 "With inflation slowing, there is space for monetary easing: Arvind Subramanian")
The Economic Survey for 2016-17 will be a completely changed exercise. The one on the eve of the Union Budget will be forward-looking, and there will be another set of documents in July to review the past-year, Chief Economic Advisor Arvind Subramanian tells Indivjal Dhasmana, Sanjeeb Mukherjee and Arup Roychoudhury that he hopes GDP growth will be at the upper end of the 7-7.5 per cent range. Edited excerpts:
Your economic surveys stand out because of their themes. You had Jan-Dhan Aadhaar Mobile (JAM) as a theme last year. You have also changed the structure of the survey. What can we expect this year?
There will be 2-3 very exciting themes. Universal Basic Income will be one. Because of the advancing of the Budget cycle, Volume II, which was like a review of the year gone by, won't be as useful if it comes out earlier, because you cover less of the year. The aim is that there will be two surveys: One on the eve of the Budget, which will be like a Volume I, and another somewhere around July to review the economic developments of the previous year. The aim would be to bring out the analytical, forward-looking, prescriptive part before the Budget. The review of the year would happen when data is available, and that would be in July.
What will Universal Basic Income entail?
We are still working on it. These are issues we have to think about. This is an idea that has a lot of promise, but also challenges. It will be an extension of JAM in that it will be based on cash transfers.
Where are you now in terms of gross domestic product (GDP) growth forecast for the year? ADB forecasts it at 7.4 per cent, while NITI Aayog says 8 per cent. Where do you stand?
In these times of massive changes in relative prices and the way the deflators in the national income are concluded, I also look at how nominal GDP behaves, which is steadily improving, and this is very encouraging. I stick by the forecast in the economic survey that the economy will grow by 7-7.75 per cent. Because of the good monsoon, inflation has eased and there is scope for monetary easing, and I think the construction sector will be unlocked a little bit. I am hoping we would be at the upper end of that range.
Where do you stand on the growth vs inflation debate? Is there now a case for monetary easing?
I believe very strongly in the view that underlies a lot of the arrangements that we have. In the medium-term there is no tradeoff between inflation and growth. Fundamentally, I believe there is no tradeoff or conflict. But something has happened to societal consensus around the tradeoff. I think we should have low inflation and that is totally conducive with sustained and rapid growth. I felt that the last few pronouncements of the Reserve Bank of India were a little backward on inflation concerns. I have been saying for about 2-3 months that inflation has turned. I thought inflation would reduce and that is how it is panning out. There is space for monetary easing.
What are your expectations from the Budget? Do you think advancing it will be a challenge as far as data are concerned?
I think the GST will be the big change. The Budget for 2018-19 will be the last full Budget before the 2019 elections. But I don't know if you can say if this will be the make-or-break Budget before 2018. Therefore, should you be radical or just consolidate the gains made in the past two years?
As far as data are concerned, I don't think there will be a huge difference. Whatever discrepancy there could be would be within the margin of error.
I think the push to increase agricultural productivity has to be maintained in the long run. We cannot afford to neglect agriculture. The aim is to double farm income.
What do you think of the GST Council's first meeting?
I have always been of the view that goods and services tax (GST) is a daring experiment in governance of cooperative federalism. The council's first meeting was fantastic. You have to see how cooperative federalism can work, the kind of exchange that was going on. There were reasoned arguments. I can't tell you how amazing it was. The quality of ministers was just terrific. States arguing about the threshold, the costs and benefits…That is exactly how it is going to work. The first session completely reinforced my faith that this is not only a daring experiment, but one we can actually pull off.
Why is the government not settling for compound annual growth rate (CAGR) in the compensation mechanism, why is it asking for average growth or the best three years? CAGR is a much better option as Andhra Pradesh's finance minister recommended.
