mukul asher


Mukul G. Asher is a Professor in the Lee Kuan Yew School of Public Policy at the National University of Singapore. He has been a consultant on tax reforms and social security issues to the World Bank, International Monetary Fund, Asian Development Bank, Organization for Economic Cooperation and Development (OECD), and World Health Organization (WHO). Mr. Asher has also worked closely with Prime Minister Narendra Modi as a consultant on tax reforms and social security issues to the Government of Gujarat.

Mukul Asher, in conversation with Hindol Sengupta, Vice President, Strategic Investment Research Unit, Invest India, expresses his views on Budget 2021. 

1. What was your impression of the budget? The expansionary budget that we were expecting, turned out to be that way in critical sectors like infrastructure, health, and others. The government proposes to heighten spending considerably, propelled by the COVID-19 pandemic. How do you see such an expansionary approach?

The budget is a continuation of the policies, particularly the 2020-21 mini budgets as well as the main budget, that were introduced. The two main characteristics of that have been:

  • We want to use economic growth to reduce poverty and address inequalities. 
  • The way to get budgetary stimulus is through infrastructure, other type of capital expenditure, investment spending and crowding in of private investments through the public capital expenditure. 

If we look at this budget which is very consistent with these two aspects, so, we can say, the fiscal deficit is estimated to be 9.5% of GDP. What one would want to look at though is that how much of the increase in deficit is due to the broader definition of expenditure, that is off-budget expenditure, which used to be left out, is now included in the budget. That is a positive move to try to be more transparent and broader in definition of government expenditure. But 9.5% is something that is much higher than what was expected. The roadmap for reducing it is also a steady decrease in the deficit. Apparently, the government is relying on high economic growth to bring about the fiscal consolidation over the next 3-4 years.

2. Why do you think that was important to do at this point of time? What do you think that rationale was? To think this was an offense, going back to the basics because we have the economic survey which spoke about the bare necessities, there are some fundamental issues remaining in India which need to be tackled specially after what happened in COVID-19 for an architecture of growth to be built.

India is among the very few countries globally, which is carrying out continuing structural reforms while it is addressing the short run issues of the COVID-19 pandemic. When you are addressing structural reforms and when the survey talks about the basics and the new index, that is related to electricity, water, housing, sanitation, etc., all of this requires a significant capital expenditure, for example the Jal Jeevan Mission. If you want to provide tap water, it requires investment. Today, the Finance Minister quoted that for several points, like Indian railways and others, a large part is provided for the capital expenditure to be carried out. This is where there is no contradiction between them trying to give basics – water supply, electricity, housing, connectivity, and the capital expenditure stress that the government has been putting. The economic survey has a very nice math of showing how between 2014-12018, the basic availability index of the key items has improved in the country.

3. Talking about the government spending in health, this has been a topic of conversation and the economic survey mentions the government and the private sector must spend more on health to build an architecture of future growth among the labour force and it also talks about how all of this can be buffered with digital technology. Today the Finance Minister delivered the budget, reading from a digital tablet. Do you think there is a larger purpose? How will both the things come together- greater push for digitisation and greater push for health?

I think, I would like to answer this in different levels:

1. When analysts in India talk about the health expenditure, they are basically looking at the central government’s public health expenditure which is 1-1.5% of GDP. However, that is not correct because we must recognise that the states combined spend more and collect more taxes than the Centre does. Therefore, we need to take into account not just the central government but the state government.

2. We have a very large out-of-pocket expenditure for health. We spend about 5-5.5% of GDP, nationally, if you take private expenditure as well. Our challenge is for that 5-5.5% expenditure, we are not getting enough better health outcomes and indicators that are desired. Now, in time to do that and have technological advancement, you also have to invest, which is a capital expenditure like digital connectivity, creating high fixed cost of creating apps and software etc. Therefore, again the capital expenditure becomes crucial.

3. Due to the pandemic, India as well as other countries, have realised that not having a good public health system and wellness system is actually a national security issue and can affect economic growth. Rightly, the finance minister, in the 6 areas she started out with, she put health as the first.

4. There are a lot of organisational reforms announced but I would have liked to see more. For example, how to make ESIS, the Employee State Insurance System as an organisation, deliver better outcome than they are doing right now. But with aid of technology, investment in technology and software, and trying to develop the dashboard which allows you to track the outcomes, this is the right direction and some of the other things that I have mentioned before shall also come about. I think we will see distinct improvement in healthcare since it is also tied with the Jal Jeevan Mission, Ujjwala, Swachh Bharat, etc. All of them indirectly have a positive impact on well-being and on health. 

4. Let us talk a little bit about insurance, it had been a long-standing demand that FDI limits on insurance should be raised and it has been raised from 49% to 74%. Could you take us through why this is important?

We had for a long time, until 1997, a monopoly life insurer Life Insurance Corporation (LIC). For a country of more than a billion people, we had one life insurance company, which is not very optimum, and the organisational changes lacked. So, we need to bring in more ideas, new products, new distributional channels, and new technologies in the insurance sector as we have done in banking and other sectors. We must read this 74% permission for FDI equity share with the announcement that 2021-22 will see the disinvestment process progressing for the LIC. So, improving the LIC, as an organisation, their functioning, transparency, greater use of technology is essential because the financial system is becoming more complex.

The insurance industry is changing very rapidly and on the other hand we are trying to build the India International Financial Centres in Gujarat International Finance Tec-City (GIFT City) where insurance and reinsurance should play a very important role. So, I am hoping the 74% will also be used by the reinsurance companies which is needed, given the low insurance penetration in the country.    

5. Talking about the asset and land monetization piece, India’s infrastructure roll out is of course growing and that requires money. There are of course deficit concerns, do you think India could possibly monetise its lands and other assets?

