We need to recalibrate expectations about India: Arvind Subramanian
The chief economic adviser argues for higher public investment to drive domestic demand and ward off the global headwinds
New Delhi: Behind the Economic Survey that has received rave reviews from all quarters lies a warning: India’s economic growth may slow. The man at the helm, chief economic adviser in the finance ministry, Arvind Subramanian, argues for higher public investment to reverse the trend at a time private investment trails in the bid to drive domestic demand and ward off the global headwinds.
In an interview ahead of the Union Budget 2016, Subramanian talks about why a bad bank can wait and the difficulty of structuring employment-linked incentives to the industry.
Edited excerpts:
What do you think is the biggest challenge before the economy right now?
We have strong international headwinds. It requires a lot of careful management domestically. The priorities are all the same. We have an agenda. We have to implement that agenda.
The government has done a lot of things that we have listed in the Economic Survey. A lot of things need to be done. We have to do all this while maintaining macro economic stability.
The usual things like a good budget, strong fiscal and macro policy, public investment, sorting out the twin balance-sheet challenge, implementing goods and services tax are important.
You’ve projected 7-7.75% growth for 2016-17 against the estimated 7.6% growth rate in the current financial year. You seem to be suggesting there is a greater chance of the Indian economy slowing down next year?
You certainly want to allow for that possibility. It is a very unusual time. If you look around the world, it is almost as if there is no ray of hope apart from India and, to some extent, the US.
Asia, China, Brazil, oil exporting countries like Saudi Arabia, Europe, Japan are all struggling.
You have to take that into account.
It is also a message that you have to recalibrate expectations about India, or at least see the Indian performance in the light of what is happening around the world.
What are the assumptions behind the lower and the upper limit of the growth projections?
The lower limit is if things turn bad internationally, and that could have a big impact.
The upper end is based on the assumption that we have a good monsoon and things don’t turn out very bad internationally.
Is recapitalization the only solution the government is looking at to fix the problems of public sector banks?
We spoke about the four ₹ in the Economic Survey (Recognition, Recapitalization,Resolution and Reform). We need to do all of them. We need to first come clean on the stressed assets we have. We need money to recapitalize banks.
The reason it is a twin balance -sheet problem is also because there is a counterpart to the bad- loan problem, and that is the borrowing done by corporates. That needs to be addressed. That is the resolution part. Either the (stressed) assets have to be sold off or they have to be rehabilitated. Only then will they (stressed firms) have the money to pay back the banks. And then we need to have reforms. We need to make sure that this does not happen going forward—this cannot happen again and again.
So, all these things have to be done as a package.
Is the government in talks with the Reserve Bank of India on the central bank using some of its equity to finance the recapitalization of banks?
Let’s see. That is an issue that has been long-standing. The government has been discussing that for some time now. We keep discussing that.
How feasible is a bad bank in India’s context?
A lot of the policy options will also depend upon how things are going. We have a strategy at the moment: RBI’s 5:25, strategic debt restructuring (SDR),Indradhanush. If it works, then we continue. But if things don’t work out as quickly as we want, then we have to consider all options, including a bad bank.
The survey talks about not raising the income tax exemptions limit and taxing agricultural income to increase the tax base. Is it a feasible idea?
Not raising the exemptions is a very feasible idea. Why should we raise exemption limits? We have the China example. It is like the Narasimha Rao strategy. You do nothing, and you achieve reforms. On taxation of agricultural income, if there are certain people who earn a particular income, then regardless of where that money comes from—land, agriculture—it should be taxed.
But given the rural distress, can this be implemented? There are political compulsions.
Politically, anything that has to do with agriculture is loaded. But the question is that can we create a political narrative that the rich are rich everywhere and the poor are poor everywhere.
Small farmers are in distress and face volatility. We have to be extremely supportive to them and protect them. If you are making a lot of money from agriculture and driving a Mercedes, then you should be taxed.
The government is discussing the idea of giving employment-linked incentives to industry. Is that a good idea?
It has become such an Exemptions Raj that we think everything needs incentives. The amount we give through exemptions is so high. The industry is very guilty as well. The government is phasing out corporate tax exemptions. When the GST comes in, we will also address some of the indirect tax exemptions. Generating employment is probably a more compelling case for giving exemptions. But structuring such incentives is very difficult. How do you design these things? But something to generate employment is not a bad idea.
You talked about increasing the taxes on gold and ATF (air turbine fuel) arguing that the prevalent low rates benefit the rich more. The GST revenue neutral rate report that you prepared also talks about the need to increase tax rates on gold. Is the Union government in talks with the states on this?
The (economic) survey brings to light things that people didn’t know—that’s what the job of an economic adviser is. Petroleum is out of GST at present, so states can do what they wish to do.
The centre should also move towards higher tax rates on gold under the GST.
Boosting public investment has been one of your constant themes even in the last economic survey. But some analysts say there is a limit beyond which you can’t push public investment.
We are nowhere close to that limit. Last year, we increased it by 0.3% of the GDP. Absorptive capacity is an issue. It’s not like we are earmarking ₹ 1 trillion extra (for public investment).
The other point being made is public investment has its limits as an instrument to push growth. Also, pushing fiscal deficit by a few basis points will not make a great difference to growth.
They are two different things. Do we need roads, do we need railways, will this boost growth? Of course. So that’s the supply side argument of doing that. Do we have the money to do it? That’s a different question and we have to reconcile with that.
But in balance, we do need more public investment, especially when private investment is so weak. Investment in railways have huge growth generating capabilities. After all, that is why infrastructure is so important.
TPP (Trans Pacific Partnership) is coming as a challenge on trade policy front. Do you think India should join TPP?
First of all, we have to recognize there is something really important happening. Any decision to join has to be first based on an economic cost benefit analysis. There are benefits and costs. We can’t have an intellectual property rights regime that will deprive our poor people (of cheaper medicines). But in decisions like this, other geopolitical factors come into play. It’s not just about economics. Especially with (the current) prime minister, what India you want to project: an India that is out of everything or an India that is part of everything?
But do you think our foreign trade policy should be driven by geopolitical considerations? That is in fact one criticism that the Manmohan Singh government faced when it started negotiating a free trade agreement (FTA) with New Zealand which may be geopolitically important but unlikely to drive our exports.
In that case, I don’t know what is the geopolitical importance we get by signing an agreement with New Zealand. But all countries do trade agreements based on geopolitics. TPP is a geopolitical agreement. The “pivot to Asia" of President Obama is very much targeted at China. So, all countries do it.
You have also criticized India’s trade policy as followed at the World Trade Organisation. What you think is the right approach for India to follow at WTO?
We should engage much more constructively. We have the leverage of the big market. We should be confident and engage.
For example, on agriculture at WTO, there are things we unnecessarily do and things that we should unnecessarily not be doing.
These ideas get entrenched— that WTO means farmers are bad and screwed. You have to see these things in the light of data which show some of our positions can evolve.
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