The Indian economy has shown greater resilience to the shocks of demonetisation and Goods and Services Tax and the growth has bottomed out, according to NITI Aayog Vice-Chairman Rajiv Kumar. The economist, who replaced Arvind Panagariya, says the only way to improve businesses and agriculture is to make them globally competitive. In an interview with BloombergQuint’s Contributing Editor Praveen Chakravarty, Kumar talked about bad loans, and the importance of coordination between the central bank and the finance ministry and much more.
Here are edited excerpts from the interview.
Q. There are two schools of thoughts on the growth slowdown. One school of thought blames it on short-term shocks such as GST and demonetisation. The other thought is that growth has been anyway slowing down and this has somehow exacerbated some of the declines for long-term benefits. Which school do you belong to?
Clearly, to the latter. Although the data are not comparable, I do want to point out that the peak growth had come about thirteen quarters ago. My own way of looking at it is: the last two years of the United Progressive Alliance had begun to see a deceleration because of various factors. It transformed into the downswing of the business cycle, which has continued so far. It got impacted by the two big shocks: Demonetisation and GST.
Any economy in the world would have shown some impact to that shock. I think the Indian economy has shown greater resilience than what we have expected. This downswing is now bottoming out. July is the period when I think the upturn has begun or would have begun.
Q. Then you do agree that there can be policy measures that can be taken to revive growth?
I should point to some green shoots, which prompted me to say this. The PMI in manufacturing hit its lowest in July at 47 and recovered close to 51 in August. The PMI in services was 47 and it recovered to 49 in August. The automobile sales have increased by 8 percent. Civil aviation is up by 16 percent year-on-year. Even the sales of heavy commercial vehicles, which are very often considered to be a strong lead indicator, has started improving in India.
These are the reasons why I think the growth has bottomed out. Also, because the first quarter – April-June period – saw a lot of de-stocking because of GST measures. We want to give a fillip to growth, yes, but more importantly we have to give a fillip to employment generation. That’s been the Achilles’ heel of the economic growth for last seven-eight years. That’s what is beginning to make a greater noise in the economy than just the GDP growth.
Q. Let’s look at what’s holding up in the economy and what’s not, so that we can talk about what can be done. Clearly, what’s holding up is that it is only us who seem to be thinking that the economy is in doldrums because foreign investors don’t seem to share that view clearly, right?
It’s great. India’s growth story is holding up hugely abroad.
Q. Why is that the case?
I think we are just being terribly impatient. We, perhaps by nature, are pessimistic. You can see in the FDI flows. They have been the highest – cumulatively in the last 3-4 years it stands at around $256 billion. Therefore, our reserves are up; our rupee, unfortunately, is depreciating as a result of that. If we go anywhere abroad, you will find that India is a good investment story. But our private sector investment has not picked up in line with that.
Q. The big conundrum is exports. Exports has been inexplicable in terms of its decline. As a share of GDP, it is at historic lows. Private consumption was holding up but even that has started to slow. So, perhaps some of the pessimism comes from reading these numbers.
Let’s go through each one because there is no generic answer. For exports, they declined over 2014-16 but have risen over 2016-17. And from last 12 months, they have seen an anemic but nonetheless a positive growth. Non-petroleum exports are below the 2013-peak but have shown a consistent increase in the last 12 months. Now that the global trade scenario is picking up, I hope we will improve.
NITI Aayog has set up a taskforce for employment and exports just for this. What we are finding there is that you need far more granular policy support than a generic, one-size-fits-all or sort of like hammer swat a fly [policy]. Therefore, we are going into sector-specific issues to see what can be done.
The second part—you talked about the investment slowdown. I agree, but a part of the credit offtake from the bank has been substituted by the greater bond markets. Corporate bond markets have probably raised close to Rs 8,000-9,000 crore or more. So there has been the substitution. The slowdown in credit offtake is largely confined to public sector banks. The private sector banks – like the HDFC, ICICI Banks – have continued doing better. There again, the banking sector problem is something we need to look at as: why was it precipitated or could it be avoided by relooking at some provisioning norms or relooking at the insistence to try and get to Basel III+I. That’s the investment cycle in the story. Finally, on the consumption: yes, it has begun to weaken but if my hypothesis is correct, it should have picked up now after July.
Q. Also, a lot of has changed structurally. Whether we like it or not, GST, inflation targeting, monetary policy committee, bankruptcy code are a reality. We have to operate, from a policy perspective, which is unique. Don’t you agree?