If we look at the broad revenue structure, we now have two taxes:

1.    Income tax- corporate and personal, which we are broadening
2.    GST

Our expenditure requirements, both at the state level and at the central level are much greater and we have not really monetised, not just the tangible assets like land but also the air space rights, the regulatory hatchbacks and others, which other countries have done.

One of the constraints in that, particularly at the state level is the property rights leasing issues. You lease a public asset but how do you get it back when the lease period is over, or you want to change it. So, we will need to solve some of these type of issues on the legal side of the property rights structure and the land rights structure, if we are to get a lot of hope from revenue and asset monetisation. However, this is the right way to go. We have neglected it for quite some time. I think with some organisations there are indeed encouraging results like with the Indian railways, for example.

6. The ‘Bad banks’ so to speak, as they are called, the suggestion that there might be a new banking institution, which would take over a lot of bad debt. How do you see that?

This is not a new idea, as such, in the public policy menu. It was tried when the 1907 Asian financial crisis came. The asset reconstruction companies were setup to address the banking issue. A lot of it will depend on the professionalism, the political will and change in our culture, because for a long-time getting loans from the bank and repaying them was not given very high priority as experience suggest. Only in the last 4-5 years are we trying to change that culture. It is a good idea, but it will depend on the professionalism with which it is setup and the political leadership and support that such a bank gets. In principle, it is a good idea and a very positive note.

7. I also wanted to talk a little bit about the renewable energy aspect, I wonder what you think of the newly launched Hydrogen Mission? India has very aggressive targets to cut emissions and the hydrogen mission seems to be an interesting idea, even though we have considered other things like CNG, electric vehicles, etc. which are constantly being spoken about. Where do you think the Hydrogen Mission fits in?

The hydrogen, if it can be converted into energy will greatly ease the global energy scarcity problem. But it is not easy to convert hydrogen into energy. India is already participating in a consortium of countries on research of Hydrogen. Given India’s lead in the International Solar Alliance and the Paris goals, India, in its own interest is committed to getting higher and higher proportion of its energy needs from renewables. Hydrogen is at the very difficult end of that renewable and this I see more of a signal and experimentation in trying to tap hydrogen as an energy. The risk is high but for India right now, that risk is worth taking. Let us see how the mission performs and more resources should be devoted if it shows promise while we do other renewable energy- solar, wind and others at the same time.

8. The INR 5 Tn development finance institution focused on raising foreign funds, this is of course important for infrastructure. How do you see this?

This is smart and consistent with the ‘Atma Nirbhar Bharat’ and the ‘Vocal for Local’ concepts because we need to garner high level of liquidity and excess savings which some in the world have, for our own development and while they bring money, they also bring ideas, management etc. Many economists hold that it is not the FDI or the money, it is the flow of ideas, that these bring that are important for getting the country to the next stage of development. I think the blending of local and foreign money here is very much in the right direction.

9. What are your thoughts on the announcements and promises made for the agriculture sector?

This government since 2014, has had the aim of transforming agriculture and modernising and raising farmers income. There have been several initiatives including E-NAM, and the farm laws, basically to provide greater economic freedom, allow for more organisational changes in marketing supply chains and putting technology in the agricultural sector. Whenever you try to introduce these and allow some contestability in the previous arrangements or the arrangements which are monopolistic like the APMCs, you are going to get what may appear from the country’s point of view, irrational opposition but from the people that are involved who are used to their rent seeking and benefits. So, they would want to oppose.

The key though, is to handle it in a politically sensitive and adept way so that the reforms can continue. Many of the things mentioned by the Finance Minister showed how much the agricultural sector is benefiting. I was particularly thrilled by the initiatives for the fisheries sector which has been neglected and for the seaweed initiatives which are going to boost the agricultural incomes in the coastal and river areas quite substantially if they become successful. We have got to keep on trying new things, new technologies, new ways, introduce contestability and diversify our crops. As our incomes go up, the demand for grains- wheat, rice, and other staples, as a proportion of the total demand declines but for horticulture it begins to go up. Therefore, when you combine it with water scarcity, we need to move away from water guzzling crops like sugarcane, wheat etc. to some extent such that it does not go down to zero, but it gets reduced and more rational cropping patterns tend to emerge for our water security as well. Hence, these are combined, and I think the proposals for agriculture were very much in the right direction in the budget. 

10. This budget also seemed to be very transparent on macro fiscal numbers. Your overview on why do you think such a move came about? Is the government becoming more transparent and the age of transparency in macro fiscal is finally here, which many people have demanded? Overarchingly how would you rate this budget? Any final words?

One can look at it in different ways, this is the time it is useful to be transparent because you show high deficit, but there will not be much criticism and you have become transparent, which sets a precedent. If you do it at some other time, there could be more questioning on it. There is no doubt that we have to move towards transparency. Notice that our budget right now is on a cash basis and eventually we will have to move towards accrual basis. The International Monetary Fund’s (IMF) financial transparency code or fiscal transparency code is now recommending that in few years budget should be as much on accrual basis, as possible. This will change all the deficit and other numbers that we are used to and Fiscal Responsibility and Budget Management (FRBM) targets that we set, that is still in the medium term. But in the meantime, as much transparency as we can bring in the budget is better, so that we get the right perspective to make our fiscal policy decisions. I would give the budget 8/10.

10. And why would you rate it so highly?

It is very important to have continuity of policies and principles that are involved, which I mentioned, that you want to use capital expenditure in the right way to increase capacity, to do structural reforms and thereby lay solid foundations for growth in this year and the next coming years and that would address poverty and inequality much better than the alternatives that are not easy to carry out. So, I give high marks to the government to carry that out in concrete terms and in a well-designed way.

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