If we implement policies that revive growth, we can go to upper range: CEA

Arvind Subramanian spoke to reporters on a number of issues

Chief Economic Advisor Arvind Subramanian addressed journalists after the tabling of Volume II of the Economic Survey 2016-17. He spoke on a number of issues. Edited excerpts:

What is the thinking behind saying that there are greater downsides for the economy to reach the higher limit of your earlier 2017-18 gross domestic product (GDP) growth forecast of 6.75 to 7.5 per cent?

We have to think in terms of probability, rather than pointed outcomes. We have given a range because there is a lot of uncertainty. But, what we are saying is that the balance of probabilities has shifted. It is less likely than before, in my view, that we will reach the upper end of that range. It is also conditional upon policy. If, for example, we can implement policies — monetary, fiscal or agriculture, among other things — that can revive growth, we can hope to go back to the upper end of that range.

You have suggested a reduction in interest rates. Should the government make the first move through sharp reduction in savings and other rates? What would you suggest for senior citizens and other small savers in such an environment?

If you do not, and you should not, suffer from money illusion, what matters is that if real interest rates matter to borrowers, real deposit rates matter to savers. Any saver has alternative uses for his savings. The way to think about it is, what are the real returns to that? If, for example, your deposit rate is seven per cent, and inflation is three per cent, and if that three per cent goes down to one per cent, then the seven per cent is really worth a lot.

It is not right to say nominal rates' reduction will hurt savers if all nominal rates are doing is to track inflation declines, as that is also benefiting savers. On the small savings front, the government has taken decisions. Government policy will be decided keeping in mind the small savers. I do not think at this stage that is critical to monetary policy transmission.

Given your detailed analysis of demonetisation, do you think the government succeeded in the objectives it aimed to achieve through note ban or was the success only partial? 

When we examine any such event, we examine its different impacts. For example, it surprised me that there was a 20 per cent reduction in cash equilibrium levels. There was increased digitisation. The increase in number of taxpayers also came as a pleasant surprise. On the other hand, there was also the impact on the informal sector. I find it very difficult to reduce it all to a 100 per cent success or zero per cent success. There were successes, as well as some costs.

One of the short-term costs of demonetisation that people have spoken about is of job losses in the informal sector. There is no assessment of that in the Survey. Are we to understand that there has been no impact?

As it is, our data on the informal sector is quite poor. The issue is the same with employment data, We do not have a reliable, consistent series of data, to be able to say with confidence whether employment went up or down. I am hopeful that once we improve employment data, we will be able to do those things better.

Does the lower year-on year dividend announced by the Reserve Bank (RBI) affect the fiscal situation in your view? You also spoke on the farm loan waivers already announced by some states to impact their fiscal deficit by 0.3 per cent. How big a concern is that?

Remember that the RBI dividend has come down but is in line with what was budgeted. I assess fiscal shock compared to what has been budgeted. With regard to that, I do not feel there has been any shock.

On farm loan waivers, this is only a simple macro calculation of, if you have loan waivers, what happens if the fiscal responsibility law kicks in? By definition, there is going to be a demand contraction. That is why we estimate this. That is why we say the balance of risk is going to be on the downside.

You have spoken on a need for further monetary easing. The Monetary Policy Committee recently cut key interest rates by 25 basis points. How much of further rate cuts are ideally needed this year?

The secretary, economic affairs, clearly stated after the recent MPC action that we positively support the cut but also that there is convergence for more such action. There is a technical assessment of what could be the potential scope. The timing and magnitude is for the MPC to decide.

What will be the impact of GST (goods and services tax) on exports?

In the old system, we had elaborate drawback (of duties) to offset the embedded taxes on exports. The beauty of GST is going to be that because we will zero-rate all exports, and because input credit will flow more freely, my expectation is that the export regime is going to be less distorted in favour of more exports. It will an unambiguous positive from the GST regime.

Your views on the items excluded from GST so far, and the case for their inclusion in the future?

My views are that GST is a terrific first step. The two major challenges, going forward, is what will be the exclusions and also the structural rates. There is nothing that prevents the GST Council from going forward and tackling all these issues. For example, there was a lot of discussion on land and real estate, and the finance minister himself said we should not take up this issue quite quickly. My own view is that we need to let these issues stabilise. We cannot keep making changes. We need to first let things settle. The GST Council is a remarkable institution. I am hopeful that the necessary changes to GST can, and over time will, be made.

Are you advocating greater pick-up in public spending to prop up the economy?

The government needs to do all that it can. A big policy lever we have is the actions to address the twin balance sheet challenge via the bankruptcy code because that is what will clean balance sheets, create supply of credit and create demand. We have other levers. All of these come with benefits and constraints. I do think that if we get a fiscal bonanza due to GST revenues, we should think about spending that consistent with deficit objectives.