Without mincing his words, Arvind Subramanian, Chief Economic Adviser to the Finance Ministry, says that as an economist he believes that “circumstances are such that growth is picking up, inflation is also higher, macro uncertainty is there — it is a classic case for fiscal consolidation.”
Subramanian, who is the chief architect of the Economic Survey 2017-18, highlighted the delay caused due to litigations intiatiated by taxmen and red flagged the steep rise in stock markets . He also talks about ‘crony socialism to stigmatised capitalism’.
He says he is not a big believer in one number for the debt or deficit. But Subramanian does talk about ‘fiscal consolidation’, concerns over crude oil prices, gender, agriculture economy, while he subtly says economic decisions cannot be taken in isolation given that general elections are not far away.
In an interview with BusinessLine, he shares his views on the economic challenges given the circumtances. Excerpts:
The Survey speaks about a possible pause in fiscal consolidation this year. What about in 2018-19? Are you looking at a particular fiscal deficit target?
In the last line of the Survey, I say ‘no fiscal populism for the Election’. I think the government is completely in agreement. As a pure economist, circumstances are such that growth is picking up, inflation is also higher, macro uncertainty — it is a classic case for fiscal consolidation.
But, this is also an unusual period with the elections next year. So the pure economic calculation of aggressive consolidation can not ignore the political reality. That does not mean no consolidation. The question is only on what is the extent of consolidation? And that is a call which the government will take in the Budget.
The issue is of how much fiscal consolidation. Starting with my dissent note in the FRBM Committee, I am not a big believer in one number for the debt or deficit. I think there should be a gentle consolidation in both debt and deficit and government can take it or leave it.
Let’s see what happens in 2017-18. The DEA Secretary has announced the government borrowing. We are late in the year and let’s see how the fiscal numbers are. We had an unusual year –11 months of GST, the growth slowdown, oil price hike, we have to factor it all in.
How much of a challenge are the high oil prices. What is the comfort zone for the government?
The lower the prices, the better it is for the government. But, we don’t control oil prices and we have to adapt to any changes. One point of note is that the government has stuck to its deregulation commitment.
You have also red flagged the steep rise in the stock markets?
Stock prices are high, very high, and the question is whether we should be watchful or not. We have to be prepared for the fall.
There are two issues: one is a steep fall and the the other is who will be impacted. It will be the small savers, who have transferred all this money who will be impacted. So politically, it is very challenging. We have to be very careful about it.
It is one thing to say we want democratised shareholding, but you also don’t want it to happen in the context of the small savers being impacted…it can end up discrediting the markets. We have had a number of scandals in the past. When things go wrong, they inevitably get politicised. Moving to stocks because prices are going up, prices are going up because you move into stocks…it becomes self fulfilling, I will not call it a bubble, but we have to be watchful.
You are being seen as far more politically correct in this Survey. Can you elaborate on the economic challenges?
Has anyone dared to say demonetisation and GST affected exports? We have also spoken about decoupling — from the world economy.
Last year, the Survey raised issues of how do we address human capital, agriculture and the long-term issue of inefficient redistribution from where the idea of the Universal Basic Income idea came through. Last year was the first time I also raised the ambivalence over private sector from which I have drawn on stigmatised privatisation this year. That is a work in progress.
The challenges in this Survey are also on health, education, employment. But on the positive side, I think the Twin Balance Sheet (TBS) is really a big step. Cooperative federalism is now a technology for pursuing reforms in other areas like power, agriculture, DBT, irrigation, price stabilisation. States alone can not do it.
What are your thoughts on reaching eight per cent growth?
My growth forecast for 2018-19 at 7-7.5 per cent is below that of the IMF. The world economy has been down, we have had bad monsoons, demonetisation, Twin Balance Sheet (TBS) issue is only now being addressed. Now with demonetisation behind us and once GST stabilises, world economy picks up and the TBS problem is fully addressed, then we can think of getting back to eight per cent. There is no time period for this, especially as the macro-economy is also a little bit of a concern.
By ‘crony socialism to stigmatised capitalism’ who are you hinting at?
Indian capital came out of the licence permit quota raj. People always suspect that if you did well in that era, was it because you were close to the government? That is a stigma. Crony socialism gave stigmatised capitalism. Then we had a period of IT, it was good capitalism, they were clean, they were competitive, they were far from government. But then all these scandals and IT disasters, imprudent lending took place.
So when this government came to power and the whole TBS problem happened, it is not surprising that it took long because there was this fear of stigmatised capitalism. The Insolvency and Bankruptcy Code, when it came it took some time…it had to be redesigned to make sure the promoters didn’t get access to it. I think it is a very complicated rich history but it has had an effect on policy making. If the IBC process works, we will go some way in addressing the stigmatised capitalism concerns.
Has GST stabilised? You flagged the TBS problem in 2014. Do you think the banking reforms got delayed?
By the end of the year, I think we will have a good sense of where GST is…it would be nine months. People are completely confused about GST. The point is how is the tax doing? Tax collections are growing at about 12 per cent.
Resolution and recapitalisation of banks have only now started. It has been delayed, but that’s where the stigmatised capitalisation comes in. Partly we also put it off because we thought growth would take care of it. Insolvency and Bankruptcy Code was fully enacted. There were some genuine reasons for delay and we thought things would get better.
The Survey has spoken about judicial reforms too…
I always give something new to think about. I think it is very important. There are things that the government can do on the tax side such as pursue less litigation and then there are things the government and judiciary can do together, which we call cooperative separation of powers.
In the ease of doing business, the Finance Minister has said that we lag behind on contract enforcement…so the actual implementation of laws does take time in India and we need to take this area very seriously. Something like 66 per cent of cases account for such a small fraction. I think there is scope for cleaning it up as well.
Either there should be a threshold for litigating or you set a committee. The problem is that people are nervous about stopping to litigate because people may see you are favouring the private sector. So even that concern needs to be addressed.