Qualitatively different but also it is qualitatively a new foundation for a higher, more growth sustainable growth trajectory. It, hopefully, will be devoid of the ups and downs or the ‘yo-yo effect’ that we have had in the economy in the past. So, it is a new political economy or a new institutional structure for the growth in the country. Also, there is now much greater formalisation pushed by demonetisation and GST. Additionally, we must make note of a rather turbulent international environment. I am not saying they are down but structural change is because of industry 4.0, the artificial intelligence, the robotics, etc – so, the global environment has become far more uncertain for the domestic investor and the domestic exporter. We can’t control it but it is different. It takes time getting used to it. Therefore you are seeing – both domestically and globally – the Indian investor is caught in a completely new game, the rule of which he or she is beginning to understand but has not yet come to grips with.
Q. But we have to operate in a politically economic context where we need solutions to work in the immediate term…
I learnt it on the job. When I joined the government in 1989, and the Ministry of Finance in 1991 in the midst of the crises. I learned there first-best exists only in the textbooks. All policymaking has to be done in a second-best scenario – that is what the reality is. A lot of us don’t understand that fact and we keep citing first-best conditions. For example, I don’t go as far as saying there is no free competition or no fair market out there – some people have argued that, written about it – but nonetheless it is clear that there is a policy you cannot make the perfect enemy of the good.
Q. The thing not much talked about is agriculture. The fact is agricultural growth has been tepid. We can talk about structural change in agriculture – like irrigation, APMC reforms, electronic all-India market, all of that – but those things take time. Is there anything that can be done in the immediate like direct benefit transfers?
I begin by saying we have trapped ourselves in agriculture in a low productivity, low income, low growth syndrome. That’s because we are refusing to tackle the central issue which is the landholding size. Therefore, this government has come up with the model land leasing law, which two states have adopted and another four are about to. This will assure the owner – the farmer – that the land is safe even if he were to lease it out to others. That’s where the prime minister’s call of doubling farmers’ income by 2022 may seem like how can we achieve it, etc.
Q. But mathematically it seems impossible.
Yes, but it means by that is we need to completely modernise our agriculture along with its marketing, logistics, productivity and the fact that you can get scalar effects in agriculture as well. So, the immediate thing we can do is: 1) to think about transferring fertiliser subsidies directly to poor farmers, which can be done through DBT. 2) To remove export bans from agriculture.
It will connect to the global markets and give the farmer the ability to sell and earn profits at current exchange rates because India is fairly competitive in most of these products. I continue to say that “please treat agriculture as a tradable product”. It is not a non-tradable strategic product. So that when you have shortages, you can anticipate them and import. Therefore, there is a better style of management that this government can take and start very quickly. Finally, I am trying out few pilot projects where I want to bring in private players to work with farmers and aggregate the land and bring new technologies and economies of scale, which will raise their incomes to higher levels.
Q. There is talk of leakage and the Fasal Bima Yojna could be working better. There are some of those efficiency gains to be had.
But the fact is that these schemes are now in place. You have got soil card for the first time, Fasal Bima Yojna and Pradhan Mantri Sinchai Yojna. You got better mobility through Pradhan Mantri Gram Sadak Yojna and better power distribution through electrification of villages. Things have happened which will, hopefully, put agriculture out of the trap, along with some other that I have mentioned.
‘Elitist’ Export Policy
Q. On exports, the fact is that the real effective exchange rate has risen 11-12 percent since the government took over. What are some of the things that can be done for exports? Because even on the currency, the RBI has been intervening in the last few months.
Yes, it has been. I want to say with all emphasis at my command that we need to switch the Indian businessman from a domestic market player to a global market player. That can happen only when we assure the Indian businessman that our rupee will not appreciate.
Q. So, guarantee a REER rate?
Yes, that it won’t appreciate over the next five years. Because that’s the only way to turn them around. The pull of the domestic market is so large that most businessmen will say that they don’t want to get into the trouble of exports.
Q. So, it’s the mindset?
It’s a mindset that can only change with an incentive structure. Which comes about by changing the underlying exchange rate regime that you’ve got. Michael Spence’s report did point to a depreciated currency as one of the key conditions for all economies that have achieved sustained 10 percent growth rate for 30 years. The second thing for exports is trade facilitation.
Q. On the exchange rate, if you want to guarantee currency stability to exporters, there are costs associated with it. On imports, today we are lucky because oil is where it is. There are certainly costs attached to a depreciating rupee. Do you think the benefits will outweigh the costs?