There is not much of a difference between CAGR and average growth rate. The real issue, which I flagged a few months ago, is that under the VAT regime they had the best three of the last five years. My point was that the best three out of five would work if the economic conditions for future are similar to the past. If you take best three this time around, we know that the nominal GDP growth is going to be much weaker than it was in the best of the last three years. So, it is completely unreasonable to have that as a standard. So, what we are trying to work out is a reasonable estimate for growth in nominal GDP, which will be the base. And if that is the case, what is reasonable revenue that will be protected for states.
So, no relationship with the past?
It will be related to the past, but try it and make it in a way that the past and the future are similar to each other. Obviously, everyone will say give me the best of the last years. But, if you say we can't afford it, people are listening.
The GST Council has resolved a few prickly issues. Now, only the contentious issue of the rates is left. You have said in the past that we should err on the lower side. Will you favour a cap on GST rates as the Congress has demanded?
My report was very clear. There is absolutely no sense in including all the minutiae of tax policy in the Constitution. Nobody does that because it is totally inflexible and does not allow for contingencies like disasters. It is perfectly consistent to say that you need lower rates and say that these should not be constitutionalised at all.
Not even in the GST Bills?
Remember, that under our GST the demerit rate is part of GST. In other countries, demerit rates could be imposed as non-vatable rates outside the framework of GST. So, even from a technical point of view you can't cap it at 18 per cent, if you have some commodities at higher rates. Also, once you agree politically on rates, it is not meaningful to cap because everyone has agreed to the number. Everyone has agreed and that will be reflected in the Bills.
You were talking about nominal GDP. Do you have any issues with the way the statistics office calculates this as it does not include nominal tax collection numbers and takes a ratio of tax to GDP?
What I think is that, at a time when relative prices change so much, calculation of real GDP becomes difficult even at the best times. We should look at a variety of indicators, real GDP and nominal GDP. Nominal GDP is what you actually measure and then real GDP is deflated, it's man-made. Nominal GDP is one important indicator in these times that I would want over everything else.
But, it is calculated by not including nominal tax collections...
When they calculate nominal GDP, they do it by just measuring nominal numbers in many sectors, and based on volume projections in some other sectors. In agriculture, for example, they calculate volumes and then go to nominal by using prices. Similarly, there is a small component where they use tax numbers to project nominal numbers. But, it is not a very big component and I don't think it is very important.
Is there any substance in fears that GST will be inflationary initially, particularly in services, because both the Centre and states will impose tax, which is currently the exclusive domain of the Union government?
If you are going to come out with a revenue neutral rate, by definition it means aggregate price level should not change because aggregate tax level should not change. Now, there may be some distributional shift, services may go up, but then something else will come down by definition. In aggregate, inflation should not at all go up. In many countries, this was a big issue because in Singapore, Malaysia, it was a new tax. In India, it is an existing tax that is being transformed to maintain revenue neutrality.
Could you give us the larger view of India's position in the global economy?
Part of me always rails against the fact that the international narrative is so dominated by what is happening in the advanced economies. The essential fact is that the rest are catching up. That is the basic narrative of the global economy today. We compare everything with the five-year period after 2008. But what surprised me was that the speed of developing economies catching up with advanced economies was greater after the crisis than the two decades preceding it. So the crisis was the aberration. The intellectual ecosphere dominated by the West obscures real facts.
In India, we know that at some point this eight-year period of easy money has to turn. How high can bond prices go? It is something we have to be prepared for. I feel that from India's perspective that is not the major risk. I think if there is a risk of capital outflow, we have to think about that. My view is that when these triggers happen for an outflow, initially there is a stampede, but there is always some discrimination among countries. In this scenario, India is very well placed. Even if there are outflows, it won't be drastic. We are the best placed among emerging markets. China is slowing, we know the situation in South Africa, Russia and Brazil. Turkey has been downgraded.
So do you fear a 2013-like situation?
I don't fear such a situation at all. As investors look around to see where they can keep their money, India will be near the top of the list.
What you may see is the opposite fear: That too much is coming in, which is a perennial problem in India. Whenever sentiment improves in India's favour, too much money comes in, which is known as the Dutch disease. To the extent possible we should buy up reserves and not allow undue appreciation.
