'Formalisation creates losers...': ISB professor suggests two course corrections for Centre

Prasanna Tantri, Professor of Finance at the Indian School of Business, has suggested two course corrections for the Centre. He wants the Centre to freeze the current infra spending, shift some funds from here to schemes like Ayushman and housing, and identify losers from the formalisation of the economy and compensate them. 

The Centre should follow a bottom-up approach in infra spending, meaning spending should be done on projects solving a problem, Tantri said in a podcast - Vaad - aired on July 12. He said last year, Rs 10 lakh crores were allocated but spending was Rs 9.40 lakh crores - Rs 60,000 crores could not be spent.

"My suggestion is this: Last year, you spent Rs 9.40 lakh crores, freeze it at that, add 5% for inflation, and then take a year...decide on the projects you will do. If you think 5% more is required, add that. Then the multiplier will be very high. It's not that infrastructure doesn't have a multiplier. If you are solving a problem, there will be a multiplier."

"I'm not saying capex is wrong," he clarified but said capex (capital expenditure) addressing a need will work. "Building an airport in a village, with due respect to those people, what will it achieve? Who will travel from there? People there don't even have enough income." 

The economist said that during the UPA government, spending on infrastructure was 1.5% of GDP. Now it has been increased to 3.3%, he said. "Instead of 3.3%, make it 2.5%. Shift this 1% to Ayushman Bharat, the housing scheme, and the 'seekho and kamao' yojna (apprenticeship scheme). The multiplier for these, if implemented well, is unimaginable."

Tantri, also an independent director at Power Finance Corporation, however, said that it was not the government's fault. "It's the fault of economists who advise the government. They told them that if you increase capex, growth will increase irrespective of whatever. They believe in some magic fiscal multiplier and advise increasing allocations."

The professor said there was no evidence that infra spending results in 3-4 times multipliers. At most, he said, it can be one and a half times when everything goes well but there is no basis for it being three or four times. "Infrastructure should be bottom-up. It should not be top-down. This percentage game should stop. Build where there is a need, and build more if needed. Suppose you find out that the bottlenecks are such that 3% is not enough, then increase it. But don't go by allocation percentage. The market will react that day, and the share price will go up. That should not be the metric."

He advocated for more funding for Housing and Ayushman schemes. "Rs 1.5 lakh is too little for any kind of housing anywhere in the country," he said and asked the Centre to at least provide Rs 3 lakh under the Housing scheme. "Why only Rs 50,000 crores? Shift a little here, one or two lakh crores. The benefit from that cannot be matched by any road."

Tantri said there is this assumption that investment in infrastructure will be a multiplier. "Those who say this don't go out of Delhi," he said and then spoke on how formalisation had affected small shopkeepers in rural India. 

"Formalization is great. Yes, it is great. But it creates losers. So, in our village, a big D-Mart opened. It is very cheap. Everyone is going there to buy. People are getting small benefits, but this has affected small shopkeepers," he said. The professor shared a personal experience. He said when he went to a local shop to buy chocolate, there was no stock.

When enquired, the 50-year-old shop owner told the professor that everybody goes to D-Mart and buys from there. "Now the road is good. Everyone has a vehicle, so the lifestyle has improved. Otherwise, where did the vehicles come from? And they go and buy from this bigger shop at a cheaper price. And there's no way he (small shop owner) can compete with them. And he is 50 years old now."
 
"Economics theory will suggest he should do something else. What can he do at 50? You have to find out who the losers are. There aren't many. Ultimately, most people are winning. If you don't recognize losers and compensate them, there will be a problem," Tantri said, underlining that this was a situation in just one district.  

Tantri, who teaches finance at ISB, said social sector schemes are not all freebies and some of these which address market failures increase the fiscal multiplier. "If you give a street vendor Rs 500, its fiscal multiplier is so many times more than that of an airport. So focus on that. And the flagship should be something like the 'seekho-kamao' scheme, Ayushman Bharat, and Vishwakarma Yojana."

Finance Minister Nirmala Sitharman will present Budget 2024 on July 23.