 "Being pro-business should also mean being pro-competition: Arvind Subramanian")
Chief Economic Advisor Arvind Subramanian says Economic Survey has laid stress on easy exit to ensure disruption in trade and tariff reduction. He says India has moved "from socialism with limited entry to marketism without exit". The time has come to be pro-competition as well. Edited excerpts:
On fiscal policy framework, many say that you are tilting in favour of moderate adjustment. As an economist, would you recommend a status quo?
It is not about loosening or tightening. The question is to aggressively consolidate or to less aggressively consolidate. We are going to consolidate, whether aggressively or modestly - 3.5 per cent, or 3.7 per cent, or whatever. The truth is that we have had a very vigorous and very rich internal debate at the highest levels and the government gets a lot of credit for that. What the Survey does is to lay out both sides very fairly. There are very good arguments on both sides. The final view has to be taken by the political masters. Yesterday (on Friday), we saw that the stock and bond markets rallied.
There are rules and let us make use of the rules. Circumventing those rules and then have generalised protection is not the way to go. The reason you have anti-dumping and other procedures is that it builds checks and balances in the global system. In this case, there are user industries, which are affected by that and therefore even the MIP has a sunset clause. It is a political decision. Steel industry is very powerful and legitimately so. There is excess capacity and dumping taking place, so the government has to reconcile that with the needs of the user industries. You do not want to be seen as protectionist at this day and age when you are embracing globalisation. To me, the best way as the first line of defence is - let the currency be competitive and then go for WTO-compliant measures. Only then should you do things that are protectionist.
To be clear, you are opposed to measures like MIP on steel like we saw earlier this month?
We should be careful with generalised recourse to protectionism. We should be careful as we don't want to go back to the old era. These things have the tendency to stay on for much longer than you'd think. And they delay the necessary action we need to take domestically. In case of steel industry, in our Chakravyuh chapter, we have pointed out that there are steel firms we have to see whether they are viable or not. They seem to have cost of production which is 80-90 per cent more than the international production cost.
You spoke of an environment where inefficient companies could exit easily. A lot of public sector companies are inefficient. Should the government take the lead and come out with a policy to shut down or sell sick PSUs?
Yes, I think we need to take on the sick PSUs frontally. There are imaginative ways of doing it. They have land. So let's use the land for attracting investment for ensuring that those who get affected are protected. There are creative ways of looking at it and the government is considering that.
You have paired 2016-17 growth projections to 7-7.5 per cent, citing external factors and rural slowdown. What can the government do to revive rural consumption?
I was doing a crude calculation where exports growth is about 18 per cent of the GDP and agriculture about 15 per cent of the GDP. Both are very important and can affect growth strongly. On rural income, it is possible that it could be La Nina going forward, based on historical data analysis. So help could come from the weather Gods. We have seen four years of bad monsoon and agriculture is something we can't afford to neglect. So Pradhan Mantri Krishi Sinchai Yojana, NREGA and crop insurance are back on the table as policy actions.
You have recommended against raising the personal income tax exemption limit. What is the rationale behind that?
If you look at China and India, China has brought more people in the tax net without raising the exemption limit over time. It is like the P V Narsimha Rao strategy, where you do nothing and reform happens. So don't raise the exemption thresholds.
Isn't higher disposable income required by the struggling economy?
Provided you set the threshold at a reasonable rate, people who come in the bracket will start paying taxes. We should get more people in the tax net. The income threshold should be set at a very reasonable rate as we don't want very poor people paying taxes. I think India has to internalise the notion that we can't be a great country, a great democracy, or a great economy if only four per cent of the people pay taxes. We are a young democracy so we can't do it overnight but the accountability mechanism will be improved over time if more people pay taxes. The PM recognises this very strongly. Granted the interface between taxpayers and authority should be smooth and not be cumbersome. We need more people paying taxes. Otherwise, the fiscal thing becomes all about expenditure and subsidies. This is not how fiscal relationship should be.
