Budget stimulus, reforms to put economy on track post note ban: Expert

A Columbia Univ professor said disruptions associated with demonetisation appear to be behind us

As the cash crunch issue following demonetisation seems to be over, the government needs to use the upcoming Budget to provide stimulus and pursue structural reforms to accelerate growth, said Columbia University economics professor Pravin Krishna.

"On India, I remain optimistic. The temporary disruptions associated with demonetisation appear to be behind us, note shortages are a declining problem. A budgetary stimulus and ongoing structural reforms will hopefully put the Indian economy in good position to achieve a higher growth rate this year," Krishna, Deputy Director, Raj Center on Indian Economic Policies at Columbia University, said in an email interview.

Stressing that infrastructure, health and education are all important priorities, he said the greater challenge is in spending smartly, and perhaps in enabling supply from a well-incentivised and well-regulated private sector, so as to maximise benefits at the micro level.

Explaining further, Krishna who is a distinguished professor at Johns Hopkins University said that he feels rationalisation of the current taxation system (both internally and on international trade) can get to lower average tax rates, while being, at least, revenue neutral.

"The ability to evade taxes is greater when tax rules are complex. Liberalising and rationalising the tax regime would be an important step to curb evasion," he noted.

Asked whether the Indian government's decision to demonetise higher value currencies served its purpose, the eminent economist pointed out that the extent to which demonetisation succeeds in taxing the stock of black money will depend upon the (yet to be announced) quantum of notes expunged and taxes collected on black money deposits.

"A fuller campaign against future tax evasion and the stock of black wealth stored in forms other than money will obviously require additional reforms," Krishna, who has written an article with globally acclaimed economist Jagdish Bhagwati said.

He, however, pointed out that there has been an impressive take-up of digital payments in society, which is a highly encouraging outcome and should bring long-term gain.

Appreciating Prime Minister Narendra Modi's willingness to take on risks to try and achieve quantum leaps for the Indian economy, Krishna said that Modi's approach may not be a preferred one for those who are comfortable with status quo or with the processes of incremental change.
 

"But, the justifiably impatient majority, whose hunger for substantially improved futures within their own lifetimes, see this quite differently -- as it seems evident in the forbearance with which the country bore the disruptions of demonetisation over the last couple of months."

Talking about the global economy, the Columbia University professor said the world is facing a number of uncertainties.

"In the United States, a new administration under Donald Trump, with dramatically different economic, political and geopolitical priorities than the Obama administration has taken over. Brexit discussions in the UK and Europe will be ongoing for a while.

"A number of important elections are due to take place in Europe with outcomes that may shift the political landscape there substantially. The future trajectory of China remains uncertain as well. And these are just some of the known unknowns..."

Asked what 25 years of economic liberalisation has achieved, Krishna explained that poverty, by whatever measure, has dramatically declined in this period.

"Improvement has been seen across all measures of the human development spectrum and across all socio-economic and religious groups," he said.

These past achievements, Krishna said, while underscoring the importance of growth in tackling poverty, should not, of course, distract us from the fact that hundreds of millions of our fellow citizens continue to live in poverty and that we have a significant distance to go before proclaiming victory.