Arvind Subramanian is chief economic adviser to Government of India, a position that Raghuram Rajan held before becoming RBI governor. Earlier, he was a senior fellow at the Peterson Institute for International Economics, an influential Washington DC-based thinktank, apart from having worked with the IMF. As CEA, Subramanian has been vocal about giving a push to public investment and also cutting interest rates, which he sees as necessary to get out of the growth slowdown. These views were first expressed in the finance ministry’s Mid-Year Economic Analysis and reiterated in the Economic Survey—both principally authored by him.
Harish Damodaran: You drafted a beautiful economic survey.
There were these high, unabated expectations about the Budget. Lots of people spoke about big bang reforms… The expectations were unrealistic and unfair. Big bang reforms come mostly in times of crises and in undemocratic countries. India is a sometimes frustratingly vibrant democracy… Currently, India is in a sweet spot. There is a political mandate, the external environment is friendly. The way I would assess the Budget is that certainly the momentum of change in reforms will continue. The follow-up on this, the GST, FDI in insurance, etc will determine how close we get to the potential of doubling the growth.
Harish Damodaran: You were the first to say relax on fiscal consolidation and push for public investment. But in the Budget, the capital expenditure is up by just 6.5%. Was it worth it? And you have done nothing about the revenue deficit.
We have to compare with the actuals, not with respect to the Budget estimates of 2014-15. The capital expenditure increase in the Budget has been R70,000 crore, which is 0.3% of GDP. Off-Budget financing will also be possible because out of the R70,000 crore,
R20,000 crore will go into national institutions, especially the Railways. Then they can leverage much more. If you take 0.3% GDP hard-core Budget provision plus off-Budget financing, it’s quite substantial. I agree, perhaps 0.5% of GDP might have been necessary. But in India, the ability to effectively spend is not unlimited. You have to find sectors and institutions that can spend well.
Also, now, with the 14th Finance Commission recommendations, 62% of all national tax revenues will go to the states, as opposed to 55% currently.
If you do the calculation based on the last one or two years and how the states have been spending money, your aggregate fiscal indicators will improve by more than what is suggested by just the Centre’s numbers, and your aggregate capital expenditure is likely to go up more… The bottomline is that there is going to be increase in capital expenditure.
Harish Damodaran: So do you believe that, on an aggregate basis, there has been fiscal consolidation?
States as a whole have been much more prudent. The aggregate fiscal deficit of states is about 2.5-2.6% of the GDP, while the Centre’s is 4.1. So, if that goes forward, the aggregate consolidated deficit should improve by between 0.3 and 0.5%, as against 0.2 if you look at the Centre’s deficit alone. And the revenue deficit is likely to improve by 0.4% of the GDP.
Arun S: But at the Central level, you have reduced spending on welfare schemes. So there is pressure on states to spend more. Thus, your statement on states being more responsible and spending more on capital expenditure falls flat.
The cutting back of schemes by the Centre is not an overall cutting back. There is going to be investment of 0.3% as a whole, and hopefully the investment will be devoted to capital expenditure. When Mr P Chidambaram says all the schemes have been cut, the thing is that eight schemes have been transferred to the states, most of them legally mandated schemes such as the MGNREGA, mid-day meals, Sarva Shiksha Abhiyan. For the other schemes, the sharing between the states and Centre is going to change. So there is no attack as such on schemes. It’s just that we have more money at the national level, and that should go towards capital expenditure.
Shobhana Subramanian: You allocated R9,750 crore for capital inclusion in state-owned banks, and in the last round, only seven banks out of 23 got capital. Is this a way of starting consolidation?
What is being done in the Budget has to be seen in the context of an earlier decision that the government is willing to see its shareholding go down to 52%. In the Economic survey, we said that you have to stop thinking about one-size-fits-all solution to our public sector banks. In the recapitalisation exercise, that is what is being followed. It’s a nice first step towards addressing the banking system.
Sunil Jain: Are you disappointed that the Budget didn’t do enough on subsidies?
It spells out a vision in terms of where we want to go. The question is how easy is it to get technology and infrastructure in place to be able to do so. Because the Prime Minister and finance minister in the Budget speech have talked about cutting leakages and not the subsidies themselves… Like it or not, we have a National Food Security Act, it’s a legacy.
Seema Chishti: The Modi government has been signalling a philosophical shift from what the UPA stood for economically. What do you think the Budget has done to address the party’s constituency? And what is the status of the MNREGA? The PM hit out at it, and next we know the Budget said it ought to be kept.
On the first point, call it broadly a pushing-growth agenda which is unorthodox. One is directly through higher public investment. Two is what we can do through private investment, and that’s where the vision gets laid out in terms of corporate tax reforms, the reform in labour and land laws, simplifying the tax regime….
On your second question, the decision to make agriculture one of the focuses of the Budget was completely taken by the government. Increasing the allocation to the MNREGA and trying to link it with other schemes that seek to build movable assets are part of this.
Harish Damodaran: The service tax hike in the Budget will increase everything from mobile bills to other bills. At a time when consumer sentiment is weak, was it a good idea?
The logic for increasing the service tax rate is the move towards GST. We are only preparing the way for what’s going to be a substantial increase in service tax next year… If you are going to get GST, the tax could even be 18 or 19%. It will be greater than what it is today.
Sunil Jain: Has the rupee appreciation become a serious problem, in terms of export competitiveness?
