INTERVIEW R Seshasayee
More unitary than federal…
“With the introduction of GST, states have substantially surrendered their fiscal autonomy. 42 per cent of the Centre’s revenues (except those raised through cesses) are distributed to the states. It cannot get any better. The Centre has launched several investment-intensive development projects and welfare schemes relating to infrastructure, housing, sanitation, healthcare… where the states are required to co-fund. Such a step has made the nation more unitary and less federal.”-R Seshasayee (RS).
In A Discussion with IE this thought-leader felt the states have lost much of their fiscal autonomy, after the introduction of GST. In recent years, Centrally administered welfare schemes have also largely pre-empted the spending capacity of the states to design and deliver locally relevant development projects. However, a welcome feature is that with better planning and communication capabilities, the Centre has been able to implement many of the welfare projects covering a wide range of schemes – sanitation, housing, roads, water supply… with speed and to good results. Excerpts from the interview:
Industrial Economist (IE): What changes do you notice in the fiscal profile of the Centre and states?
R Seshasayee (RS): I will make just one point that seems to have largely escaped attention. With the introduction of GST, states have substantially surrendered their rights to raise revenue to the Centre. True, this is a more efficient way of raising revenue for the nation. Simultaneously, there has been an avalanche of welfare and development schemes launched and administered by the Centre. These cover a wide variety of areas, from employment guarantee to medical insurance, from low cost housing to rural roads and so on. The states are required to participate in most of these schemes pitching in their share. While there has been an increase in devolution of revenues from the Centre to the states as recommended by the Finance Commission, the budget leeway of the states seem to have shrunk; the budgetary space is increasingly pre-empted by Centrally-administered development and welfare schemes. Autonomous expenditure by the states has been squeezed. As a result, there seems to be little possibility of the so called competitive federalism and competition on the basis of economic development. I recall the discussions at the IE seminar in 1997 presided by M S Ahluwalia on the issue of fiscal autonomy of states. That concept is almost dead now.
IE: We are in the thick of state elections. Political parties have come out with their election manifestos. How do you find these?
RS: In the current elections, one witnesses an insane competition amongst political parties for showering freebies. This syndrome has unfortunately spread across the country. This is a slippery slope. Support to the economically underprivileged is not only understandable, but desirable. There was this concept of Universal Basic Income (UBI) proposed by the then Chief Economic Adviser Arvind Subramanian in 2016. That would have meant a carefully structured, impactful intervention, provided it is introduced when the fiscal situation is sound and growth has stabilised at an acceptable level. We are today witnessing both national and regional parties offering cash support to a wide section of citizens including housewives, farmers … with little logic, especially when the fiscal situation is badly strained. Just the wrong time and wrong thing to do.
IE: Are we spending enough for development?
RS: State budgets have little surplus for capital expenditure. They seem to have reconciled to leaving such investment to the Centre. Today development schemes relating to urban infrastructure or rural development are Centrally directed schemes. The increase in expenditure on the welfare schemes proposed by political parties not met by states’ own revenues result in an increasing burden of debt. This gets expanded year after year.
For Tamil Nadu this is expected to increase to around Rs 570,000 crore by next year. This essentially means the state borrowings are to be repaid by our children and grandchildren. In the absence of large scale increase in revenues, the state’s debt would impose heavy burden on future generations.
IE: Your thoughts on Atmanirbhar ?
RS: The Prime Minister and the Finance Minister have repeatedly assured the nation that Atmanirbhar did not mean import substitution, not inward looking economy, not high import tariffs, etc. It is strange that we have to explain what it is not, rather than making itself evident, as to what it is. I understand it means competitiveness and if so, that’s very much welcome.
Competitiveness cannot realistically be all pervasive. We need to choose the areas where we have a certain basic comparative or competitive advantage and we should build on that. In my view, it’s not easy to become self-reliant on all electronics, from chips to printed circuit boards, to telecom gear. Incumbent players have huge scale and strongly embedded position in global supply chain. The trick is to pick an area that is facing technology disruption, incentivise investment in new technology development and create a globally competitive manufacturing infrastructure through a cluster approach. Incentivising scale is important. This requires entrepreneurs who are willing to take risks and it requires the government to be able to understand, manage and partake in the risks.
I suggest focus on three sectors – automobiles, pharma and textiles – and nurture these to build global levels of size and excellence. The entire ecosystem for R&D, tie-ups with academic institutions and the infrastructure, both physical and human, should be built. On achieving success in these, the number of sectors could be expanded.
One should be very conscious of the structural changes taking place with rapidity. Manufacturing is going to be highly automated; shop floor will be robotised taking advantage of the fall in prices of robots.
IE: Start-ups and unicorns seem to make waves. How sustainable are these?
RS: The new brain power is focused on technology. There have been impressive success stories on start-ups. I am optimistic on the whole. But one must view this development with some caution. Many technology start-up’s are losing money and have little prospect of making money in the near future, and yet, their valuations are sky high. What this means is, that some American pensioner (or Chinese/Japanese) is paying the salary of a delivery guy, employed by a Unicorn, which is making losses. This model is difficult to sustain on a wide scale for a long time.
IE: Your comments on the spate of reforms…
RS: In any reform certain sections are bound to get hurt. When industrial licensing was abolished, we witnessed the demise of Hindustan Motors and Premier Automobiles. Workers in those factories lost their jobs. Yet it was a small part of the pain. There was immense gain in terms of the huge spurt in technology and production and vast choices available to consumers. An overwhelming part of the population benefited from the gain.
Likewise, in the case of agriculture, the reform is in the right direction. Consumers would get food products of quality and at cheaper prices… But the pain inflicted on the farmers of Punjab and Haryana is real, because they are unlikely to enjoy the continued luxury of guaranteed price and off take, no matter whether the market requires the produce or not. It’s important to address the pain, especially as it involves a large population of farmers, who have their implicit political power. I feel the government should have allowed time to get the idea gain acceptance, proactively offered safeguards against exploitation by strong buyers, such as empowering and supporting Farm Producer Organisations to face strong buyers and through proper ground work before enacting it.
The same applies to the proposal on privatisation of PSUs. Remember labour unions are so strong in the banking sector? Policymakers should devise an attractive golden handshake plan for voluntary retirement.
IE: How do you find the revival of industrial activity?
RS: It’s quite promising. The entire industrial sector is seeing revival. Most sections of the industry have used the opportunity to focus on costs, efficiency and productivity during the difficult days of lockdown and slowdown. Kudos to managers for successfully handling the crisis, not only keeping the company afloat but also getting more competitive. Most companies today are more productive and more viable. The best instances are provided by pharma companies which compete so effectively on a global scale. Excepting the tourism and hospitality sectors and commercial real estate, most other sectors are performing well.
There is a welcome, feel good factor. The Union budget has highlighted this factor. This has created the prospects for attracting investments in the near future. -SV