How has the response been to your figure of Rs 1 lakh crore that goes in subsidies towards the well-off?
I got a call this morning from the Finance Minister. He said, "See Arvind, I told you that chapter would be the most discussed." On a serious note, there was no political pressure or compulsion. In fact, I was very sensitive to the criticism last year when we did the outreach. We were told that "All you talk about is subsidies for the poor. You don't talk about subsidies for the rich". I took that to heart and for me the eureka moment was when I did the GST report. The report includes a benefit cost analysis. That is when the bells went off. I said this is what we need to do. The GST is one thing that will address that right away. I strongly believe in the Dracula Effect. Bring daylight to bear on something, and it becomes a topic of discussion. Now everyone will be talking about this, and that is what you want economic advisors to be doing.
You have recommended simplified power tariffs. How can that happen?
It is aimed at states and state regulators. One of my desires after this is to take time and meet the states. One of the things we need to do is to see how the tariff structure can be made more progressive within the consumer segment. I would love to take my team to the regulators and ask if we want to have hundreds of taxes. I mean, separate tariffs for pisciculture and rabbit farm tariffs. Separate tariffs for municipalities and municipal corporations. Why do we have these? I want to go to every state regulator and say please explain this to me.
You have pushed for lowering of trade tariffs, whereas the Commerce Ministry does not want zero duties in future free trade agreements (FTAs). Are we going backwards when the world is talking about lower tariffs?
One thing I will claim for this Survey is that exit as a theme is a very important. Even in trade policy, I think a lot of it is about exit. Trade policy by definition is disruptive. If you are not able to do that, you can't have tariff reduction. There is a line in the survey, which I am very proud of: "From socialism with limited entry to marketism without exit". We have become pro-business. But being pro-business is not pro-competition. What prevents us from getting there is that we cannot handle the social and political cost of disruption and exit. On trade policy, there is a political consensus on the way we deal with the WTO and FTAs. So it is a much harder problem to crack that way.
Do you think the time is right for India to look at Trade in Services Agreement (TISA)?
I think we should look at TISA, we should engage in TISA. In services, we are meant to have a competitive advantage. I think the Prime Minister is keen on the fact that we must be constructive in our engagement going forward. At least, we must start that. Why can we not have a rational debate on special safeguards? Let us focus on things which matter. Just look at COP21. The Prime Minister said we had to be constructive; we had to be on the table.
The Survey also focused on social sectors, including a separate section on mother and child. With increased devolution to states, the Centre has slightly reduced its outlay to some sectors. Is that not at odds with what your report suggests?
If you look at the first nine months of the fiscal year, we do the calculations for Centre and state for agriculture, health and education, and in real terms they have gone up at an aggregate level. I think that the broader point that social sectors need something is undeniable. The problem in this is that here the delivery is so much with the states. And here I feel some people don't recognise that there is a struggle between two values that they themselves hold. One is that decision-making has to be closest to the people, which means more decentralisation. And another is that some of this is very important and, therefore, the Centre must direct it. There is tension in that and you have to be honest about that tension.
What would happen to growth projections is the FM sticks to fiscal deficit target and tightens spending somewhere?
I have been honest that if you are going to consolidate, your growth projection has to be affected by that at a time of weak demand. There is no question that if you aggressively consolidate in these relatively weak growth times, there will be an effect on growth. Suppose you meet that target through disinvestment and asset sale, then you don't take away from demand.
You speak about financial sector stress and you also articulate the need for exit. Do you see that an execution level, there is an inherent conflict between the two?
The exit insight is important in the following respect: There is a lot of focus on the banks and not enough on the underlying corporate problem that lead to this. You need exit from steel, you need exit from discoms and stressed sectors. You have to come clean on that. That is part of the problem.
You have done many changes in Volume I of the Survey, which are being widely discussed. But Volume II has remained more or less the same and is becoming redundant. Do you plan to improvise Volume II in future?
This is a very thoughtful and insightful comment. However, it is unfair on people who put so much work on Volume II. We are discussing how to change that. It is something I will give a lot of thought to once the Budget season is over.
