Over the last five years, there has been huge emphasis on reducing cronyism in the economy, be it through the bankruptcy code or simplifying the tax regime or using direct benefit transfers, says CEA Krishnamurthy Subramanian
NEW DELHI :
A day after most exit polls predicted a second term for the Narendra Modi-led National Democratic Alliance, chief economic advisor (CEA) in the finance ministry Krishnamurthy Subramanian on Monday discussed the policy priorities before the next government in an interview. Edited excerpts:
What are the policy challenges that the new government will face?
The main emphasis for the new government will have to be on enhancing productivity, especially in the corporate sector. I would, in particular, focus on the three factors of production, which are land, labour and capital. A large number of farms are actually very small and, hence, are not able to utilise the productivity gains that come with the economies of scale. So, the emphasis should be on enhancing productivity. Second, over the last five years, there has been huge emphasis on reducing cronyism in the economy, be it through the bankruptcy code or simplifying the tax regime or using direct benefit transfers. The government has ensured that for companies that have not been managed well, tax payer money is not wasted to rescue such inefficient firms. Introduction of direct benefit transfers has also reduced inclusion and exclusion error. This entire exercise to reduce cronyism has to be taken further. The third focus area should be the agrarian economy; in particular, we have to focus on extending markets to the farmers, for example, by strengthening eNAM (electronic national agriculture market). Right now there are a lot of fragmentation in the agricultural markets.
How do you think land, labour and capital should be used more efficiently? What changes would you suggest?
The cost of acquiring land needs to be recognized. The 2013 (Land Acquisition) Act added significant cost, thereby making the acquisition of land much more difficult. So, that is something that needs to be streamlined. On labour, the four codes that now have been created need to be passed (by the Parliament). This could lead to a lot more streamlining of regulations in the labour market. On the capital side, thinking carefully about the public sector banks, ensuring that they are able to use a lot more technology to screen and monitoring borrowers, because, world over, banks have now become very technology-intensive and our banks should also follow their footsteps.
Does the economy need a demand stimulus to come out of the consumption slump?
We have to be careful that we don’t oscillate between excessive optimism and excessive pessimism. In India, we tend to be on the extremes usually and sometimes we turn myopic in our assessment. We must keep in mind that consumption growth so far has not happened because companies have offered three products at the price of one, or because of the income hikes by the Pay Commission. This is basically core consumption growth that has happened. We have to look at the fundamentals. If you look at what has happened in the last five years, for the reforms that have been enacted, there is a lot of emphasis that has been placed on ensuring that the necessary conditions for economic growth are created. The effect of this will start showing with some lag. I would say that the core of consumption is pretty okay and we should make sure that we are wise in the way we interpret and not oscillate between the extremes.
Will PM-Kisan be extended to tenant farmers to boost rural demand?
You have to be very careful. Any scheme like this depends on the quality of data. Data on tenant farmers is not available. Therefore, it is very hard to design a scheme for tenant farmers. Conceptually, what you are saying can be thought of, but practically, we don’t have the data and this can lead to a huge amount of exclusion and inclusion errors. As an economist, I would strongly urge that design and implementation of programmes only have to be based on high quality data.
What is preventing private investment from picking up?
The winding up of corporate leverage happened over a period of six-to-eight years. Therefore, the winding down cannot be immediate. A lot of excess capacity was built up and demand for investment has been slow. As a result, fixed capital formation has been slow, though it has started to turn around and look better in the last three-four quarters. What we have to remember is that the impact of fixed capital formation on growth manifests with a lag. The slowdown in capital formation was because of the dual balance sheet problem and some of those effects are now gone.
Agri prices have been depressed for the second consecutive year. Is low inflation now a policy challenge?
This is interesting. Whenever inflation is high, you ask the government why it is high. I would say, lower inflation puts a lot of purchasing power in the hands of the middle class and the poor. Inflation is a pernicious tax on these people. Rural wages had gone up 15-16% per year until 2014. So, because of base effect, it has been decreasing. I would rather prefer a lower inflation scenario because high inflation also feeds inflation expectations, and you can get into an inflation spiral. So, if one has to choose between the two scenarios, the current one is preferable.
How should India guard itself from growing protectionism and escalating trade tensions between China and the US?
There are opportunities India should carefully identify based on our comparative advantage. We should be selective about the destination countries and sectors to target, and ensure that we utilise this opportunity.
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