Watch Firstpost's exclusive discussion with BJP Leader Yashwant Sinha below:
Blaming the current UPA government for its failure to contain inflation due to wrong economic policies, former Finance Minister and senior BJP leader Yashwant Sinha said the government's populist measures such as food security and NREGA are not only creating an indolent workforce but also a non-performing and high-cost economy.
In a live discussion with Firstpost yesterday organised through the Google Hangout, Sinha said the first and foremost task of P Chidambaram on 28 February, when he presents the 2013-14 budget, is to see that he does no further damage to the economy. He should cut expenditures, but not the kind that is vital for growth. "The finance minister is cutting expenditure but the quality (of the cuts) is not known, which is key for growth revival. Suppose the finance minister cuts the expenditure by Rs 1 lakh crore, it will not have any benefit unless he cuts down on unproductive expenditure," said Sinha.
Agreeing that 5-6 percent is the new normal for growth now, Sinha said the current budget situation could not be worse and blamed the 2008 budget for today's mess. "In 2008, the UPA decided to completely throw away the responsibility of a Fiscal Responsibility and Budget Management Act , which enabled them to take liberties with the fisc and float a massive deficit of Rs 100,000 crore."
And it was this high fiscal deficit, high interest rates and low investment growth that led to a loss of confidence in the economy. Sinha also stressed on the government's ignorance of the supply side in dealing with inflation, which has resulted in low growth today. An attempt to curb inflation only by depending on monetary tools such as increasing interest rates, squeezing liquidity, etc, can only bring a short-term impact. His solution includes addressing supply side bottlenecks by releasing a large portion of the 80 million tonnes of foodgrain that is still being hoarded by the government, rather than introducing a food security bill.
However, with inflation still high, he does not advocate a further cut in interest rates. "There is too much pressure on the RBI to cut rates, but this is not the right time to reduce rates. The government first needs to control inflation." He said only if the government can tackle inflation and there is a trend decline in inflation in the next six months, will the RBI have any elbow room to deal with this crisis. Raising rates when inflation is high will only result in low savings.
He also opposed the invention of any new tax, be it an inheritance tax or super-rich tax, and said compliance is the key to mop up revenues. "The current tax rates have survived various governments since 1997. It will be sad if Chidambaram revises his own rates. Compliance is an issue, not tax rates. Raising tax rates will result in more avoidance," explained Sinha.
Sinha also called for increasing the Rs 1 lakh tax deduction limit under Section 80 C of the Income Tax Act to bring back domestic savings to at least 36 percent from the current 30 percent levels.
The BJP's economic policy
If the BJP were to come back to power in 2014, reviving growth would still remain a tightrope walk due to the current government's populist schemes, which have created a consumption-led demand rather than investment-led demand.
As an immediate priority, the BJP would first correct the macroeconomic problems of high inflation and high interest rates by tackling the supply-side problem and scrapping the food security bill.
The problem of high current account deficit and savings needs to be dealt with by encouraging domestic savings and reviving investor confidence, rather than relying solely on foreign investment. He said that in the absence of domestic savings, foreign borrowing is a dangerous idea because short-term volatile funds can go belly up at any time and create a south Asia type of crisis.
" I am wary of this, I will invite FDI, but not in sectors where it is not required. FDI can at best be the icing on the cake. It cannot be the bulk of investible sources," said Sinha.
Second, the BJP would tackle sectoral issues by allowing FDI only in sectors that require it, rather than sectors which will kill the Indian industries, such as multi-brand retail.
In order to revive the economy, it would expedite the national highway projects. " The problem of the current government is that it is not decisive enough and sectoral issues, like that between the environment and coal ministry, or environment and highways, is never sorted out." A decisive government, on the other hand, will sort out all such issues in quick time and introduce policies to deal with natural resources in the right manner.
Third, the BJP would bring back the bring back the Fiscal Responsibility and Budget Management Act to reduce the fiscal deficit by raising revenues to a level which is fixed as the target.
And fourth, the BJP would take up more infrastructure projects like housing, rural development, highways and agriculture development so as to create investment demand, after which consumption demand is bound to follow.
According to Sinha, Finance Minister Chidambaram is currently looking for quick fixes for the economy, which will not solve India's fundamental problems. He believes India has always progressed with caution, and FDI is no panacea to India's problems.