India Inc. has been waiting eagerly for the announcement of the Union Budget 2023-24. While every year the Budget gets massive eyeballs, this time, it is extraordinarily important due to a grim global outlook. With mass layoffs, inflation and supply chain issues affecting the world economy, Indian market comes under special focus as many experts also call it India’s year.
One such economist is the veteran Lord Meghnad Desai, Chairman, Meghnad Desai Academy of Economics & Data Science (MDAE), and professor emeritus, London School of Economics. Known for his expert take opinions on the state of economy, Lord Desai, in an exclusive conversation with Outlook Business says that stagflation is here to stay. Sharing his perspective on the global outlook 2023, Lord Meghnad Desai reflects on what the government can and should do to help the economy through the Budget 2023. Edited excerpts
The overall global outlook for 2023 seems grim, especially with mass layoffs happening. On the other hand, many say that it is India's year. Will we be able to navigate this crisis?
I believe that globally, the stagflation is here to stay. In India, however, there is a tendency to exaggerate the positive. Now, all that is well for the government but as economists, we have to look at the world and not think that India will always be an exception.
In your Union Budget 2023-24 thoughts, you said that India needs to control its Budget deficit. How do you think the government can do that?
Yes, I can only say that keeping the Budget deficit low is required for India as outside investors will be reassured that India can show fiscal discipline. Now, how the government does it, is difficult for me to judge. At this point, given that there are nine state elections as well, the government would be tempted to throw revadis (freebies) at voters. But that would also be shortsighted. Let’s also remember that foreigners have other markets they can invest in.
You suggested an independent body for scrutinising the Budget independently, just like the Office of Budget Responsibility in the UK. But aren't both countries and their functioning starkly different to have that? How do you see this working out?
All countries obviously differ from each other. But the UK adopted this device without anyone asking for the same – a device to not only increase people’s trust in the government but also like any other healthy habit, it would be a good one for India. Of course, in India, there are few who will agree to say some unpleasant truths to the government but it is for the GOI to envisage such independence. But yes, I doubt the GOI will take my advice. It may pay the price of an outflow of funds if the world loses confidence in GOI.
In many of your interviews, you have said that India is obsessed with manufacturing and that it needs to stop. But the current government is focussed on Atma Nirbhar Bharat. How do you see this panning out?
In India’s context, the subsidies that are paid out to attract manufacturing and sustain it, are costly. This means that as an economist, we need to know which other needs are being starved. Now, division of labour says don’t do everything yourself and buy things which are cheaper from abroad than make them at home. India wasted forty five years after Independence to be like the Soviet Union, which is a bad example to emulate and this time it will be copying China or Korea or Taiwan.
There is a lot of FDI coming to India so there is clearly the world out there seeing some potential in the country. What can India do to maintain this, rather than improve it?
See, investors come to India because even if only 20 per cent of Indians are well to do, it still means that there is a market of 200 plus million. More so, services are well developed in India and hence, e-commerce investors are willing to bet on India – the products can come from outside and get delivered across the country.
In Budget 2023, which sector do you think, the government should focus on the most and why?
In this Budget or Budget 2023-24, the government should avoid cuts in direct taxes. They should remove the perverse incentives caused by low tax on capital gains as compared to earned income. Indians prefer to pay indirect taxes but often take drastic steps to avoid direct taxes. The Goods and Services Tax (GST) has been a great innovation; it would be better if VAT on luxuries was increased. So, tax people when they are having fun.
India has become a success story of e-commerce, digitisation and fintech. Aren't these enough to insulate the country from the global downturn and continue its journey on the path of growth?
India has done very well in those – service areas. But inflation can hit supply of goods whether they are imported or are home made. So, India should relax its exchange rate constraint. It will cause inflation yes, but, will mainly fall on expensive goods. This will enhance the GST collection as well.