On fiscal policy framework, many say that you are tilting in favour of moderate adjustment. As an economist, would you recommend a status quo?
It is not about loosening or tightening. The question is to aggressively consolidate or to less aggressively consolidate. We are going to consolidate, whether aggressively or modestly - 3.5 per cent, or 3.7 per cent, or whatever. The truth is that we have had a very vigorous and very rich internal debate at the highest levels and the government gets a lot of credit for that. What the Survey does is to lay out both sides very fairly. There are very good arguments on both sides. The final view has to be taken by the political masters. Yesterday (on Friday), we saw that the stock and bond markets rallied.
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You have argued against resorting to trade protectionism. Can we infer that the imposition of minimum import price (MIP) and anti-dumping duties on steel are not the best way to deal with the current global turmoil?
There are rules and let us make use of the rules. Circumventing those rules and then have generalised protection is not the way to go. The reason you have anti-dumping and other procedures is that it builds checks and balances in the global system. In this case, there are user industries, which are affected by that and therefore even the MIP has a sunset clause. It is a political decision. Steel industry is very powerful and legitimately so. There is excess capacity and dumping taking place, so the government has to reconcile that with the needs of the user industries. You do not want to be seen as protectionist at this day and age when you are embracing globalisation. To me, the best way as the first line of defence is - let the currency be competitive and then go for WTO-compliant measures. Only then should you do things that are protectionist.
To be clear, you are opposed to measures like MIP on steel like we saw earlier this month?
We should be careful with generalised recourse to protectionism. We should be careful as we don't want to go back to the old era. These things have the tendency to stay on for much longer than you'd think. And they delay the necessary action we need to take domestically. In case of steel industry, in our Chakravyuh chapter, we have pointed out that there are steel firms we have to see whether they are viable or not. They seem to have cost of production which is 80-90 per cent more than the international production cost.
You spoke of an environment where inefficient companies could exit easily. A lot of public sector companies are inefficient. Should the government take the lead and come out with a policy to shut down or sell sick PSUs?
Yes, I think we need to take on the sick PSUs frontally. There are imaginative ways of doing it. They have land. So let's use the land for attracting investment for ensuring that those who get affected are protected. There are creative ways of looking at it and the government is considering that.
You have paired 2016-17 growth projections to 7-7.5 per cent, citing external factors and rural slowdown. What can the government do to revive rural consumption?
I was doing a crude calculation where exports growth is about 18 per cent of the GDP and agriculture about 15 per cent of the GDP. Both are very important and can affect growth strongly. On rural income, it is possible that it could be La Nina going forward, based on historical data analysis. So help could come from the weather Gods. We have seen four years of bad monsoon and agriculture is something we can't afford to neglect. So Pradhan Mantri Krishi Sinchai Yojana, NREGA and crop insurance are back on the table as policy actions.
You have recommended against raising the personal income tax exemption limit. What is the rationale behind that?
If you look at China and India, China has brought more people in the tax net without raising the exemption limit over time. It is like the P V Narsimha Rao strategy, where you do nothing and reform happens. So don't raise the exemption thresholds.
Isn't higher disposable income required by the struggling economy?
Provided you set the threshold at a reasonable rate, people who come in the bracket will start paying taxes. We should get more people in the tax net. The income threshold should be set at a very reasonable rate as we don't want very poor people paying taxes. I think India has to internalise the notion that we can't be a great country, a great democracy, or a great economy if only four per cent of the people pay taxes. We are a young democracy so we can't do it overnight but the accountability mechanism will be improved over time if more people pay taxes. The PM recognises this very strongly. Granted the interface between taxpayers and authority should be smooth and not be cumbersome. We need more people paying taxes. Otherwise, the fiscal thing becomes all about expenditure and subsidies. This is not how fiscal relationship should be.
How has the response been to your figure of Rs 1 lakh crore that goes in subsidies towards the well-off?
