No evidence for jobless growth: Principal Economic Advisor Sanjeev Sanyal

Sanyal adds the government expects the fiscal deficit target of 3.3% of GDP to be met

India's policymakers are not planning to go down to a two-rate goods and services tax (GST) as suggested by the International Monetary Fund (IMF), Principal Economic Advisor Sanjeev Sanyal said. In an interaction with Arup Roychoudhury and Indivjal Dhasmana, Sanyal also said that the critics of the government on employment had the same incomplete data set to go by as the Centre and that the role of private sector in banking needs to increase. Excerpts:

Your thoughts on rupee touching historic lows? 

The Reserve Bank has a long-standing policy of managing the rupee based on allowing the market to determine the medium- to long-term trajectory while controlling short-term volatility using foreign exchange reserves. We have more than adequate foreign exchange reserves to manage any short-term dislocation. For the rest, the rupee will respond to the market depending on both domestic and foreign circumstances.

The Economic Survey sees GDP growth for the year at between 7-7.5 per cent, and the RBI projects a GDP growth of 7.4 per cent for 2018-19. When the Modi government came to power, people were talking about sustained 8 per cent plus growth and some members of the government even spoke of double-digit growth. Have we underachieved?

One can always ask for stronger growth, but this is good enough to be the world's fastest-growing large economy. That is not bad, given that the system is not primed in any way, the financial system is constrained by the banking clean up, we do not have a huge borrowing binge going on. The monetary part of the system is well controlled. The RBI has kept things tight. On the fiscal side of things, there is no push for a major expansion. Also, the growth is coming on the back of some strong reforms like the introduction of GST and the insolvency and bankruptcy code (IBC). Some degree of disruption was bound to happen when you implemented GST in a country as complex as India and started cleaning up the banking system. Given all that, we have done quite well.

The government has the IBC process in place, which has already started showing results. But then it announced SHASHAKT, which included tackling non-performing assets (NPAs) above Rs 5 billion by getting in asset management companies (AMCs) and alternative investment funds. Do you expect such a way to work? 

There is a misconception that the SHASHAKT scheme is some sort of an alternative to bypass the IBC process. The IBC is the main law for this. The fact is that there will be hundreds of companies coming through the National Companies Law Tribunal and others in the future, effectively clogging the pipeline. So you need a neat process to create a wider ecosystem around the IBC so that resolution happens along the way. There used to be a very large number of mechanisms to deal with bad loans. We got rid of them after the RBI's February 12 circular. So we had to have something to replace them.

The idea behind AMCs is not to create some disaggregated bad bank. The idea is to create an ecosystem of people who deal with these things. In any country you go to, there are AMCs and professionals who deal with bad assets. That is what we are trying to create here. The idea is to find value for these NPAs. 

The Monetary Policy Committee (MPC) has raised interest rates twice in a row. What is your forecast for the monetary policy for the rest of the year? 

It would not be correct for me to speak about what the MPC will do in the future. The fact that they increased rates is not that surprising. There are a few interesting things that RBI speaks about. It has already taken into account these two rate hikes when it talks about 7.4 per cent growth. It says the balance of risk is equal on both sides. It also says that inflation will temper down to 4.8 per cent rate. They said they are keeping themselves at neutral. If the situation changes, they will take a view accordingly. 

According to you, what will be the inflationary impact of the minimum support price hikes carried out recently? 

Inflation impact will overall be moderate to very small. MSP only impacts procurement. We have done the math and by and large it will be a very moderate impact. The RBI's statement also says so.

The 2018-19 fiscal deficit target seems already to be under pressure. After accounting for states' share, a GST shortfall is a possibility. Non-tax revenue might not be as good as expected, and this being an election year, there are spending commitments... 

The fiscal situation is reasonably comfortable. Why do you assume that there will be populist spending? So far, we have not done so. Elections come and go. So far, we have kept things very tight. Fuel prices for example. This government has hardly shown itself to be populist. We expect the fiscal deficit target of 3.3 per cent of gross domestic product (GDP) to be met.

Job creation has been one of the government's biggest challenges. The critics say that this period has been one of 'jobless growth'. How big are employment and lack of comprehensive job data as concerns?  

