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Swaminathan Aiyar : What Modi must do to boost growth

Reforms needed as no country has experienced rapid growth without a 15% exports boom: Aiyar.

ET Now|
Updated: May 27, 2019, 08.02 PM IST
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Mr Modi has got a huge mandate for deep-seated reforms for a five-year period and the emphasis must be on the five-year period rather than the immediate reforms., said Swaminathan Aiyar, Consulting Editor, in an interview with ETNOW.

Edited excerpts:

The growth now needs a push but should it come at the cost of a minor slippage in the fisc? How should the new government balance the growth and the fisc?
The new government should not be fixated on the immediate short term. Mr Modi has got a huge mandate for deep-seated reforms for a five-year period and the emphasis must be on the five-year period rather than the immediate reforms. There has already been an interim budget, there will be another final budget. You can make some way for a fiscal boost but I would say the idea that every time there is a fall in auto sales, the government is obliged to somehow pump up the economy, is a mistake.

Some people call in anti cyclical, in fact, I think it is very clear that the western concept of a business cycle does not apply to us. So yes, the Reserve Bank needs to be sure there is sufficient liquidity out there but at the same time, if the government is going to spend more, this should only happen if there is an agreement with the RBI on the transfer of reserves.

The Bimal Jalan Committee is going to go into the matter. Does the RBI have excess reserves that can be transferred and some of those estimates are huge. So if those reserves are available that can certainly be used to boost the economy but that is not what I call a reform or a priority.

The more important thing is in the long term we have a situation where we have not achieved our fiscal targets because fiscal deficit was down to 3.0% within three years of Mr Jaitley coming and has not happened after almost six years! And even then, there has been so much jugglery of various kinds to artificially try and pretend the fiscal problem is not there.

We have to have a much more long-term approach and say fiscal deficits are crowding out private investment. This is leading to high real interest rates. This is a fundamental problem and our export competitiveness in inducing industry. Emphasis must not be on how do you have a quick fiscal boost to increase spending rather let us focus on long term ways of reforming our spending patterns, our subsidy patterns to make sure that we have a much better fiscal situation which enables interest rates to come down and provides a long-term basis for growth and prosperity.

The investors now want land and labour reforms. Despite the strong mandate that Modi government got in the previous five years, they could not do it. What are the chances or rather possibilities that Modi 2.0 can do that?
The private sector is not putting money to investment because it does not see the surge in demand. It does not see a surge of demand because in the first place, no country in the world has done rapid growth without a boom in exports of 15% plus. Our exports have more or less been stagnant for five years. If exports remain stagnant, there is no way that there is going to be a surge in demand and hence there is no way that people are going to invest nor should they invest.

We need to create a situation where exports can flourish. What does that mean, now our land is expensive compared to our neighbours, our labour because of our labour laws is expensive compared to our neighbours, our capital is expensive, our real interest rates are among the highest in the world.

If you cannot get these three down, you are not going to get exports up. If you cannot get exports up, there is going to be no need for fresh capacity. Without fresh capacity, there will be no investment. As I said, let us get the priorities right, get your factors of production competitive and then the economy will take care of itself, we do not require constant government fiddling to put in additional impetus here, additional impetus there just in terms of the fiscal or monetary policy.

The legal reforms too needs attention especially on the judiciary front. How can the new government address that legal reforms factor?
This is one of the most important reforms that we need. One of the things required for rapid development is what they call public goods and there are no good public goods more important than a police that is efficient, fast and is able to catch people and the judiciary that has quick processes and that is quickly able to convict people, Cases should not drag on for 10 years, 15 years, 20 years. If you do not have a police judicial system that works, then on the one hand there is no justice and redress for those who need it. It also means that the cornerstone of a market economy is an enforcement of contract and if enforcement contract still in India takes four-five years, it carries on and on we desperately need such long-term reforms to become competitive in the rest of the world.

We have had a certain amount of success in the last 10-15 years in catch up. Now we need to get better and stronger institutions which must include a police judicial system that is honest, that is competent and that is fast.

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