I got a call this morning from the Finance Minister. He said, "See Arvind, I told you that chapter would be the most discussed." On a serious note, there was no political pressure or compulsion. In fact, I was very sensitive to the criticism last year when we did the outreach. We were told that "All you talk about is subsidies for the poor. You don't talk about subsidies for the rich". I took that to heart and for me the eureka moment was when I did the GST report. The report includes a benefit cost analysis. That is when the bells went off. I said this is what we need to do. The GST is one thing that will address that right away. I strongly believe in the Dracula Effect. Bring daylight to bear on something, and it becomes a topic of discussion. Now everyone will be talking about this, and that is what you want economic advisors to be doing.
You have recommended simplified power tariffs. How can that happen?
It is aimed at states and state regulators. One of my desires after this is to take time and meet the states. One of the things we need to do is to see how the tariff structure can be made more progressive within the consumer segment. I would love to take my team to the regulators and ask if we want to have hundreds of taxes. I mean, separate tariffs for pisciculture and rabbit farm tariffs. Separate tariffs for municipalities and municipal corporations. Why do we have these? I want to go to every state regulator and say please explain this to me.
You have pushed for lowering of trade tariffs, whereas the Commerce Ministry does not want zero duties in future free trade agreements (FTAs). Are we going backwards when the world is talking about lower tariffs?
One thing I will claim for this Survey is that exit as a theme is a very important. Even in trade policy, I think a lot of it is about exit. Trade policy by definition is disruptive. If you are not able to do that, you can't have tariff reduction. There is a line in the survey, which I am very proud of: "From socialism with limited entry to marketism without exit". We have become pro-business. But being pro-business is not pro-competition. What prevents us from getting there is that we cannot handle the social and political cost of disruption and exit. On trade policy, there is a political consensus on the way we deal with the WTO and FTAs. So it is a much harder problem to crack that way.
Do you think the time is right for India to look at Trade in Services Agreement (TISA)?
I think we should look at TISA, we should engage in TISA. In services, we are meant to have a competitive advantage. I think the Prime Minister is keen on the fact that we must be constructive in our engagement going forward. At least, we must start that. Why can we not have a rational debate on special safeguards? Let us focus on things which matter. Just look at COP21. The Prime Minister said we had to be constructive; we had to be on the table.
The Survey also focused on social sectors, including a separate section on mother and child. With increased devolution to states, the Centre has slightly reduced its outlay to some sectors. Is that not at odds with what your report suggests?
If you look at the first nine months of the fiscal year, we do the calculations for Centre and state for agriculture, health and education, and in real terms they have gone up at an aggregate level. I think that the broader point that social sectors need something is undeniable. The problem in this is that here the delivery is so much with the states. And here I feel some people don't recognise that there is a struggle between two values that they themselves hold. One is that decision-making has to be closest to the people, which means more decentralisation. And another is that some of this is very important and, therefore, the Centre must direct it. There is tension in that and you have to be honest about that tension.
What would happen to growth projections is the FM sticks to fiscal deficit target and tightens spending somewhere?
I have been honest that if you are going to consolidate, your growth projection has to be affected by that at a time of weak demand. There is no question that if you aggressively consolidate in these relatively weak growth times, there will be an effect on growth. Suppose you meet that target through disinvestment and asset sale, then you don't take away from demand.
You speak about financial sector stress and you also articulate the need for exit. Do you see that an execution level, there is an inherent conflict between the two?
The exit insight is important in the following respect: There is a lot of focus on the banks and not enough on the underlying corporate problem that lead to this. You need exit from steel, you need exit from discoms and stressed sectors. You have to come clean on that. That is part of the problem.
You have done many changes in Volume I of the Survey, which are being widely discussed. But Volume II has remained more or less the same and is becoming redundant. Do you plan to improvise Volume II in future?
This is a very thoughtful and insightful comment. However, it is unfair on people who put so much work on Volume II. We are discussing how to change that. It is something I will give a lot of thought to once the Budget season is over.