BackAllowing FDI in retail is a desirable way to proceed: Arvind Subramanian
India’s chief economic adviser discusses the Economic Survey, budget and the state of the economy
Premium(Pradeep Gaur/Mint)
New Delhi: Arvind Subramanian, the chief economic adviser in the finance ministry and the man behind an entirely new-look (and extremely well-crafted) Economic Survey, discussed the survey, the Union Budget that followed, and the state of the Indian economy, in an interview with Mint. Edited excerpts.
Now that the Reserve Bank of India (RBI) has cut the policy rate, will you revise the growth outlook that you presented in the Economic Survey?
If you look at the survey, we give our economic projection of 8.1-8.5% (for the next fiscal year), but what we say is that number represents an increase over the last year. And that increase is justified by four factors. One, reforms are taking place. Oil prices are declining, consumer demand will go up, the monsoon is likely to be better, and if inflation continues to be low, there is scope for monetary policy easing. So that is already factored into our projection of growth rate. Not that I was privy to that decision (by RBI), we had lots of discussions, but just by looking at the inflation forecast and seeing that there is scope for monetary policy easing, it was factored into our forecast.
Your survey talks about your concerns about the new GDP (gross domestic product) series. Is it a challenge for public policy if your base changes for two fundamental metrics—growth and inflation?
Luckily, the inflation thing has not changed much though the base has changed. It is broadly the same. My approach in the survey was that we need to be completely candid and honest how we see it. I think public policy has to be based on complete transparency. I honestly feel two or three things about the growth numbers. One, the process for doing this is completely outstanding. The staffing, the integrity, the independence of the people who do this is outstanding. It has brought us up to world class. But, as in many things in life, processes and outcomes could be different. Especially puzzling is the number for 2013-14 for a number of reasons. We cannot reconcile that with other developments in the economy the CSO (Central Statistics Office) itself produces. Remember, it was a crisis year. My honest assessment is that this is the only number we have, but we have to be cautious in interpreting this number, because this is not easily reconcilable with a lot of other developments of the economy. So in the survey, we have said that despite the 8.5% growth we are projecting, India should be viewed as a recovering economy, not a surging economy.
You paint a rosy picture of the economy in the survey though factory output is sluggish, exports are in the negative, rural demand is falling and private investment is yet to pick up. Is the high GDP number giving us a false sense of confidence about the economy?
In the survey, there is no rosiness. What we are saying is that the potential going forward is there provided a lot of things are done. So it is about the medium-term potential. Remember, we say the potential is double digit. (Economist) Dani Rodrik and I wrote a piece many years ago saying India’s potential is 7-8% growth rate. I still think on the basis of the old numbers (that) that would have been the potential. With the new numbers, you can’t say that is the potential. The assessment that double-digit (growth) is the potential has to be seen in the context of the new base numbers that has been bumped up statistically.
You also say in the survey that India is in a sweet spot, which you call rare in the history of a nation. Why do you say that?
Because two things have come together now. One, after many, many years, we have a government with a clear political mandate for change. And it is a relatively unencumbered political mandate, though we know there are problems in terms of a lack of majority in the Rajya Sabha. Second, the external environment is relatively good for India. One, oil prices are down. That gives us a lot of space—fiscally, externally, inflation-wise. Second, of course, is that India, relative to other countries, is looking good. So the combination of political change domestically, which is a mandate for change and reform, and the external environment, those two coming together is what creates this sweet spot.
Though you ruled out big-bang reforms in your survey, you said the government should act boldly and should signal a decisive departure from the past. With that in mind, do you think the budget fares well?
Yes, I think there are two or three really big things that have happened. The whole fiscal federalism, the reshaping of India’s landscape, is almost revolutionary. It is going to change India in many ways, both economically and politically. If you believe that the dynamo for change in India is competition between states, I think this will really further that. So this is really a fundamental and real change. Second, thanks to some of the work we did earlier, this budget has finally recognized that in the short run, private investment is going to be weak and public investment has to come in and fill in the gap. This increasing public investment as a strategy for growth..., and also identifying three or four key sectors where this spending can happen realistically and efficiently such as roads and railways. Third, I think this has been done, I would insist, without compromising on fiscal discipline. In fact, the arguments that we put out, why we are absolutely credible fiscally, is what RBI used yesterday (Wednesday) in supporting its rate cut. So that shows we are thinking alike. The other thing I would say that happened in the budget is there is a vision for direct tax reform. To say that we will go from 30% to 25% to become internationally competitive, reduce exemptions, it is not today, but a vision laid out. If you put all this, plus the rate cut, plus if you can get these legislative changes—goods and services tax (GST), insurance and coal... If 18 months ago, someone says this is what the government did—interest rate cut, investment-oriented budget, tax reform, GST, insurance—you will say, wow! I am not saying all of this has happened. If it does happen, it amounts to something I would say is very meaningful.
