 "It is possible that we will do better this year, and possible that we won't: Arvind Subramanian")
Indian economy is closely integrated with the global economy, which is facing a slowdown, and so the headwinds are difficult to avoid, Chief Economic Advisor Arvind Subramanian told journalists in an interaction after presenting the Economic Survey 2015-16. In this uncertain environment, monetary and fiscal policies should aim to purchase insurance, so to speak, against the global slowdown, he said. Edited excerpts:
In the backdrop of a global slowdown, what are the biggest challenges facing the economy?
There is need to re-calibrate expectation because India is so entwined with the world, which is facing a slowdown. We must, in this uncertain environment, aim for macroeconomic stability, and monetary and fiscal policies should aim to purchase insurance, so to speak, against the global slowdown. Instead of a twin deficit problem, like we had in 2013, we now have a balance sheet challenge. It is one of the most critical short-term challenges confronting the Indian economy — the impaired financial positions of the public sector banks and some large corporate houses — what we have hitherto characterised as the balance sheet syndrome with Indian characteristics.
The issue is a very thorny one. It has happened the world over. It needs a multi-pronged approach. One of the critical prongs is resources. Broader public sector balance sheets should be brought to bear on where to find resources from. The conventional thing will be to sell assets or issue bonds. The suggestion we also make is that the assets the government has in certain regulatory institutions could be utilised. Why not revisit that? We have to find creative ways of leveraging resources to address this challenge. If the world slows down, we will slow down as well, as India is becoming increasingly integrated with the world.
What explains your growth forecast of 7.75 per cent for 2016-17?
The 7-7.75 per cent range reflects that the range of exogenous possibilities is also very wide: A rebound in agriculture, that could take us to the upper end of the array, to the international crisis, that could take us to the lower end of the array or below that. There is also this uncertainty that has been created by divergence between nominal and real gross domestic product (GDP) growth rates, inflation projection between four and 4.5 per cent, which is below RBI’s projection and possible low inflation next financial year on account of minimal effect of the Seventh Pay Commission recommendations, below-potential growth, and excess capacity, besides stress on private sector and deflationary situation prevailing globally.
In 2015-16, the growth projection had to be cut from 8.1-8.5 per cent to 7.6 per cent. Does that explain your cautious stance this year?
One way to look at it is that we have learnt from the experience of last year. The forecast for last year was overoptimistic as there were two external factors — the export situation and agricultural monsoon. This year, the assessment is based on looking out at the external environment that seems to be very grim. It is possible that we will do better this year, and possible that we won’t.
You have a chapter dedicated to allowing easier exits, or Chakravyuh, as termed in the Economic Survey. How significant is it to allow ease of exit vis-à-vis easier entry for firms?
Let me give an example. Say, in any industry, you have done everything possible to remove entry barriers. Supposing 10 firms come in, seven are efficient and three aren’t. It makes sense that those three companies should exit, as they are using up valuable resources. There is a need to create a situation where those three inefficient companies can exit the sector. It is not only for the public sector but also for the private sector. It is a very horizontal problem that fits the Indian economy.
You have projected 8-10 per cent growth in the medium term. What is the rationale?
Basically, in the next two-five years, we will reach eight to 10 per cent growth. There is no contradiction in saying that this year the world economy is weak and therefore we need to focus on domestic demand. In the medium to long-term, we have to have exports as the engine of growth that is necessary for us to attain eight to 10 per cent annual growth. There is a case for pursuing structural reforms like the implementation of the Goods and Services Tax.
But, there seems to be growing uncertainty over GST?
I think GST is a temporary setback. We are very much hoping it will be retrievable.
Is there scope for further monetary policy easing?
There is scope for easing monetary policy in two ways. One is to inject liquidity to bring it in line with the current policy rate. The second is, given our inflation projections and assessment, perhaps there is more scope for easing the policy rates.
In the backdrop of a global slowdown, what are the biggest challenges facing the economy?
There is need to re-calibrate expectation because India is so entwined with the world, which is facing a slowdown. We must, in this uncertain environment, aim for macroeconomic stability, and monetary and fiscal policies should aim to purchase insurance, so to speak, against the global slowdown. Instead of a twin deficit problem, like we had in 2013, we now have a balance sheet challenge. It is one of the most critical short-term challenges confronting the Indian economy — the impaired financial positions of the public sector banks and some large corporate houses — what we have hitherto characterised as the balance sheet syndrome with Indian characteristics.
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How can the balance sheet issues be addressed?
The issue is a very thorny one. It has happened the world over. It needs a multi-pronged approach. One of the critical prongs is resources. Broader public sector balance sheets should be brought to bear on where to find resources from. The conventional thing will be to sell assets or issue bonds. The suggestion we also make is that the assets the government has in certain regulatory institutions could be utilised. Why not revisit that? We have to find creative ways of leveraging resources to address this challenge. If the world slows down, we will slow down as well, as India is becoming increasingly integrated with the world.
What explains your growth forecast of 7.75 per cent for 2016-17?
The 7-7.75 per cent range reflects that the range of exogenous possibilities is also very wide: A rebound in agriculture, that could take us to the upper end of the array, to the international crisis, that could take us to the lower end of the array or below that. There is also this uncertainty that has been created by divergence between nominal and real gross domestic product (GDP) growth rates, inflation projection between four and 4.5 per cent, which is below RBI’s projection and possible low inflation next financial year on account of minimal effect of the Seventh Pay Commission recommendations, below-potential growth, and excess capacity, besides stress on private sector and deflationary situation prevailing globally.
In 2015-16, the growth projection had to be cut from 8.1-8.5 per cent to 7.6 per cent. Does that explain your cautious stance this year?
One way to look at it is that we have learnt from the experience of last year. The forecast for last year was overoptimistic as there were two external factors — the export situation and agricultural monsoon. This year, the assessment is based on looking out at the external environment that seems to be very grim. It is possible that we will do better this year, and possible that we won’t.
You have a chapter dedicated to allowing easier exits, or Chakravyuh, as termed in the Economic Survey. How significant is it to allow ease of exit vis-à-vis easier entry for firms?
Let me give an example. Say, in any industry, you have done everything possible to remove entry barriers. Supposing 10 firms come in, seven are efficient and three aren’t. It makes sense that those three companies should exit, as they are using up valuable resources. There is a need to create a situation where those three inefficient companies can exit the sector. It is not only for the public sector but also for the private sector. It is a very horizontal problem that fits the Indian economy.
You have projected 8-10 per cent growth in the medium term. What is the rationale?
Basically, in the next two-five years, we will reach eight to 10 per cent growth. There is no contradiction in saying that this year the world economy is weak and therefore we need to focus on domestic demand. In the medium to long-term, we have to have exports as the engine of growth that is necessary for us to attain eight to 10 per cent annual growth. There is a case for pursuing structural reforms like the implementation of the Goods and Services Tax.
But, there seems to be growing uncertainty over GST?
I think GST is a temporary setback. We are very much hoping it will be retrievable.
Is there scope for further monetary policy easing?
There is scope for easing monetary policy in two ways. One is to inject liquidity to bring it in line with the current policy rate. The second is, given our inflation projections and assessment, perhaps there is more scope for easing the policy rates.