Whether a currency is appropriately valued or not is difficult to answer. It depends on the timeframe and the starting point. Since January 2014, there has been an appreciation of 8.5%. But then there was a big depreciation in July-August 2013. I have studied China, Japan and some other Asian countries. All their growth successes have depended on exports. All export successes require many things, but certainly avoidance of overvaluation of exchange rates.
Appu Esthose Suresh: How do your policies of being business-friendly reconcile with that of being a good cop on black money?
It is politically imperative to seem to be doing something on black money. We need to reconcile that with providing a more business-friendly environment. The balancing act in the Budget is quite nice. On the one hand, you have the law etc, which reassures investors that the government will ensure that illegitimate acts do not happen. Then the whole vision of luring corporate taxpayers by laying down a roadmap for reducing rates to 25%, GAAR (General Anti Avoidance Rules) being delayed by two years, and the government not contesting high court judgments (on transfer pricing cases involving Vodafone and other MNCs), gives the message that there is not going to be an adversarial tax environment.
Prashant Sahu: Do you think India can build a forex reserve of $1,000 billion in two-three years? And, do you think an expansionary fiscal policy will also mean little scope for an expansionary monetary policy soon?
The idea we have in the survey of building large reserves is for the long run. China has accumulated these reserves over a long period of time. The second reason for talking about it is to basically say that we need to formulate policy keeping in mind broader geo-political and strategic factors. China does that par excellence. What it’s actually going to translate into in terms of policy, how quickly we do it and if we should do it at all—a debate must take place. China’s economic and political power in the world stems from the fact that it has $4 trillion in reserves. It acts as a World Bank and IMF put together, but in different ways. So we may say we are a different kind of power and that we are not like that and that we don’t want to exercise our power, but that’s a debate we need to have. As for fiscal policy, ours is not an expansionary fiscal policy, but a contractionary policy… Also, we are consolidating a fair amount… good quality consolidation. I think it is a very supporting fiscal framework for monetary policy.
KG Narendranath: When your effective revenue deficit is actually increasing, how can it be called quality fiscal consolidation?
My focus on quality fiscal consolidation is that you should get less revenue expenditure and much more capital expenditure. In this Budget, revenue expenditure is coming down by 0.6% of GDP and capital expenditure is going up by 0.3 % of GDP. So there’s a nice switch from public consumption to public investment in this Budget. The reason the revenue deficit doesn’t go up by more is because of the constraint on the revenue side partly from the tax devolution. With more tax devolution, your revenue deficit would also go up.
Sandeep Singh: Even in a bull market, the government could not realise its disinvestment targets. The target for 2014-15 was around R44,000 crore; around R26,000 crore was raised.
The chosen companies for disinvestment were commodity companies. Even though the stock market went up, the commodity prices crashed. Second, there were administrative issues. We have a very dynamic Secretary of Disinvestment, but she started quite late. The third thing is, if you say we have to sell these companies by this day, then you handicap the seller—in this case the government.
Shaji Vikraman: The impression one gets is that this time, apart from on the monetary policy framework agreement, consultations with the RBI have been few and far between.
Nothing is unilateral in any of the decisions, all this has happened pursuant to consultations. The monetary policy framework agreement in fact increases and codifies independent lower inflation objective, while giving the RBI the power to pursue that. In some sense, all the government is saying is that we agree on these objectives but it is the RBI’s job to carry these through… On foreign capital inflows too, it is very clear that this is going to be in consultation with the RBI.
Harish Damodaran: If we are talking about 10% GDP growth, how are we going to sustain it if agriculture continues to grow at 2%? And do you believe this 10% growth figure?
The CSO (Central Statistics Office) has done a magnificent job; they’ve taken us closer to world standards. But as with a lot of things, democracy is a brilliant process but the outcomes sometimes are puzzling. So certainly the 6.9% number for 2013-14, I’m still puzzled by that. So that’s why we say very carefully in the Economic Survey that whatever the balance of evidence suggests, we don’t have a choice anymore, we have to use these (new GDP estimate) numbers. The way we have put it is, notwithstanding these new estimates, which are the only estimates we have to work with, the balance of evidence suggests we should view India today as a recovering economy rather than a surging economy. I think we have been very careful about that.
Coming to your question, I think agriculture needs to grow at 3.5-4% every year. We need to start on improving agriculture productivity.
Surabhi: Earlier growth was at 4.5-5% and now suddenly we have a new CSO series that says growth is 6.95%. Are we supposed to wish away those years of bad growth and say there isn’t a problem with manufacturing?
There is one thing about manufacturing in the new series that is understandable and one that is not. The one that I understand is that there’s been an increase in the share of manufacturing in GDP. But the point is, now the manufacturing sector’s output is determined at the corporate level and not at the plant or establishment level… Secondly, the higher manufacturing growth seems to represent a huge increase in productivity growth.
Banikinkar Pattanayak: In your mid-year review, you said India was without a credible monetary anchor for almost six years till the third quarter of 2013. The reference was obviously to tenures of Yv Reddy and D Subbarao. Was that a fair comment?
I know both of them very well and I like them a lot, but when you have double-digit inflation for six years, what can you say? That there was a credible anchor? Dante has a lovely line in Inferno, where he says something to the effect that fence-sitting is the worst of all moral crimes.
Prashant Sahu: If the government doesn’t meet revenue targets next year too, how will it meet its expenditure commitments?
A very strong belief is shared at all levels that public investment has to be the way forward because private investment is still weak. The amazing thing is that if you talk to big private investors, they say they want more public investment. And I would love to believe that we all had a small role to play in this.
Transcribed by Tanima Banerjee & Arun Subramanian