Rakesh Mohan, Krishnamurthy Subramanian sing divergent tunes on PLI scheme

Vijay Kelkar bats for single 12% GST rate

Chief Economic Advisor (CEA) Krishnamurthy Subramanian and Economic Advisory Council to the Prime Minister member (part-time) Rakesh Mohan on Thursday were at variance on the production-linked incentive (PLI) scheme.

Mohan partly blamed the “misguided” exchange rate policy for the stagnation in merchandise exports for the past decade, necessitating a PLI scheme.

“We have lost out on trade. We have had trade stagnation in the past decade. Some of this is related to an increase in protectionism, the other to a somewhat misguided exchange rate policy, which is heavily overvalued,” said the former Reserve Bank of India deputy governor at a Global Economic Policy Summit organised by the Confederation of Indian Industry.

He said this is illustrated by the compelling need to have a PLI scheme.

“You can do a quick calculation. What will be the exchange rate equivalent to an increase in subsidy given through PLI? You will get to know how appreciated our exchange rate is.”

In response, the CEA said there is an important distinction between the exchange rate policy and raising production via PLI.

Emphasising the important aspect of the PLI scheme is that it incentivises growth, Subramanian said while in 1991 the product markets were opened, not enough attention was paid to the factor markets.

He clarified that he is not only including labour and capital in the factor markets, but also the nature of production or the scale of production itself.

The CEA said PLI is more than democratised subsidies.

“It is directed towards growth, providing firms incentives to be closer to optimal scale, reap economies of scale, and reduce their average cost,” he said.

He cited the Economic Survey of 2018-19, penned by him, to emphasise that the government policy in the last seven decades has provided perverse incentives to firms.

The government has already announced the PLI scheme for 13 sectors, including electronics, medical devices, pharmaceutical drugs, telecommunication and networking products, food products, air conditioners, light-emitting diodes, automobiles and automotive components, textile products, and specialty steel.

Subramanian also did not agree with Mohan’s view that 1991 witnessed a second generation of economic reforms. Mohan said the first generation (first-gen) of economic reforms were initiated soon after Independence, when a comprehensive approach to growth and development was made through planning and import substitution.

Subramanian refused to call the Nehurvian-era policies first-gen reforms. The first-gen reforms were initiated in 1991, he said.

Mohan emphasised on the need for third-generation reforms, which would underscore public delivery of goods and services, particularly related to long-neglected health, education, water, and sanitation.

Kelkar’s prescription

The 13th Finance Commission Chairman Vijay Kelkar suggested reforming the goods and services tax (GST) by going for a single rate  of 12 per cent.

“We have a bizarre system of four to five rates. No wonder we have so much litigation. I would recommend the government announce a single rate of 12 per cent, including 6 per cent central GST and 6 per cent state GST,” he said.

He also batted for expanding its coverage by including petroleum, real estate, and land in it. He also called for sharing GST revenues with local bodies to deliver public services and goods.

Ashok Gulati, Infosys Chair professor for agriculture at Indian Council for Research on International Economic Relations, called for completely overhauling agriculture by not only concentrating on land productivity, but also on total factor productivity.