April 6, 2013

Interview: What the Government should do about the Economy

Bharatiya Janata Party Treasurer Piyush Goyal tells Aditi Phadnis what the government should do to get the economy in order.

So we know what Rahul Gandhi wants for India. What does the Bharatiya Janata Party (BJP) want for India – beyond being a naysayer to every initiative the current government takes?

We still do not know what Gandhi wants for India. What we do know is that he says he cannot do anything about our problems.

We, the BJP, are not naysayers. On the contrary, we have supported the government on many measures of national interest. We have a plan to pluck the low-hanging fruits, a mid-term plan and a long-term plan, to quickly take India to double-digit growth and prosperity.

For example, we all agree India needs to be connected. There are only three ways to connect India – through railways, air and roads. Railways are ideal for connectivity. But rail lines cannot be set up overnight. That will be the long-term plan. A robust road network, with land acquisition, right of way, environment issues, will be the mid-term plan. But if I could make air travel more accessible for ordinary people quickly, it can be the immediate low-hanging fruit.

How can air travel be made more accessible for the common man?

India already has 350 airports, and fifty per cent of them are non-functional. What if these airports could be modernised and made functional the year round?

A basic airport requires a jet landing strip, terminal building, customs, immigration and air traffic control. Food courts and shops could cross-subsidise the costs. I have done the math – you can make a good functional airport for Rs 300 crore only. 

The total taxes levied by the Centre and the states on aviation turbine fuel amount to only Rs 5,000 crore annually. Also, there are all sorts of taxes like passenger taxes, airport development charges, landing and parking fees, and so on. This increases the cost of air travel by nearly 100 per cent and makes it out of the reach of the common man. A one-way Delhi-Mumbai ticket by air should cost only Rs 2,500 if there were no taxes.

Delhi airport is the most expensive in the world. It reportedly costs $29,000 for a flight with 400 people to land and take off, whereas comparable cost in Dubai is $2,500. I’m proud we have a great airport. But it is not an enabler for the common man to travel by air. We should innovatively use the cross-subsidy opportunity, with the land around airports, to finance their upgradation and eliminate all taxes on the sector.

Making civil aviation more accessible is a win-win for everyone. Using the existing infrastructure, no land acquisition or environmental clearances are needed: all you are doing is leveraging capacities you’ve already created. And, in turn, connecting remote parts of India rapidly and generating millions of jobs in the process.

So you’re saying air travel can be a route to the revival for India’s economy?

This is just one example of innovative thinking and seeing things differently. I believe if one forgoes taxes or revenue to expand the market and create economic activity, it is in fact prudent use of fiscal policy to create jobs and rapid growth. For example, Indian ships were being registered abroad owing to high rates of taxes in India, and we were losing revenue. The National Democratic Alliance government introduced “tonnage tax” on ships, as is prevalent in other sea-faring jurisdictions, and attracted all ship-owners to register their vessels and conduct the business from India. Thus, economic activity grew rapidly in the sector.

What about India’s current economic problems. First, inflation…

Read the speech of India’s first Finance Minister R K Shanmugam Chetty. In 1947, he said, and I quote, “Inflation is not due to further increase of currency but to a steady fall in the supply of goods”. He further said, ” The only real answer to inflation is to increase our internal production and thereby close the gap between the available supplies and the purchasing power in the hands of the community which in present circumstances imports cannot bridge.”

I believe, the only way to sort out the inflation problem is by supply-side management. On the contrary, we have made interest rates so high in India, especially for small and medium businesses. Can the Indian economy ever become a manufacturing hub at interest rates of 14-18 per cent? Inflation can only be corrected by keeping an eagle eye on the supply side. You will recall, we lost an election because onion prices skyrocketed. What should have been done is that when the prices went up, we should have immediately imported 50 planeloads of onions. Many times, you do’t even have to bring in the product, a mere announcement will bring prices down.

You remember, in the 1990s, there was such a shortage of LPG cylinders that you had to beg and bribe the gas company person to send you your refill? Why was that? Because we simply did’t have enough companies making these cylinders. Ram Naik just opened up gas cylinder manufacturing to the private sector and created a surplus of cylinders and bottling facilities. Costs came down owing to sufficient availability.

The other issue is land and real estate. Acquiring land and selling it should not be the route to make bumper profits. It happens when cities do not grow and demand increases. We sorted out this problem in Gujarat. Take the case of the Ahmedabad Urban Development Authority. It created a ring road around Ahmedabad and expanded it sixfold. There is sufficient land available for development, and prices are stable.

How do you suggest the current account deficit (CAD) be brought under control?

Now, let us discuss the deteriorating CAD. Gold imports have shot up in recent years since they provide a hedge against inflation and security to the housewife. There is also social pressure, especially during marriages. I think it is time we introduced a gold bond, measured in weight, assuring quantity-to-quantity supply whenever the investor requires. The banks could even give a two to three per cent interest as a sweetener, and they could deploy the funds in much needed infrastructure creation at six to seven per cent for long tenures. The banks could hedge a part of the quantities, and if required, the government could even provide a reserve quantity of gold as security. This will cool the market and reduce gold prices and thereby imports.

We should also focus on expanding the tourism potential. Foreign tourist arrivals (FTAs) are under seven million in India, whereas city states like Dubai and Singapore have much more. Turkey and Egypt have been able to expand their tourism rapidly. India should implement bold measures to rapidly increase FTAs, may be draw plans for an ambitious target of 60 million at the end of 10 years, which could provide opportunities for large-scale investment in infrastructure, job-creation and increased foreign exchange earnings – from $16 billion at present to $100 billion.

I have concrete plans on the subject, and I am confident we can provide sustainable solutions to address the CAD problem.

What are the dark clouds you see on the horizon? What is the next shock we should brace ourselves for?

Capex as a percentage of government expenditure has fallen drastically. In the revised estimates for the last year, there is an increase of Rs 60,000 crore in subsidies and a reduction of Rs 77,000 crore in planned capital expenditure. This will further kill the investment cycle. The costs of this are now evident. The government is spending on revenue account more than it earns, thus leaving behind debt for future generations without creating assets. I fear we are headed for a debt-trap, unless we reverse this trend quickly.

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