Not having a comprehensive job data is definitely a major issue. The absence of a serious job database impacts policymaking. There are a lot of theoretical problems in Indian data collection due to the informality of things. But remember, even those who are saying there is jobless growth have the same data sets to go by. So the debate is more impressionistic than anything else. But based on the data that exists, the government is creating jobs. Job growth always remains a challenge, but the fact that we are growing at a healthy pace in terms of GDP shows that they are being created at a good trot.

Is job generation close to 10 million or 20 million a year that was promised by this government?

We can debate because there are many issues. We can get caught up over how do you define what is employed, how much is the actual growth in the labour force because people remain in education sector longer and also woman labour force participation has declined and with people going abroad increasingly. I would argue that it is not the case that this is a jobless growth. It is very difficult to make that case.
 

Will the National Sample Survey Organisation's (NSSO') employment survey that comes out in October-November fill the gap in data that policymakers are looking for?  

It will create a base case. It will not solve the problem for now. However, as we get more data points, we can compare it subsequently.  

Has India Inc played its role in jacking up investments, employment generation?

There was an investment binge in mid-2000. But that binge actually accelerated banks' credit from 2009-2012. By the end of 2012-13, there was already a sharp slow-down and huge excess capacities were created in all kinds of sectors. Part of banks' clean-up has been to restructure some of those financials, but in real economy terms those capacities were still there and have to be used up. Those capacities are finally getting used up now, according to an RBI survey and also what we know anecdotally. For the first time in some period, we are hearing that large investments are coming through. We have also had reasonably good foreign direct investment (FDI) inflows. So, we will begin to see private investments flowing in many cases.

You talked about bank clean up, will that be followed up with consolidation?

Consolidation is not a first-order solution to this problem. It's a second-order solution. The first-order solution is cleaning up. Get them going, at least those which are capable, and get them to grow again.    

But where will credit come from as 11 banks are under prompt corrective action (PCA)? Is there a possibility of relaxation on this front?

This will basically be a case-to-case issue. But at least very big ones, which are not under PCA, should now be encouraged to leverage money for lending, now that they are getting capital, raising capital, receiving money through the IBC process.

But, some of the results for the Q1 of FY'19 show that PSU lenders are not in good shape -- SBI, PNB have net losses?

But, remember this is now done. If you look at stressed assets of the system, those are not rising. Basically, we have now done full recognition of the system, the books are open, we, by and large, know everything that is in there, including scams. The system pretty much knows what is going on. Also, besides recapitalisation, we are making a side ecosystem conducive for lending -- for example, amendments to the Prevention of Corruption Act that have been passed in Parliament. No country in the world can have sustained long-term economic growth without having an expanded banking system.

There are still governance issues and IMF in its report has recommended privatisation of PSU banks. Will the government look at it?

We don't have a timeline. Both private banks and public sector banks have a role to play unlike say in the hotel sector. There are governance issues for both private and public sector banks. I would argue that we should maintain a mix. The question is should this mix be 70:30 (PSU banks' market share versus private sector lenders'). I would argue that there is a case for private sector lenders to have a larger role. It can come in many ways, including organic growth. Once these lenders are in better condition, we can even consider other things, including reducing stake.  

IMF has also prescribed two GST rates. Do you see it coming?

We will broadly simplify and make it much more efficient, but I don't think that we will go down to two rates as IMF is asking for. We will certainly not go down to very very few rates. Three rates are quite possible as the finance minister and Sushil Modi had talked about. But, this is a prerogative of the GST Council and not the Centre.

The government has targeted Rs 1 trillion a month on an average from GST for FY'19. So far, only April has delivered the target out of four months that the government has collected GST collections. Will the target be met?

You have to remember that there is a huge seasonality in India. Much of the activity goes up in the economy in the second half of a financial year.

There is an impression that we are increasingly becoming 'swadeshi' or protectionist by hiking customs duty on a range of items from time to time, starting from this year's Budget? 

We now live in an external environment which is evolving. At every stage, we will protect national interests by responding to it. We are not the source of the changing situation. We take the external world as it is.

Has the World Trade Organization (WTO) become redundant?

Not redundant. But, we certainly need to now revisit it and try to think about it more seriously because we have ended up with a very complex system of blocs of all kinds, bilateral deals and even those are changing. In a situation that is not set in stone, we have to have a dynamic approach.

RBI has asked for more powers over PSU banks. Will the government consider that?

We are continuously in discussion with RBI and suitable measures will be taken. There are clearly significant powers given to it under various Acts. If they require some more powers, we will consider that. It's not as if in the past we have not made adjustments.