy issue which started piling up during the previous government, which kept increasing during the current government. Bad debt influences so many activities in the economy, most importantly, private investments. According to the Centre for Monitoring Indian Economy (CMIE), we are seeing the lowest investment cycle in 14 years, and it is the state of banks that is largely responsible. The stressed assets of the banks point to stress in sectors such as steel and construction. The ultimate solution to bad loans is neither recovery laws nor the bankruptcy code. It is healthy growth in the economy. Without healthy economic growth, you can only give symptomatic relief without addressing the root cause of the ailment.
If in the fifth year of the government, there are so many cases coming under the Insolvency and Bankruptcy Code (IBC), some of which belong to big business houses, it shows the economy is not going well. There are many signs like bankruptcies and unemployment indicating the economy is not growing at the pace the government is claiming. It is government spending that is supporting the economy in whatever way it can, not private sector investment.
If you were to present the Union budget, what will be your approach?
I would have done what I had done when I was finance minister in the Vajpayee government. We had faced a similar situation. The economic growth rate had collapsed to below 5% in 1997-98, fiscal deficit had gone up, the current account deficit was uncomfortable and the East Asian crisis had an impact on our foreign exchange reserves. And then we went for the nuclear test. You could not have asked for a more dismal picture when I presented the budget in 1998. We decided to lay a great deal of emphasis on construction, infrastructure and housing so that a lot of economic activity could take place almost immediately. We started our national highway projects, rural roads and gave concessions to housing, which had a multiplier effect on the economy. We decided to go for investment first and consumption later.
Investment in infrastructure and housing will, in turn, create employment and put money in people’s pockets. That will encourage consumption. The idea was to have government and private investment directed towards economic activity that will lead to employment and consumption.
In our case, it worked despite having four bad monsoons. I will fault the United Progressive Alliance, which reversed this priority and promoted consumption through tax concessions and spending on rural employment schemes hoping it will drive investments, which did not happen. Instead, it fuelled inflation and led to interest rates hardening.
Do you have a solution for the agrarian distress?
There is a conflict of interest between the farmer and the consumer, which is the society. If you give a higher price to the producer, it will lead to inflation and consumers will not be pleased. The best way to fix the agrarian distress is to have a basic income scheme of some kind for the farmer, not the scheme suggested by (Congress president) Rahul Gandhi for every poor person. I recently suggested in an article that it should be ₹6,000 per crop season which means ₹12,000 in a year for a farmer with one acre of land or less. But the upper limit should be ₹18,000. Small and marginal farmers are 90% of the total farming households. The annual burden of this will be ₹2 trillion. If the centre and states share the financial burden in the ratio of 70:30, centre’s burden will be about 1% of GDP. May be this will add something to the fiscal deficit. May be we announce this and then review the other concessions to farmers, which may or may not be useful to them.
We have to look minutely at what are the subsidies available to the farmer and see which ones will become redundant as a result of the basic income scheme and may be that will reduce the financial burden. I am in favour of a basic income scheme for farmers like Telangana has done and now Jharkhand and Odisha have done. It will address the conflict of interest between consumers and farmers.
Do you think this will be an election budget?
I don’t know why we are calling this a budget. It has to be a vote on account. The difference is that you will not present the economic survey, you cannot bring the Finance Bill in this. Any direct tax change is therefore ruled out. As far as expenditure is concerned, you will not introduce any new service. These are conventions of the Constitution which have evolved over a period of time.
Is there any legal binding?
Conventions of the Constitution are as valid as written word of the Constitution. You cannot say it is only a convention and therefore can be broken.
You have spoken about jobless growth. What would your approach be to address the problem of unemployment at this stage?
The issue of jobs can be fixed very simply. We have to build thousands and thousands of kilometres of roads, crores of houses, take electricity to villages, facilitate expansion of railways for both freight and passenger trains, open more sea ports and build new real estate townships. There is so much work to be done, let us concentrate on that work and employment will be generated automatically.
How do you view the Congress’s announcement of a minimum income guarantee? Is it mere populism?
It depends on what calculations they have done and what they are going to give poor people per month. It will be that amount that will determine what the financial burden will be.
Congress’s announcement comes a month after it promised a nationwide farm loan waiver—do you think we have the fiscal space for this?
We don’t have the fiscal space for either. However, I would like to see the calculations for the income support scheme. As far as loan waiver is concerned, I have seen reports which would suggest that if loan waiver was up to ₹2 lakh per household then the burden would be ₹4-5 trillion. Unless it is spread over a period of time, it is going to be a huge burden. It cannot be done in one year.
You don’t favour loan waivers…
I prefer a comprehensive solution to farm distress and a part of that could be a one-time loan waiver, arriving at the amount keeping in mind the resources.
What is your advice to the government on the interim budget?
My only hope is that this government will not indulge in adventurism as far as the interim budget is concerned and will concentrate only on the vote on account.