Dilip Mookherjee spoke to Hindu Business Line at length on a variety of issues including demonetisation, the upcoming Budget, and the Trump Presidency’s impact on the world economy.
What are your views on the recent demonetisation
Yes I’m struck by the audaciousness of the move, I don’t know how well
planned it was. In terms of motives one can only second guess. Part of the
motive is to push the economy towards digital payments. How successful that
will be remains to be seen.
As far as raising tax collection, which is the other motive, I haven’t
followed in detail recent changes to the income tax collection mechanism but my
impression is that not much has been achieved. Twenty years ago I was
consultant to the Raja Chelliah Committee on the tax administration side. That
time I studied the problem closely and some of our recommendations were
accepted, some were not. Arindam Das-Gupta and I subsequently wrote a book
about tax enforcement and how backward India was even among developing
countries. We recommended changes in the information system, changes in the
audit system, changes in penalty and prosecution. Some improvements were made
in the information system but not enough. But on the assessment, manpower side,
manpower incentive side, and penalty and prosecution - nothing was done. So tax
evasion is a huge problem in India and I think the real reforms that are needed
on the governance side haven’t happened.
In terms of immediate outcomes it seems demonetisation has been pretty
ineffective. The amount of money that has been deposited in the banks seems so
large giving suspicion that people who were corrupt managed to launder their
black money back into the system. The government is still relying on the old
command-and-control approach with raids, etc. During our study we looked at six
other countries apart from India, but the lessons haven’t been learnt. So,
serious governance reforms are yet to happen.
There are a few political motives for demonetisation as well. We’ve
heard stories about how this move has led to a serious funding crunch for the opposition
parties, but the BJP (Bharatiya Janata Party) and its allies would have
probably known about it and been better prepared.
I don’t think this move will make a big dent on black money. Besides,
the cost of this exercise has been enormous, especially for the poor. India is
still a primarily cash-based economy; the informal sector is still a very large
fraction of the economy especially in terms of people, who have been hit.
There’s been a huge crunch in terms of working capital. But also a lot of
people keep their wealth in the form of cash. And that is part of the problem
-- the lack of financial inclusion. Those fundamental problems are still there.
Most of the Jan Dhan1 accounts are dormant; a lot of people don’t even know that there are accounts
opened under their names because the government was keen to achieve a target by
a particular date. This was a half-hearted attempt where the fundamentals of
financial inclusion remain to be achieved.
In summary, it seems to me demonetisation has been ineffective and has
imposed a huge cost - both short- and long-term - on the poor. The only
positive thing that may emerge is that it may push the economy towards more
digital transactions. But then again this may end up increasing the digital
divide in the country. On the one hand, you need to improve tax collections,
and on the other, include more people into the formal financial system - and
demonetisation is unlikely to achieve that.
There could be an increase in mobile money but then again most of the
poor don’t have smart phones, but I believe there are apps being developed
which are compatible with other phones and that would be a positive outcome.
So what do you think will be the shape of the upcoming
Budget, especially in the context of demonetisation?
I think there will be a lot of sops in the Budget. The government is
getting ready for the 2019 elections; it knows that demonetisation has imposed
huge costs. RBI (Reserve Bank of India) Governor Urjit Patel has already issued
a warning to the government on debt levels. I’m very concerned about that. Two
years ago the Railway Budget was considered very innovative but it involved
going to the PSUs (Public Sector Undertaking) and asking them to lend money, so
the strategy essentially amounted to borrowing from the PSUs. That’s what Rajiv
Gandhi did in the mid-1980s, which resulted in the crisis of the early 90s.
The government will try and stimulate the economy by whatever means
possible. It is also trying to take control of the RBI, through means which we
are all aware of. This kind of increased centralisation of monetary and fiscal
policies is very worrying.
There seems to be a shift in the very nature of
‘welfarism’ from providing public goods like education, healthcare,
infrastructure to providing ‘freebies’ to the people – TV sets, grinders, etc.
– why do you think this has happened?
It is easier for political parties to give goods to people directly -
politically it makes sense. But at the same time there has been a neglect of
infrastructure and delivery of other public goods which has had a serious
adverse impact in the long term. But the one positive aspect I see in this
‘welfarist’ approach is improvements in nutrition and child health. And Tamil
Nadu is a leader in that; it was a pioneer in the Midday Meal scheme. In terms
of health indices Tamil Nadu is on top. The state has done very well on child
and maternal health.
But putting that aside, in terms of public versus private benefits – it
is disturbing to see the politically-motivated drift towards private benefits
of limited development value. And the leakages have been enormous - the gadgets
meant for the poor often end up in the hands of the middle class. At the same
time there has been a neglect of serious developmental problems like public
health, water, pollution, which need urgent attention.
What does Donald Trump’s presidency spell for the
global economy especially for countries like India and China?
Not good at all, I’m afraid. There is going to be more restrictions
especially on immigration and outsourcing. It’s certainly going to be lot
harder for companies such as Infosys and Wipro, which have been so far relying
on moving large number of workers between the US and India. Getting H1B visas
will become more difficult. There’s going to be a big emphasis on ‘Make in
America’. I doubt whether there would be any concrete measures to roll back the
WTO (World Trade Organization), that’s because Trump is essentially a populist
and his bigger focus will be on immigration.
On trade there could be a window of opportunity for India with a
post-Brexit UK trying to develop a greater trade relationship with India.
India and China have benefited from globalisation and the unskilled
workers in the West have paid the cost for that. It is the classic textbook
factor price equalisation at work. India and China have a comparative advantage
in services and low-cost manufacturing, so those sectors have benefitted here
but people who are employed in these sectors in the West are paying the cost.
However, I’m more concerned about Trump’s foreign policy and what it
implies for global stability. His commitment to NATO (North Atlantic Treaty
Organization) is much weaker so that will feed into Russian expansionism. I
don’t think he’s interested in providing the kind of cover in Europe and East
Asia as the US did in the past. Japan and Korea will be encouraged to develop
their own military capability as the US recedes. And he has a very combative
approach towards China.
He does not understand the lessons of history, that these inward-looking
policies will provoke retaliation that will costly for all parties concerned.
It’s going to be a very turbulent world scenario. Of course all this will have
very serious economic implications, which are very hard to foresee at the
I was surprised with the way the US stock market reacted the way it did
after Trump’s victory but that was largely reflective of all the tax breaks
that are likely to accrue to the rich in the US. So going ahead it will be a
tough period for all the countries including India and China.
B. Baskar interviewed Dilip Mookherjee: http://www.thehindubusinessline.com/economy/there-will-be-a-lot-of-sops-in-the-budget/article9499818.ece
1. Pradhan Mantri Jan dhan Yojana (PMJDY) is the Indian government’s flagship financial inclusion scheme. It envisages universal access to banking facilities with at least one basic banking account for every household; financial literacy, access to credit insurance and pension facility.