Govt must batten down on expenditure, play long innings to fix economy

NRI and foreign economists should be ignored as completely as commentators are ignored by top class batsmen, writes TCA Srinivasa Raghavan.

What is the similarity between batting in cricket and economic policy? For success, both depend on making the correct choices on a continuing basis. 

Thus, there are two contributors to success in batting. Depending on the bowled ball, the field, the pitch, the atmosphere etc, the batsmen must first select the right shot to play and, second, they must keep doing it consistently till they make a mistake. This is exactly true of economic policy also. 

The problem, for both batsmen and governments, is that they don’t know they have made a mistake till it’s too late. This is what happened with demonetisation and the way GST was designed. 

Now with the economic slump in full swing, the government has to very carefully choose the right shots to play. It must not give in to the pressure from the mob of economists clamouring for action. 

My own advice, drawn from cricket, is that when the going gets tough, the tough don’t try to get going. They settle down for a long and hard grind. 

The government should do the same, and just batten down on expenditure instead of using the forthcoming budget to play some wild shots to boost consumption and investment. 

However, the reason should not--repeat not--be the fiscal deficit. That 3 percent target is a piece of nonsense dreamed up by the IMF in the early 1980s to comfort the bond markets after the Latin American debt crisis. Then in the late 1990s the Maastricht bunch borrowed it because it appealed to the Germans. 

As a developing economy with a democracy that puts pressure on governments to adopt welfare programs, we need to be be at 5 percent at all times. 

Indeed we are already there or perhaps even at 6 percent. This is because when you add up all the hidden items of expenditure, it’s like a batting line up in which as many as three batsmen are injured and four are bowlers. There’s no option but to play slowly and carefully if the match is to be saved. 

This, however, doesn’t mean that simple doable things should not be done. It’s just like taking singles — one per over till things come under control. As the coach in our college would say, “Silo (slow) khelo”. 

What this means for economic policy is that both personal income tax and GST rates need to be slightly lowered. By how much is a call that the finance minister will take but the direction has to be downwards. 

The government also needs to realise that Indians have a very high and consistently revealed preference for cash transactions. The trick, just as a good batsman plays spin, is to use this preference, not oppose it.

For this to happen it’s important to understand that not all cash transactions are made to evade tax. Most are made because it’s simply very convenient. 

So here’s a suggestion: send all tax inspectors on paid leave for three years. Revenue will become buoyant again. (This is not an original idea. Chanakya had suggested it 1,000 years ago). 

One last thing: NRI and foreign economists should be ignored as completely as commentators are ignored by top class batsmen. Both have become a nuisance because they know absolutely nothing about India. Running an economy is not like running a regression.