Oh, far more! There is an assumption some people are making that our imports are price inelastic. I don’t accept that at all. In this case – given the prime minister’s insistence on import substitution in energy, which he keeps talking about all the time – I think if you got a depreciated rupee, which made your energy costs higher, you will get both lower consumption and less wastage, but also a nice kick towards producing your own domestic renewables and other sources that you can achieve. I am convinced in my mind. The encouragement to export means greater employment. There is no doubt about that.
Q. Especially textiles and footwear, the most employment-intensive.
Textiles, garments, handicrafts, agro-processing. We’ve not done enough for that. Pardon my saying it, but I think our exchange rate policy in some sense is a very elitist policy. It benefits those who have got a large share of imported goods in their consumption basket. It discourages those who want to generate employment. I think we must change it as soon as possible. The RBI is in charge of that, and I hope some people in the RBI are listening to our conversation.
Q. Then you were talking about trade barriers, and trade facilitation agreements. Have you spoken to the commerce minister about this?
The facts are amazing. We take 96 hours on average to clear cargo, while in Singapore it takes less than 24 hours. And we’ve got ourselves a 5-year target to come there. I’m saying why can’t we do 48 hours in the next 1 year, or 6 months?
Q. Is that possible?
Why not? After all, it is all governance, isn’t it?
Q. Is it about governance, or is it infrastructure?
No, it is governance. Now, most of your things are on electronic databases, which are talking to each other. I think it is just about getting the right incentive structure there, on our port authorities, customs and the rest of the lot, and getting better coordination there. That can achieve this trade facilitation quite quickly. The other part of it, which is the logistics part of it, our logistics are far too underdeveloped. But that’s where too, growth will come. Once you get the foreign trade going.
Q. So, for exports, you are very clear about rupee depreciation, and trade facilitation?
Also, some more sector specific granular policy support, identifying the critical constraints on that. I heard, for example, that in garments, you will be surprised to know that 80 percent of garment exports are concentrated in ladies’ dresses, blouses etc. We don’t do any mens’ suits, or outer-wear, and none or close to zero of synthetic fibre based sports-wear. That’s because our import duty on synthetic fibre is 11.5-12 percent. It’s 0.5 percent in Sri Lanka. Therefore, any garment that needs imported material is pretty much out of our scenario.
Resolving India’s Bad Loan Crisis
Q. The New Bankruptcy Code will not solve the stock of non-performing assets in the time frame that we want. This was known for three years now. Why were we shying away from tackling this?
First, it began to be known for three years. It’s only in the last one year or so that the enormity of the problem has really come up in some cases. That some of our public-sector banks are sitting with more than 20 percent or so NPAs, and their net worth has been wiped out.
Q. That’s because of the asset quality review that the RBI got done.
I think the asset quality review, pardon my saying it, maybe was a bit too harsh. I say that especially because there were a lot of projects which were dependent on government payments, and receipts from government departments, which were delayed inordinately. That made those projects financially unviable.
Q. Why should the creditor care?
The point is that that if you are a public-sector bank creditor...
Q. So, it’s like government’s left and right hand…
That’s right, so why shouldn’t they have cared. You could have had a different treatment for those NPAs that are dependent on government payments. That’s one part of it. The second part of it is that 70 percent of your banking system is sovereign guaranteed. It’s not going away anywhere. It’s not like you are going to get a bank run tomorrow. So that also meant to me that – this whole 360-degree asset quality review – I am not for a minute supporting the evergreening of loans, those who were willful defaulters, they should be given exemplary punishment, as is being done in some cases with the Bankruptcy Code dragging them there – but there are a large number of people, who were probably in a situation, to be able to get back into the black. Those, you have forced banks to push back into the red. The latest that I read was the order from SEBI which said that if you are late by a day, you’ve to report. I mean, hello!
Q. You don’t think that’s a good idea?
Do you? I think it is time now to be a little more nuanced about the situation. It is also time to take the bull by the horns. Accept that there is a problem here and recapitalise the banks, and increase the budgetary allocation of Rs 10,000 crore, by a factor of…
Q. A factor of 10?
Well yes, you said it. Do whatever is needed to get the issue off the problem book.
The Interest Rate Trajectory
Q. On interest rates, I don’t subscribe to the call for lower interest rates, maybe we disagree there.
Why don’t you subscribe to it?
Q. The repo rate has gone down by 200 basis points in the last three years, but private investment is still down. Why are interest rates being held up as the villain in this?