There is no question of devaluation because it is market-based. You have to be opportunistic. When there are episodes of gradual decline, you should allow that to happen so to build a cushion. You should not allow any disruptive changes.
Your economic surveys stand out because of their themes. You had Jan-Dhan Aadhaar Mobile (JAM) as a theme last year. You have also changed the structure of the survey. What can we expect this year?
There will be 2-3 very exciting themes. Universal Basic Income will be one. Because of the advancing of the Budget cycle, Volume II, which was like a review of the year gone by, won't be as useful if it comes out earlier, because you cover less of the year. The aim is that there will be two surveys: One on the eve of the Budget, which will be like a Volume I, and another somewhere around July to review the economic developments of the previous year. The aim would be to bring out the analytical, forward-looking, prescriptive part before the Budget. The review of the year would happen when data is available, and that would be in July.
What will Universal Basic Income entail?
We are still working on it. These are issues we have to think about. This is an idea that has a lot of promise, but also challenges. It will be an extension of JAM in that it will be based on cash transfers.
Where are you now in terms of gross domestic product (GDP) growth forecast for the year? ADB forecasts it at 7.4 per cent, while NITI Aayog says 8 per cent. Where do you stand?
In these times of massive changes in relative prices and the way the deflators in the national income are concluded, I also look at how nominal GDP behaves, which is steadily improving, and this is very encouraging. I stick by the forecast in the economic survey that the economy will grow by 7-7.75 per cent. Because of the good monsoon, inflation has eased and there is scope for monetary easing, and I think the construction sector will be unlocked a little bit. I am hoping we would be at the upper end of that range.
Where do you stand on the growth vs inflation debate? Is there now a case for monetary easing?
I believe very strongly in the view that underlies a lot of the arrangements that we have. In the medium-term there is no tradeoff between inflation and growth. Fundamentally, I believe there is no tradeoff or conflict. But something has happened to societal consensus around the tradeoff. I think we should have low inflation and that is totally conducive with sustained and rapid growth. I felt that the last few pronouncements of the Reserve Bank of India were a little backward on inflation concerns. I have been saying for about 2-3 months that inflation has turned. I thought inflation would reduce and that is how it is panning out. There is space for monetary easing.
What are your expectations from the Budget? Do you think advancing it will be a challenge as far as data are concerned?
I think the GST will be the big change. The Budget for 2018-19 will be the last full Budget before the 2019 elections. But I don't know if you can say if this will be the make-or-break Budget before 2018. Therefore, should you be radical or just consolidate the gains made in the past two years?
As far as data are concerned, I don't think there will be a huge difference. Whatever discrepancy there could be would be within the margin of error.
I think the push to increase agricultural productivity has to be maintained in the long run. We cannot afford to neglect agriculture. The aim is to double farm income.
What do you think of the GST Council's first meeting?
I have always been of the view that goods and services tax (GST) is a daring experiment in governance of cooperative federalism. The council's first meeting was fantastic. You have to see how cooperative federalism can work, the kind of exchange that was going on. There were reasoned arguments. I can't tell you how amazing it was. The quality of ministers was just terrific. States arguing about the threshold, the costs and benefits…That is exactly how it is going to work. The first session completely reinforced my faith that this is not only a daring experiment, but one we can actually pull off.
Why is the government not settling for compound annual growth rate (CAGR) in the compensation mechanism, why is it asking for average growth or the best three years? CAGR is a much better option as Andhra Pradesh's finance minister recommended.
There is not much of a difference between CAGR and average growth rate. The real issue, which I flagged a few months ago, is that under the VAT regime they had the best three of the last five years. My point was that the best three out of five would work if the economic conditions for future are similar to the past. If you take best three this time around, we know that the nominal GDP growth is going to be much weaker than it was in the best of the last three years. So, it is completely unreasonable to have that as a standard. So, what we are trying to work out is a reasonable estimate for growth in nominal GDP, which will be the base. And if that is the case, what is reasonable revenue that will be protected for states.
