The Economic Survey 2016 has been more realistic in its assessment of economic prospects and projected GDP growth of 7-7.75 per cent for FY17. More than the economic projections, the Survey makes some bold policy prescriptions like taxing farm income. Speaking to Bloomberg TV India, the government’s Chief Economic Advisor and author of the Survey, Arvind Subramanian, says there is a chance that growth next year will be better than this year. But there is also a chance that it could be lower than this year because the world economic environment is getting really very grim, he said.

One of the key things that came out of the Economic Survey with regards to growth is that you have given a band of 7-7.75 per cent. Is it a glimpse into the Finance Ministry’s thinking or are you preparing a ground for eventually telling the people that it will be prudent to sacrifice a little bit of growth rather than deviate from the FRBM targets?

The assessment is based on the factors affecting growth and the way we see it going forward. The reason for this forecast is that there is a chance that growth next year will be better than this year. But there is also a chance that it could be lower than this year because the world economic environment is getting really very grim. There seems to be no spot in the world apart from India that seems to be doing really good. It is basically a signalling and kind of making the point to the world that India’s performance will be conditional on what happens in the rest of the world. We have become more integrated with the world and therefore we should recalibrate our expectations to take account of that fact.

The point that the Survey makes of recalibration of mid-term economic outlook, are you saying that the FRBM target of 3 per cent of GDP in the medium-term needs to be relooked at considering the overall economic situation?

The call to take a fresh look at the medium-term framework has nothing to do with what is happening now. Fundamentally, three things have happened that necessitate this point. We need to plan our expenditure in the medium term framework. Earlier, the Planning Commission used to do that. We don’t have the Commission and so we need to do that. Second, on the revenue side as well there is a need of medium-term framework. The 14th Finance Commission provided some revenue estimates. But they have assumed some GDP estimates, which is now difficult to achieve. Much more important is the fact that we need to think about what kind of anchors we want for fiscal policy. At the moment we have a deficit target. But there is a lot of debate around the world: should it be a debt anchor or should there be a golden rule that borrowing will only be for investment, and also the recognition that in all fiscal frameworks there must be room for flexibility in the short run depending upon the cycle. That is the reason to look at medium-term fiscal framework.

The feeling that you have regarding the global perception, how would it be if we were to tell the world that we are keen about our own growth and will not stick to certain dogma just because certain markets will react in a certain way?

The Survey lays this out very clearly. There are very good arguments to stick with the part we have announced and there are compelling arguments to go a little bit slower than we announced. It goes to the government’s credit that we have had this very animated internal debate and government has been open about it. That is what bond markets and everybody should think about. People well above my pay grade should take that call as they have.

But the intent is not fiscal profligacy?

One of the things that irritate me about the description of the debate in the press is whether to expand fiscal policy or responsibility versus irresponsibility. But the debate is actually about whether we should be aggressive in consolidating or less aggressive in that. We have had a wonderful debate and you will see the decision on Monday.

There is a significant opinion that the biggest internal risk is what has happened to the banks and the NPA situation. What is your position on that? How grave or serious is it?

We call this a twin balance sheet challenge. The RBI is looking into the bank part of it – how many stressed assets are there, the sectors and more. They are doing a detailed thing and that is important. The problem is challenging as it affects both the corporate sector and the banks. So any resolution has to be comprehensive. We need recapitalisation, resolution and reform.

What is the logic behind that statement that RBI can use its own balance sheet to recapitalise?

We have to find resources for recapitalisation. It can come from the Budget or issuing of bonds and many other ways. The government has lot of equity in the RBI and the question is whether some of that equity can be redeployed as equity in the public sector banks. So it seems like the central bank is very well-capitalised. We have a lot of capital there, unusually higher than other central banks. So the question is if we can redeploy some of that capital or not.

Has it been done elsewhere in the world?

We have certainly discussed this over the last many years in India. How much capital government has in RBI and what can be done about it? And so it is not a radically new idea.

What would be needed to move it from theoretical debate to actual execution?

The Central government and RBI have to come together and talk about this and decide. We have to see what are the things we have in our arsenal to address this problem.

You talked about $35 to a barrel when it comes to price of Indian crude oil basket. How are you so confident?

If you look at how much the oil prices have declined, that was translated broadly into reducing subsidies, increasing public investment and reducing the deficit. Public investment has been one of the engines of the economy. All the evidence and forecast are saying that the oil prices are going to remain soft. But we do say that there is a risk if the oil prices start going up and one has to keep that in mind.

Given that free trade pacts have increased imports than exports, should India continue to negotiate for FTAs? How should India position itself to the new mega regional agreement?

India’s FTA worked exactly the way you expect them to work. We have cut our tariffs and that has led to an increase in imports by 60 per cent from FTA countries. The increase in our imports is greater than increase in our exports and we have to take these results and say what next. I think this “what next” question is a big and complicated one. Big mega regionals happening between the US and Asia, the US and Europe, US and Asia, and China might also join, and there is the fear that we are going to be left out.

The government recognises that when you make that decision, the economic cons and benefits are going to be one component of it. But with Trans-Pacific Partnership, there are other aspects: intellectual property loses, that is going to be different. A lot of assessments have been done but these decisions are not driven by economy, they are driven by bigger geo-political consideration.

Were you aware of what would happen at the WTO or the US complaining on our solar energy programme?

There is a broader point here about how do we engage to the world on trade. The broader point is that do we need to change the rules to take into account green energy initiatives and so on. Even there we need to engage constructively.

What is behind the bold recommendation of taxing agriculture income?

I think the point is we need to bring more and more people under the tax net. If 95 per cent of the people are outside the tax net, you are looking at a disconnect between citizens and the State. Where you get your income from should not be relevant provided you can afford to pay taxes.

We are not saying tax the small farmers or the poor, of course not. But the point is if you set a tax limit and you want to bring more people into the tax net, then that should happen regardless of land or manufacturing or agriculture.

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