Budget 2015 needs to give a free hand to private sector: Jagdish Bhagwati

In a chat with ET Now, Jagdish Bhagwati, Prof Eco & Law, Columbia University, shares his macroeconomic outlook and talks about his expectations from the Budget 2015. Excerpts:

Supriya Shrinate: Some say that the biggest risk for the Budget 2015 is going to be the truckload of expectations. Your take?

Jagdish Bhagwati: It has to be emphasised that everything cannot come through the budget. A government introduces policy changes throughout the year. These changes are not necessarily concentrated in the budget.

Expectations on the financial part are okay. But things like opening up the system to foreign investment, improving trade access and trade commitments are done through the Commerce Ministry, and not the Finance Ministry. So, expectations from the budget should be reduced a bit.

We should also curtail our expectations on deficit targets, etc. They cannot just vanish overnight. India is on the cusp of change and is very lucky right now. FM Jaitley should try and take advantage of this fact. We have got a tremendous amount of price decrease. It is a huge relief. The resultant accruals can boost public spending; it can boost the government's commitment on important areas like energy.

Supriya Shrinate: Do you believe FM Jaitley was right in accepting the 4.1% fiscal deficit target for this year?

Jagdish Bhagwati: It depends on how you project these things. Growth has improved, but there has been no miracle. Still this growth will lead to a bit more revenue for the government. The fall in oil prices has helped too.

The government needs to forecast how much additional fiscal expenditure it can make. The system is growing, the marginal resources are more available now, and inflation is reasonably under control. Also, prices have not broken out in a big way. So the government could afford more deficit. Both NITI Aayog Chairman Panagariya and RBI Governor Rajan are in agreement on this.

Supriya Shrinate: During UPA II, there was an obsession to not let ratings agencies downgrade India. Do you think FM Jaitley will be able to satisfy rating agencies if he were to breach the deficit target? I want your answer from the rating agencies' perspective.

Jagdish Bhagwati: Rating agencies — if they are sensible — do not go just by the fiscal deficit numbers. They usually look at a country's overall economic policy.

If the agencies are looking at what has been happening since the Modi government took over, they are almost certain to realise that the system is opening up. That is a huge plus factor in the overall evaluation. If the system is not opening up and if the fiscal deficit is getting out of hand, then God help you in terms of your ratings. But India's case at the moment is different.

Supriya Shrinate: Do you think this fiscal slippage will be very different from what Pranab Mukherjee's fiscal slippage was? He let the fiscal slip and look at where we landed. What is your view?

Jagdish Bhagwati: That is exactly the point I am making. But the context is different now.

Whatever FM Jaitley does, he has a cushion to fall back on. Jaitley has got to present his case to rating agencies in this way. I am not sure if he'll do that, but Panagariya will surely do that because he has a wider context in mind. The current team is good, and Raghuram Rajan will also add some positives.

Supriya Shrinate: We have seen that corporate India has rallied behind the Modi government. Why then have we not yet seen investment break ground? What is corporate India still wary of?

Jagdish Bhagwati: Part of the problem lies in the world economy, which is depressed by and large as of now. There are many problems with the global economy.

But involving the private sector closely is a step in the right direction. They compete in international markets, and they compete well. That is the strength of Indian corporates. When you leave it to the private sector, they will find a way to get around those problems.

Supriya Shrinate: We have only to look at how much they are exporting out of India now.

Jagdish Bhagwati: I was an export pessimist earlier when there were barriers. But once exporting was made easier, our businessman found ways for doing all sorts of things.

Supriya Shrinate: They are exporting just about everything from India now.

Jagdish Bhagwati: Yes, there is no reason why we cannot do what the Chinese have been doing. We have just to leave it to the private sector. I am not a libertarian, I do believe in government playing a role, but we have really undermined the private sector in a big way. This budget should initiate steps to correct this anomaly.

Supriya Shrinate: One can see that this government has initiated a host of positive steps. What else can the government do in this budget to get potential game-changers like Make in India or Digital India really take off?

Jagdish Bhagwati: Make in India can send a signal to investors abroad that India is open for business now. It will also help boost our exports. India has to do what China has done in attracting foreign investment in a beautiful way. Our exports are still very limited. We have to correct that.

If we let foreign investors enter in a big way and make things in India, it will be a win-win situation both for those firms and India. They can exploit a skilled labour force with knowledge of English and decent amount of literacy.

From India's perspective, manufacturing is important. That is where Make in India becomes crucial. The government needs to emphasise on not just manufacturing, but specifically on the labour-intensive side. Once that happens, that will do much good to employment generation.

Supriya Shrinate: Many people say that along with manufacturing, other job generators like services should be pushed as well. Your view?

Jagdish Bhagwati: Yes, the government should push a lot of tradable services. Only giving important to manufacturing is an old Indian fallacy.

Supriya Shrinate: Do you think PM Modi could have undone things like retrospective taxation? Isn't that a ghost that needs to be laid to rest?

Jagdish Bhagwati: PM Modi will have to assure investors on such things. He has the force of personality, and he is supposed to be not anti-investment. He has also got to assure people on judicial reforms.

Supriya Shrinate: Both FM Jaitley and PM Modi have said that subsidies have to be targeted better for them to reach the intended beneficiaries. Do you expect Jaitley to bite the bullet as far as subsidies are concerned?

Jagdish Bhagwati: But the way to do it would be through the Aadhar movement. The government must get direct cash transfers going.

The only problem is that the politicians won't get their usual cut. That's why they are digging up holes.

PM Modi has announced that he will go back to Aadhar. At the same time, some Minister has said they are going to continue with the old NREGA scheme.

It has thus become a politics versus economics case. But economics clearly says that it is wasteful to give assistance to the poor through NREGA because it creates useless assets.

However, you cannot eliminate politics. The politicians are the one who are going to vote on this. Modi has to keep this in mind.

That shows how difficult some of these things are. That's why you need a determined Prime Minister with a clear vision and common sense. But some things are definitely going to take a long time.

Supriya Shrinate: In Budget 2015, which sectors do you expect to be opened up for foreign direct investment? Are you still hopeful about retail?

Jagdish Bhagwati: What is more important than opening up sundry sectors to foreign investment is leaving it to the private sector. We have only to look at Japan to learn our lesson.

Industrial policy is not the answer. The answer lies in letting the private players come into their own. You may proscribe them from entering certain sensitive sectors like defence, but outside that they ought to be given a free hand.