Bank consolidation as a reform is overstated: CEA Arvind Subramanian

He says the govt did not anticipate the rising global oil prices

Chief Economic Advisor Arvind Subramanian spoke to Business Standard journalists on a wide range of issues — from GDP growth and fiscal consolidation to job creation and the goods and services tax (GST). Edited excerpts:

Your thoughts on the economy after demonetisation and the GST, and the prospects, going forward?

There is a global export recovery. I think we can be part of that. With (bank) recapitalisation and NPA resolution, we can seriously start addressing the twin balance-sheet challenge. We need to stabilise the implementation of the GST. If we can finish two-three reforms, we should be in reasonable shape. A lot will depend on the second-quarter GDP numbers. That will give us a clearer picture. Apart from the two transitional shocks, which are now stabilising, what we did not anticipate were the rising global oil prices. I think oil prices this year are going to be 13-14 per cent higher than the average of last year. 

What do you expect from the July-September GDP numbers, which are expected this week?

I, honestly, don’t know. The IIP in the second quarter is better than the first. If you look at some of the other data, some have done better, some have done worse. The big factor here is government spending. Government services are pretty big in GDP. How much have the states spent, how much has the Centre spent? The Centre frontloaded its expenditure but most of that was revenue spending. If you look at the corporate sector results, they were probably better than in the last quarter. But we have to wait and see.

What are your views on fiscal consolidation? We are seeing some pressure on indirect tax revenues, as well as some items on non-tax revenues. Rating agencies have also said that fiscal consolidation remains a concern.

We need to have a slight sense of balance about these ratings agencies. I am not a big fan of what they do, for reasons well explained. We are still evaluating the numbers. I think it is too early to get a good sense of where we are going to be — partly because this is a transition year on account of the GST. We have to assess where that is going. We will take a call later this year. Your road map, going forward, depends on your starting point as well. I honestly think that the government has embarked on a steady path of fiscal consolidation, not because of rating agencies, but out of genuine conviction. We will lose one month’s revenue because of the GST. That is clear. In a way that is fiscal stimulus for the private sector, as they will only have to pay 11 months’ tax.

Because of the recent amendments to the Insolvency and Bankruptcy Code, barring promoters, these assets have really become cheap, causing concern among bankers. Your views?

The reality is that no political process can live with the guy causing the problem and benefiting from it. That is true of India as well. That is what the new amendments to the Code are about. Whether that will have an economic cost, we don’t know for sure, but it is possible. But that is an economic cost that the political system has thought worth paying. 

What further changes need to be made to the GST?

The first priority should be to simplify the GST further for small and medium enterprises. Second, I would like to see electricity and what’s been left out come into the GST. Then there needs to be a little bit more simplification on the rates. We need to set this stage where 28 per cent should be only for demerit goods, and then the 12 per cent and 18 per cent should be converged somewhere in between.

There have been a lot of changes made to the GST recently. Isn’t that causing more confusion among SMEs?

For all the implementation challenges for the GST, the process has been highly responsive to feedback — whether it is the 28 per cent rate, filing procedures, or impact on the small businesses. This is cooperative federalism at its best. As for too many changes, you can’t have it both ways. We started with some things and then there were design issues, so we had to respond to that.

Chief Economic Advisor Arvind Subramanian at Business Standard in New Delhi. Photo: Dalip Kumar

Do you think potential output has gone down after the government rolled out demonetisation and the GST?

With regard to demonetisation, I don't know whether it has gone down but with the GST, possibly it has. To be consistent in my analysis, if I think of the GST as a negative productivity shock, even if it is not permanent, then by definition, it has gone down.

You are part of the committee to review direct tax law. Its terms of reference are broad. Does this make drafting a new law a cumbersome exercise? 

We (the committee) will meet next month for the first time. We have yet to discuss what the remit is. One area which I know much less about is the updating and cleaning up of the existing set-up. Where cleaning stops and policy reform comes in is a grey area. From the GST we have learnt that in India we have to recognise that half or more of tax administration is tax policy. The simpler things are, the easier the administration. That is the message that I would like to carry into this committee.

What are your views on the recently announced bank recapitalisation programme, and also plans to consolidate state-owned banks?

