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RBI needs to do more to tackle inflation: Tamil Nadu FM

In an exclusive interview with Livemint, Thiagarajan also said that the Reserve Bank of India (RBI) should be able to function independently. Further, he spoke about the policy interventions required to tame inflation and his state’s support for startups. 

Here are the edited excerpts of the conversation: 

What’s your perspective on the state of the Indian economy? We had seen 4.1% growth in Q4 and 8.7% in FY 21-22. The union government says the economy is resilient and there’s no fear of stagflation as such. Would you agree?

I wish I could share their optimism but when I look at the impact on people’s lives, the extent of joblessness and what’s happening around the country because of this new scheme (Agnipath), I worry that chickens are coming home to roost. 

The numbers can be a bit misleading without context as an 8.7% growth rate is fine, but it’s relative to the fact that it was negative last year. If you do the math, you’re barely back to where you used to be two years back. That’s not much room for great joy in my opinion.

The inflation numbers continue to remain above the RBI’s band of 4%- 6% even after the rate hikes and it is likely that the RBI would continue to raise the rates further just as any other central bank in the world. 

What do you think is the right kind of policy intervention that the Centre should be adopting right now to tame inflation?

The primary nature of the monetary policy is to be battling inflation but the RBI hasn’t been able to do it. They diluted their mandate where they see themselves as accountable for boosting growth, protecting the value of the rupee and delivering dividends to the government. 

You don’t have a lot of control over fiscal policies that can reduce inflation. Fiscal policies are better at stimulating and monetary policies are better at controlling. That’s why you have relatively independent organisations. 

The RBI should not be under the sway of the Government of India and should be able to operate independently. 

I also don’t think the Government of India has room to tighten the fiscal policy as it is already bumping up against the limits of its debt capacity and the country’s investment-grade rating, though there may be many upsides to tightening it. 

I don’t think politicians, with so much joblessness and a very precarious economy, have the stomach to cut fiscal spending at this point. 

So, it really goes back to the RBI. The RBI has to bite the bullet and allow the government to be the fiscal and expansionary part of this equation, thereby going back to its day job, which it should have been doing all this time. It may be a little too late but they should still try.

The opposition states seem to have a lot of leverage after the SC judgment on GST council and they have already been pushing for an extension of the GST compensation payouts. 

What are your expectations for the meeting that’s scheduled for next week?

Compensation is one major issue. I have already written about it and I don’t want to go into too much detail. I have already said this publicly and I’ll say it again. 

I don’t think the union government wants on their conscience the implications that would befall some of the states if they were to cut the compensation completely. 

For a state like Tamil Nadu, we hedged ourselves in a couple of ways. I started this reconciliation project where I went for unused funds. We found money and so far, I haven’t accounted for any of it back onto the balance sheet. I built myself some cushion on behalf of the chief minister but many states don’t have such a cushion. That’s going to be a very difficult issue. 

The GST doesn’t work with any competence. Forget about the design and forget about the implementation. The council is supposed to meet every three months. Does it? No. 

The execution of the daily management of this GST is unprofessional by any kind of corporate standards. This is the largest revenue stream to the whole country and if it doesn’t warrant a meeting every three months, then I’m not sure what the priority of the union government is.

The Central government has plans of allocating $26 billion as a part of its inflation-fighting plan which already risks widening the fiscal deficit from 6.4 to 6.8% of the GDP this year. 

Don’t you think these calls from the opposition states to extend compensation payouts will exacerbate the current state of the economy, which is still not fully recovered from a pandemic-induced slump?

I agree that there’s potentially a problem if the states allow the union to do the heavy lifting and don’t do what they need to do. But as you know, the bulk of this compensation or eventually all of it comes from the GST cess. 

If I were in the union finance minister’s shoes, I would consider a short-term extension for two reasons – we should get a huge bounce in GST revenue and secondly, if things go right, we could find that the low base effect also helps the states. 

You can modify the formula a little bit by setting up a new baseline and you give a new number. Some states will be desperately affected but as far as Tamil Nadu is concerned, though it is not the greatest thing, we can live with it because we have pre-planned and we put some provisions in place.

The tussle between the states and the Centre isn’t just with GST. We had seen it in the past with NEET, NEP or even with the National Monetisation Pipeline. The states allege that the Centre has taken away a lot of power from them while the prime minister asks the states to abide by the idea of cooperative federalism. 

Isn’t this more of a political issue than actual economics?

I don’t want to engage myself in this kind of memory-less discussion. The greatest proponent of states’ rights in independent India was Narendra Modi who was the CM of Gujarat for 13 years. He was far more strident and aggressive when it came to asking for independent decision-making than I. 

It was the prime minister’s position that changed when his seat changed and all of a sudden, he has forgotten that states even exist. 

Our position has been consistent and the logic for whatever we are asking is embedded in the constitution. I’ll leave it there.

You have been taking a lot of trips overseas and so was the CM. The state is at the number five position when it comes to FDI inflows. 

What’s the Stalin administration doing to make Tamil Nadu the next investment capital?

I think we are number one this fiscal year but at any rate, we are the fastest growing. We see a 40% increase year-over-year. There’s a huge move towards India in the global economy right now. Tamil Nadu is riding its natural advantages within that wave. 

We have relatively more advantages than any other state in the country starting with those you had mentioned – human development index, social development index, lower Gini coefficient number and a market of 80 million scale with high purchasing power. We also have geographical advantages, a large coastline, multiple airports and good infrastructure. 

The overriding public policy lesson is to do the core things right. Those have been the sustainable advantages over decades.

It’s a world of start-ups and what’s the state government doing when it comes to fostering aspiring young entrepreneurs?

We are doing many things but I’ll probably highlight a few. We came out with a new entity called the Tamil Nadu Seed Investment Corporation. We appointed a former venture capitalist as the CEO and the government itself will be investing in start-ups and encourage them by providing shared services, mentoring, connectivity to funders, etc,. 

Secondly, Under the Tamil Nadu Infrastructure Fund Management Corporation, we will be investing another hundred of crores investment into start-ups. We have so many start-ups in Tamil Nadu that have built products and deliver services that are very innovative. The government of Tamil Nadu itself can benefit from it. 

Last November, I saw an event and I stated my intent to the CM that the government should procure directly from the start-ups in road tech, automated cooking, robotics and fintech. This, we believe, is a big win. 

We amended our tender rules so as to encourage them and let the start-ups pitch to the concerned department officers directly. The government of Tamil Nadu is a big buyer and our annual budget is 50 billion dollars. So, we can always encourage these kinds of start-ups.

Rahul Gandhi a couple of weeks back put out on Twitter some data, stating that India looks a lot more like Sri Lanka. 

You and your party have a very strong alliance, would you be therefore endorsing his statement?

I would say both yes and no. I agree that when you have a concentration of power without a democratic process without checks and balances, you’re going down the wrong path. But considering the size of Sri Lanka and the kind of economy it is, the odds of a crisis hitting Sri Lanka are much higher and I don’t think we are at risk in my opinion of facing that kind of a dramatic collapse in the economy.

We have been hearing a lot about different political and developmental models lately from our politicians.

What exactly is a Dravidian model, something that your state claims to have championed?

The Dravidian model is very simple. It first starts with self-respect. No one is ostracised and the model gives everyone an equal opportunity to succeed. Education for all and reservations to ensure that those who have been historically oppressed get more chances to make up for their centuries of oppression are core to it. 

It focuses more on local self-government and devolving power from the union to the state to the district and to the local bodies. The model ensures that the bottom always has a chance to get to the top. 

When my driver’s son goes to the same school where my son goes, being a child of privilege, then I have a successful outcome.

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