As the Narendra Modi government completes two years, the man in charge of long-term transformational reforms says India needs to change some of its laws to make the country an export base. NITI Aayog Vice-Chairman Arvind Panagariya tells Bloomberg TV India that much rides on the banking system clean-up to trigger a domestic recovery. Excerpts:
How would you describe the way these two years have panned out, given the ambitious objectives and aims this government had?
We have made a solid start, and the economy is coming back on its feet, in fact it is beginning to run. We started with relatively low growth when the government came to power. The last growth estimate for FY16 is 7.6 per cent. The Q4 by this estimate is 7.8 per cent, which is very close to the magical 8 per cent.
A vibrant global economy is always preferable to a slowdown. That being said, India still has the possibility of having a good run. The reason is that our fundamentals are strong — the savings rate is still in the 29-30-per cent neighbourhood, and the investment rate is good as well. But I still see the global economy as very large, even if it is not growing very rapidly. The merchandise export market is $18 trillion. As long as we have our policies in place, which we are improving, what we need to do is to raise our share in the global pie. That is at 1.7 per cent, which is relatively low; China has more than 12 per cent. We have to keep doing the things that make our goods competitive, make changes that allow goods to flow in and out smoothly. We’ve to do a lot on trade facilitation, infrastructure improvement. Also, in the long run, this is about fixing some of our laws so that larger firms can come into the Indian market and use the Indian soil as an export base.
For domestic industry, we are seeing two things operating. First is the debris of the past, which is yet to be cleaned on the banking side, and on the books of the companies — the loans and the leverage. The other is that you do not see major capex commitments and concomitant employment generation. You would agree with me that the biggest worry is that while global leaders are making a beeline for India, you don’t hear of domestic industry talking about their big plans.
Much of the domestic industry that is vocal and visible, is the one that is not doing so well, and a lot of legacy issues are there. The steel industry we inherited was in rather bad shape. Steel prices then fell further as cheaper steel was imported from China. The construction industry was also ailing when this government came in. These are the ones that you hear a lot more about. But there are parts of Indian industry that are doing quite well and are vibrant. The auto industry and the auto component industry are both doing well.
The auto industry now complains about excessive judicial intervention…
Those are separate issues, but you know, at least the industry by itself is doing well, and is growing at a healthy rate. Then you have software which is continuing to grow. Telecommunications continue to do well as well. So I think there is a part of the domestic industry that is doing well. It could do even better, which is our ambition.
Let me focus on the initial part of your comment. The parts that are not doing well, why is that so?
There the inheritance has been pretty daunting. Already, projects had not been moving, they were stuck. Then the fall in commodity did not help either. Steel prices and aluminium prices fell in the global markets.
I was reading a commentary that came from India’s largest bank. They say that the biggest expectation right now is ‘Saavan ko aane do’...
You see, part of the inheritance was also the very large NPAs in the banking system. And then the loans that were on their way to turning into NPAs — which has now happened over the last couple of years. So NPAs have risen further in the last two years. This turns out to be a very difficult problem to solve. It spills over into real estate because you don’t have a place to borrow from to buy a house. If bank credit is not available at a good or reasonable interest rate, then you can’t go and commit to buying a house. These are the three or four legacy issues that have been harder to solve. Banking tends to be the hardest. To clean the banking system, even the US took quite a while, and there too it is not yet fully cleaned up.
How do you explain this bank clean up to people internationally who follow the Indian economy? Could you put that in the context of what the US did or what China is doing. There are other examples all around the world as well.
China has not done a terribly great job at this. The Chinese banking system is still ridden with lots and lots of problems. Probably on the whole, we are better shaped than China is in the banking system. The US perhaps moved a little faster than India has been able to, but that’s also partly because the US has a lot of expertise in this area.
And they have a bankruptcy law in place...
Yes, their bankruptcy law was already in place, and a very well functioning bankruptcy law at that. Also, do not discount the ability of the US Federal Reserve, which did a part of this cleaning up of the American banks and the real estate lending issues. The Fed’s sheer size is also much larger. They have the expertise on how to rescue the projects that are running poorly, knowing how to bring them back to life once you acquire them. They have experience about restructuring assets, recovery of the loans.
These are abilities that may not exist to the same degree in India…
That’s right. Here for example, if one were to think in terms of an asset reconstruction company, to get these assets out of the banking system, you need in these asset reconstruction companies the necessary expertise on how to bring back to life some of the steel projects that may be doing poorly, or construction projects that may be doing poorly. Once you know that, you are able to convince others to invest into the asset reconstruction company. Only then do you bring together the funds, and be credible so that you can revive the banks from which the assets are being moved.
Let’s come back to ‘Saavan ko aane do’, because clearly this is one of the biggest expectations for the economy right now. Incidentally, we have had some sprinkling of showers in North and West India. What is your assessment of the upcoming monsoon? Have you had occasion to go through the details and data?
So far so good. I think it is certainly looking good. First of all, the starting point is that we have had two consecutive droughts. At least past recorded history says that we have not had three consecutive droughts in India. That gives some idea of the probabilities. The Met Department has been generally positive in its forecast. Luckily we have seen some beginning to the showers. So I feel quite optimistic. ‘Saavan ko aane do’ is a crucial sentiment across the country because that’s where people live. In the end, the rural economy is where Bharat is. More than two thirds of the Indian population is still in rural India which directly or indirectly depends on agriculture.
What kind of uptick would a normal monsoon likely give to the growth numbers?
I am optimistic that we will hopefully inch towards 8 per cent as the current year ends. Perhaps we could even cross that 8-per cent figure.