First, I think consolidation is absolutely overstated as a reform. You merge bad with either bad or bad with good, that is not a reform. You have got to address the bad. For me the big reforms going forward will be first to differentiate between good and bad even in terms of recapitalisation. That is the way forward. You distinguish between what’s viable in the long term and what is not, and a policy of gradual shrinking of the balance sheet. Second, there should be more of private sector participation. The reason we need private sector ownership in India is because HR policies are so constricted for public sector banks. They are constrained in decision making and hiring. When you do public to private lending in India, it is toxic because exit is impossible.

Chief Economic Advisor Arvind Subramanian at Business Standard in New Delhi. Photo: Dalip Kumar

Can we see Universal Basic Income (UBI) becoming a reality, maybe in the 2019 Budget, if not the 2018 one?

UBI is not an idea that only the Centre can run with. We have 29 states and any of them can run with it. If you want to implement it centrally, it won’t be cheap. You can only finance it if you wind down existing programmes. We know that in India it is fiendishly difficult. But the states have an advantage. They can say to the Centre “we will not ask you a paisa more than what you give us”. But essentially untie the aid, and let us decide what we want to use it for, whether fertiliser subsidy, or MGNREGA, or UBI. It is not something that one should think of only as part of the Union budget. Jammu & Kashmir is keen on this idea. Discussions are going on. Let us see where it goes.

You have done financial inclusion, bank recapitalisation, the Jan Dhan-Aadhaar-mobile trinity, and the GST. What's left to do now?

There are three or four areas. First, state capacities in delivering health and education have to improve. Early in my career, I had been a bit cavalier about the neglect of health and health care, as I felt the growth pick-up from the 80s would increase the returns and, therefore, make the education outcomes better. It hasn't. It's one of India's founding sins that we haven't been able to focus on these two areas. 

Your views on job creation?

I don’t think there can be a credible jobs strategy without a credible growth and development strategy. You need to create a general climate of dynamism where there is investment and growth. You cannot create jobs sustainably when you grow at 4-5 per cent. That needs to be supplemented with sector-specific measures, by providing incentives to certain sectors. It will be challenging. There are headwinds in terms of automation. We also need to focus more on agriculture as a creator of jobs, on how we can get agricultural productivity up. 

Do you think reining in the current account deficit would be worrisome, now that oil prices are rising and exports are falling?

We made a big to-do of the fact that the oil market had structurally changed and I thought it would cap at $55-60 a barrel because of shale. For me a genuine puzzle is why the oil prices are at these levels. If oil prices stay above $60-65 a barrel for very long, I'd have to admit that my analysis was not that right earlier. Everyone had said that shale was competitive at $50 to a maximum of $55 a barrel. As long as it stays at $60-70 a barrel, I don't think we're in that dangerous territory of the current account deficit being 3 per cent (of GDP). Because, remember, every $10 dollar per barrel translates into an extra 0.2-0.3 per cent of GDP in terms of the CAD. 

Chief Economic Advisor Arvind Subramanian at Business Standard in New Delhi. Photo: Dalip Kumar

But exports fell in October, that may impact the CAD…

The notion that exports are falling is not right because if you look at manufacturing export growth in the past three months, exports have been growing at over just 9 per cent. It was a bit higher in the first quarter but 9 per cent is still substantially greater than in 2016.

In your latest survey, you mentioned that rural distress was region-specific. You also mentioned that it was not because of demonetisation. Do you still feel that it’s the case, now that demand is going down for the kharif crop and prices are crashing?

We have taken action on this by imposing tariffs on both oilseeds and yellow peas. That is an attempt to shore up agricultural prices. The funny thing now is that while for the non-perishables the prices are down, perishable prices such as for onions are soaring. So, I don't know if we should ascribe the price changes of one or both of this to demonetisation or none. What was different about the last agricultural year is that normally when we have a good monsoon and good crop, farm incomes don't decline. Prices come down, but not by a large degree, and greater output at lower prices still ensures that farm incomes go up. The last season was unusual in the sense that apart from wheat prices which have gone up, all other items have seen a crash compared to previous year. 

I think more analysis is required on whether the economy is down in general or is it an effect of demonetisation.