So, no relationship with the past?
It will be related to the past, but try it and make it in a way that the past and the future are similar to each other. Obviously, everyone will say give me the best of the last years. But, if you say we can't afford it, people are listening.
The GST Council has resolved a few prickly issues. Now, only the contentious issue of the rates is left. You have said in the past that we should err on the lower side. Will you favour a cap on GST rates as the Congress has demanded?
My report was very clear. There is absolutely no sense in including all the minutiae of tax policy in the Constitution. Nobody does that because it is totally inflexible and does not allow for contingencies like disasters. It is perfectly consistent to say that you need lower rates and say that these should not be constitutionalised at all.
Not even in the GST Bills?
Remember, that under our GST the demerit rate is part of GST. In other countries, demerit rates could be imposed as non-vatable rates outside the framework of GST. So, even from a technical point of view you can't cap it at 18 per cent, if you have some commodities at higher rates. Also, once you agree politically on rates, it is not meaningful to cap because everyone has agreed to the number. Everyone has agreed and that will be reflected in the Bills.
You were talking about nominal GDP. Do you have any issues with the way the statistics office calculates this as it does not include nominal tax collection numbers and takes a ratio of tax to GDP?
What I think is that, at a time when relative prices change so much, calculation of real GDP becomes difficult even at the best times. We should look at a variety of indicators, real GDP and nominal GDP. Nominal GDP is what you actually measure and then real GDP is deflated, it's man-made. Nominal GDP is one important indicator in these times that I would want over everything else.
But, it is calculated by not including nominal tax collections...
When they calculate nominal GDP, they do it by just measuring nominal numbers in many sectors, and based on volume projections in some other sectors. In agriculture, for example, they calculate volumes and then go to nominal by using prices. Similarly, there is a small component where they use tax numbers to project nominal numbers. But, it is not a very big component and I don't think it is very important.
Is there any substance in fears that GST will be inflationary initially, particularly in services, because both the Centre and states will impose tax, which is currently the exclusive domain of the Union government?
If you are going to come out with a revenue neutral rate, by definition it means aggregate price level should not change because aggregate tax level should not change. Now, there may be some distributional shift, services may go up, but then something else will come down by definition. In aggregate, inflation should not at all go up. In many countries, this was a big issue because in Singapore, Malaysia, it was a new tax. In India, it is an existing tax that is being transformed to maintain revenue neutrality.
Could you give us the larger view of India's position in the global economy?
Part of me always rails against the fact that the international narrative is so dominated by what is happening in the advanced economies. The essential fact is that the rest are catching up. That is the basic narrative of the global economy today. We compare everything with the five-year period after 2008. But what surprised me was that the speed of developing economies catching up with advanced economies was greater after the crisis than the two decades preceding it. So the crisis was the aberration. The intellectual ecosphere dominated by the West obscures real facts.
In India, we know that at some point this eight-year period of easy money has to turn. How high can bond prices go? It is something we have to be prepared for. I feel that from India's perspective that is not the major risk. I think if there is a risk of capital outflow, we have to think about that. My view is that when these triggers happen for an outflow, initially there is a stampede, but there is always some discrimination among countries. In this scenario, India is very well placed. Even if there are outflows, it won't be drastic. We are the best placed among emerging markets. China is slowing, we know the situation in South Africa, Russia and Brazil. Turkey has been downgraded.
So do you fear a 2013-like situation?
I don't fear such a situation at all. As investors look around to see where they can keep their money, India will be near the top of the list.
What you may see is the opposite fear: That too much is coming in, which is a perennial problem in India. Whenever sentiment improves in India's favour, too much money comes in, which is known as the Dutch disease. To the extent possible we should buy up reserves and not allow undue appreciation.
There is no question of devaluation because it is market-based. You have to be opportunistic. When there are episodes of gradual decline, you should allow that to happen so to build a cushion. You should not allow any disruptive changes.