On one hand, I think it’s the signaling argument, to answer – ‘what will the government do to revive private investment, how far will it go?’ According to our friend Surjit Bhalla, it is also an argument to say that ‘accept your mistake that you got your inflation expectations all wrong, and therefore don’t punish the innocent because you think there is some hidden guilt.’ That’s one part of it.
On the second part – I agree that maybe the interest rate cut may not be a necessary condition, but it’s also not a sufficient condition. A sufficient condition is for us to create the demand for credit in the economy.
If you talk to bankers, they will say that they are willing to lend; where are the projects and the investment demand?
That is for two reasons. One – for three or four years, we’ve suffered from excess capacity and under-utilisation. If your output gap is positive and large, of course there won’t be any investment demand. The second thing is – I’ve argued for the government coming in with large infrastructure, low gestation projects, on an engineering, procurement, construction (EPC) basis, which will revive the investment climate and get the large companies to begin demanding credit on viable projects.
Just to give you one example, in affordable or low-cost housing, in which the Pradhan Mantri Awas Yojana gives a subsidy, if you de-risk that project by acquiring the land and getting all the approvals, say you want to build 1 lakh houses, and then invite private bidders – the same builders, they come in at that point, and go to the bank to get the working capital. That will get the credit demand going. Once you got that and the multipliers working, you have a pump-priming of the economy by not just pushing up consumption demand, but by actually improving the investment climate.
Q. You do agree that interest rates being held up as this villain is perhaps a bit unfair?
I grant you that, but with one caveat. Any good, efficient policy meant for reviving the economy has to walk on two legs. It has to be both, monetary and fiscal. And this whole – in my view – nonsense of this against the other, it is just that much. There is a time now for the Mint Road and North Block to work closely together, and in tandem and figure out what is needed to be done, so that on one hand there is better transmission of the interest rate cut and there is greater supply response and that they are in sync, rather than working against each other.
Q. So, talk of independence of the central bank is some la la land concept?
Independent of course, but working in close coordination can be achieved. Why is it that if you are independent you should be in opposition? Independent doesn’t mean opposition. You don’t have to be confrontational. You are part of the government, and the policymaking team.
Stimulating The Economy
Q. What is your view on lowering corporate tax rates from 30 percent to 25 percent? Is that enough to stimulate private investment or demand for credit?
In any case, it will be effective only in the long run. The effective corporate tax rate is no more than 22 percent. Therefore, that demand is a little bit unfair because if you are paying 22 percent, then what is it that you want more? If you want 25 percent with continued exemptions, then that’s just not right.
What you want is to reduce tax administration. The worst thing here is that the kind of tax terrorism those middle and next 1,000 (businesses) face is what has got us here. I am referring to the corporate direct tax regime. The tax administration needs to be far more taxpayer-friendly and yet insisting on compliance. I think the two are not incompatible. That can be done. It’s time for us to take some major reform efforts on the CBDT (Central Board of Direct Taxes) and the Direct Tax Code. But more than that, get the incentive structure for better governance and less rent-seeking in the CBDT, which is harassment. That tax harassment, especially for the smaller and medium enterprises, which then creates an environment where businessmen don’t feel in some sense wanted, needs to be changed very quickly.
Stimulate investment demand through larger public capital expenditure such that there is vigorous crowding-in effect which I think will happen, given where we are.
Q. Personal consumption has been robust. But it is starting to show signs of slowing down.
The rate of growth of personal consumption expenditure this year is 6.8 percent as compared to 9.8 percent earlier average. So, it has slowed and which is ominous in some sense.
Q. What can be done for that other than lower income tax rates? I have argued that we already have very high-income tax exemption thresholds.
I think so. That’s where the interest rates could work. You get a lower EMI on your housing, cars and consumer durables. That’s one thing which you can do right away. Second, we can give direct subsidies for employment generation. For example, there is a scheme in Jharkhand where the government will give Rs 5,000 a month per worker to every employer who goes beyond 100 employees in the textile industry. And it will be Rs 6,000 when the person is from scheduled caste/tribes or women.
Q. But a large percentage of the textile sector is informal.
Yes, but you can extend that to informal because this is not related to the payment on ESI (employee state insurance) or EPF (employees’ provident fund). This was the reason why the Union Textile Policy didn’t work. But here it doesn’t make a distinction between formal and informal. Odisha has a similar scheme. Why can’t this be extended today across the board for everybody? If you extend your employment beyond what you had at the end of August, the government will give that much money.