Another change that this budget seems to signal is the culture of pension. For example, it says if you pay 1 per month, you get 2 lakh insurance. So it is interesting that you are introducing a payment element into the pension plans and it is no more a freebie. It also opens the window, if you want to increase the contribution, you can.
I think there are two things worth highlighting. One, it is the beginning of a comprehensive social security system, with what you said, payments and not just freebies. The other thing is the possibility of giving choice to the employees, whether to opt for EPFO (Employees’ Provident Fund Organisation) or NPS (National Pension Scheme), ESIC (Employees’ State Insurance Corporation) versus other health schemes. We have to do it in consultation with stakeholders.
On the 14th Finance Commission, don’t you think some of the schemes where you are now asking states to contribute more should actually be transferred entirely to states along with the money, leaving them to decide whether they want to continue it or not?
That is a matter of transition, you can’t do everything disruptively. It has to be gradual. We have to see how it works. States may say we want to change our priorities. That is where the NITI Aayog is going to play an important role. That is the process underway. Over the years, states will say we want this scheme, we don’t want this scheme. That is a discussion that is going to happen over a period of time.
The Finance Commission has done away with the fiscal discipline criteria in its weightage system of allocating money to individual states. Do you think that is a good move?
I have thought about that and you can have two views on that. I don’t have a strong view either way.
One of the concerns flagged in the budget is the rural economy and the agriculture sector. But there is not really much that you have done, maybe because of the fiscal constraint. The attention has not been as much as your concern has been. You have flagged the concern but stopped short of going the full distance. How do you address it?
Two things. The allocation for MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) has been increased, allocation for rural agricultural...has increased; there is also emphasis on irrigation. There is a concern and whatever allocation possible has been made. The finance minister has also said in the budget if more money is required, it will be allocated for the MGNREGA.
The public sector has a record of inefficiency. Don’t you think you are betting too much on it when it comes to reviving the investment cycle?
The increase in allocation for infrastructure in the budget is ₹ 70,000 crore, out of that ₹ 20,000 crore is going to go the National Investment and Infrastructure Fund so that they can leverage it. So, it is not a huge increase in the budget. It is not like ₹ 1.5 lakh crore (trillion) and we don’t know how to spend it. It is a modest but very substantial increase. Second, it is going to sectors such as roads where there is a pipeline of projects. In railways, the ministry has a plan to spend it. We know these two agencies can spend and spend reasonably well.
In the survey, you talk about allowing foreign direct investment (FDI) in retail, knowing fully the government’s position on the issue. Is it a more apolitical view?
The survey is written by someone who is both an insider as well as an outsider. The credit goes to the government, which allows that space. Otherwise, it becomes a government document. One of things we analysed is that the APMC (Agricultural Produce Market Committee) Act. One of the things I found surprising is that there are thousands of agricultural markets in India and how much is added to the cost between the farm gate and the final price is huge—in some states adding up to 14-15%. What that means is that the farmer gets less and the consumer pays more. So the question was how do you change this. So one of the things we found during the course of writing this chapter is that it is not enough to eliminate the restrictions, you have to create the infrastructure for marketing which has not happened, whether it is in storage or warehousing. Then you have to see who can create this infrastructure. For that, all options should be on the table.
So as the chief economic adviser in the finance ministry, would you advise the government to open up the retail sector to FDI?
My preference would be yes. But then, that’s a political call. But as a purely technical and economic analysis, I think in the context of identifying these bottlenecks, it is a desirable way to proceed.
How critical is the land bill? It is becoming a litmus test for the government. I want your response as an insider and as an economist. Does everything rest on this bill? Why has it become so important for the government?
As an economist, I will say one has to act on many fronts and this is one of them. So it has to be seen as part of a package. If a good land bill can be passed, that is good for doing business and for investment. But if it can’t be, then it has to be seen in the overall context of how much cost it will have. So you have to see the whole thing as a package. On the politics of it, I leave it to the people who deal with it. I don’t know the politics of it.
The rupee-dollar exchange rate is very critical to India’s exports and competitiveness. What you think is an ideal exchange rate in the current context?
One of the most difficult things in international economics is to say what is the fair value of any currency. There are many, many ways of doing it. But the broad policy is that if you want to make India’s exports competitive, you cannot afford a very strong rupee and it has to be broadly flexible. The third thing that I said in the survey, if you think geopolitically keeping China in mind, it seems to me as a rising power, we should think of building our external reserves in that context, not just in the manner of economic context. We should think of the cost benefit of acquiring a lot of reserves as a kind of acquiring a geo-economic and geopolitical weapon. That is just a thought.
Does that mean you also support India building a sovereign wealth fund (SWF)?
You need to first have the reserves to build an SWF. To me, it is more important to have the reserves, then we can decide how to invest it.
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