Q. Like the Apprenticeship Act in Germany.
Yes absolutely. We have an Apprenticeship Act. I am looking at it right now and there are a couple of points which have prevented its better utilisation. I have been arguing that some amount of money that you spend on skill development should be transferred to apprenticeship. When firms take on apprentices, they take them in places where they need you tomorrow. While very often the skills that you generate could be the skills for yesterday. That’s the reason why the uptake – placement of skilled workers – has been less than 10 percent. That aggravates the situation because having got skills, the expectations are higher.
Q. The government spending has been growing at 2.5 times the nominal GDP growth. Some would argue that we were already in a stimulus package. In just four months we are already at 92 percent of the targeted annual fiscal deficit. How much more can the government spend?
What I noticed was that the growth in government expenditure has slowed down from last year. It was 16.2 percent last year and it is 9.8 percent this year on a real basis, so that’s gone down. I don’t want to give a number, but I do want to say that the FRBM, which is the fiscal target, is a self-imposed punishment on yourself. You want to tie yourselves in hand and foot for this. I have insisted even to the NK Singh Committee that you should focus much more on the revenue deficit than on the fiscal deficit. Because if you are going to use your borrowing for capital investment and productivity enhancing investment, I cannot see anyone objecting to it. How much more? If you are going to do bank recapitalisation, large infrastructural projects, low-cost housing and roads and highways, then it is inevitable.
There are a large number of ‘spending ministries’ in our government like rural development, and urban housing which have not spent what their budget allocation is. So, why not first get that money out of the door?
Q. Perhaps because the absorptive capacity of the economy for increased government spending is just not there.
I don’t agree. The absorptive capacity can be created by steps taken on governance. If you are going to be innovative enough to de-risk your projects and then invite the private sector; and not take the attitude that ‘the private sector is going to make lot of money, I’m not going to let you go in’, you have to change the mindset, you have to think of the private sector as a partner to take the economy along.
Q. If we breach the deficit, rating’s outlook which is positive right now, can potentially change. It can then have an impact on flows. You may argue if there are outflows, it may be better for the currency. Do you think that is the problem to be worried about?
I don’t think that is a problem at all because I think, on the other hand, we are into a 1994 situation when I was in Ministry of Finance, where you don’t want such foreign capital flows coming in. If they are coming, then it’s okay, but at the moment, if the rupee continues to appreciate then they have got a double advantage. They will get much higher interest rates – a differential of 4-6 percent compared to what they could get there – plus an appreciating currency.
So, they will be laughing all the way back to the bank. I don’t think the outlook will be affected. In fact, now the global investors will reward you by rushing in when they see us taking steps to push growth and employment. As we have discussed, the Indian story is good. If the Indian story appears to be becoming better, and if the denominator seems to be increasing rather than us trying to control the numerator, then I think they will be more gung-ho about it.
Q. That’s a contrarian view I have not heard so far.
I think so. I know that investors also look at the overall stability of the economy, which includes political stability. After all, every investment bank also has a country risk analyst.
Q. What you are essentially saying is that a stimulus is somewhat inevitable, to boost spending.
Pretty much so. The sooner we can do it the better. We have outlined and discussed all the measures that are needed. Those measures need money, and they also need to be done. Then it’s up to the government. It may not necessarily increase the fiscal deficit if they are smart about it. But if it does, then we have to make sure that the revenue deficit doesn’t increase. And if fiscal deficit increases, I don’t think people will punish you for that.
Q. Are you putting a condition to it saying the money for that should be obtained through measures such as disinvestment and privatisation or you are not going to tie the two together?
I would want this thing to happen. I want greater resource mobilisation on the part of the government. Then there is also a possibility that you could recapitalise the banks through bonds, which is off the balance sheets. The bottom line is: you need to give helping hand to revive the economy so that it doesn’t become too late and it is not too slow. You want it accelerated so people can then begin to see the benefits of huge number of structural reforms and all the work in progress that has happened in three-and-a-half years to bear fruit. And the fruit is the criteria at the moment to get our young people in better jobs.
Q. Does Prime Minister Modi need a one-handed economist now?
The prime minister is always very clear that he needs only a one-handed, small-talking economist. So, I fall in danger of having talked too much. All policy economists must necessarily be one-handed. There is nothing achieved by telling our political leader this on the one hand, and that on the other. That’s the measure of our own words and if we can’t do it then we should not be in this business.
Watch the full interview here.
(This story was originally published in BloombergQuint)
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