Interview given to Bijoy Kumar Sing of PTI on August, 9, 2018:
Q1:
What is you assessment of current macroeconomic situation in
India? Some experts believe that the macro situation is becoming more
challenging in the last year of Modi government? FDI growth hits 5-year
low in 2017-18, rupee has depreciated, oil prices and inflation are
rising?
A1:
Economic growth, which has been subject to many ups and downs over the
past seven years, seems to be back on a recovery path. The most
important indicator of this is the rate of growth of real fixed
investment, an essential element of sustained, sustainable growth. On
the external front some challenges such as the threat of rising interest
rates and commodity prices are the negative face of a rise in developed
country growth. So they are partly offsetting. The rise in oil prices
due to Geopolitical factors, like Iran sanctions are however a concern.
The US-China Tariff war however provides an opportunity to increase
India’s exports to the USA and to attract, labor intensive elements of
the global supply chain unsettled by higher “China risk”, to India.
Domestically the main risk to macro stability, is politically driven
Govt consumption spending at the cost of investment and fiscal prudence.
If this temptation is resisted, the country will be back on a firm 7.5%
plus growth track.
Q2: India has emerged as the sixth largest economy replacing France? How do you see this development?
A2: in a series of papers since 2004, I had predicted the rise of China and India as economic powers (https://sites.google.com/
Q3: The US actions on trade have emerged as the biggest worry for
global growth. What will be impact of rising trade tensions on Indian
economy and what should be India's strategy?
A3:
We must distinguish between US trade actions against market economies
like EU, Canada, Mexico and other market economies from those against
non-market China. The conventional wisdom that everyone will loose from a
trade war applies to the former, but not to the latter. A single party
dictatorship has dozens of ways of imposing non-tariff barriers on
imports & foreign investment, that free open democracies, run by
rule of law, cannot even imagine. The US-China tariff war will have some
short term disruptive effects on global economy, but provides great
opportunity for India to attract Labour intensive, export oriented and
Indian market oriented investment from those currently located in China.
The Indian Govt, private industry and PSUs must make an effort to
attract them to India.
Q4: The general elections are less than a year away and there is a
possibility of populist policies being announced by both the central and
state governments. Is there a possibility of slippages in the fiscal
deficit?
A4:
Historically every Govt pushes up what are referred to as populist
expenditure in the year or so leading up to the election. The test is if
they keep it modest and don’t disturb the trend in fiscal
responsibility. There is therefore always a risk of fiscal slippage. At
State level, this is partly linked to losses incurred by State
electricity distribution.
Q5: Prime Minister Narendra Modi had said that demonetisation will
reduce generation of black money in India. But money deposited by
Indian's in Swiss banks rose by 50 per cent last year. So, how do you
read the effects of demonetisation nearly two years later.
A5:
The data that I have seen shows that money deposited by Indians in
Swiss banks has been on and remains on a downtrend. As as
demonetization, I had written the week after demonetization that it
would reduce the growth rate of the economy by about 0.5-0.6% in the 6
months following the demonetization or about 1% for the year as whole
(assuming the recovery takes a year). My subsequent estimates show a
loss of 1.2% of GDP in the 12 months following demonetization. On the
positive side I had predicted an increase in income tax compliance,
which seems to be happening (as per limited data available). The effect
on black money in real estate and elsewhere did take place, but seems to
have been less permanent.
Q6: There is common perception that departures of foreign' economic
advisers (Raghuram Rajan, Arvind Panagariya and Arvind Subramanian)
underline the Modi administration's rejection of free trade and open
market approaches to policy in favor of protecting domestic industries
and farmers. Your comments.
A6:
Since I retired from the post of Chief Economic Advisor at the end of
2009, my successors as CEA (Kaushik Basu, RaghuRam Rajan and Arvind
Subramanian) have all returned to jobs abroad, after completing their
Indian tenure. The same happened in the case of Arvind Panagriya of
NIti. In my judgement this is not primarily due to any disagreement on
free trade and open markets, which is indeed one of the weak points of
the current Govt (I have argued for trade reform in the, Bibek Debroy
edited, book, “India at 70, Modi @3.5 “ )
Q7: Recently Commerce Minister Suresh Prabhu had said that 40 per
cent of India's GDP will come from exports by 2025, and India's economy
will be a USD 5 trillion economy 2025. At present, exports constitute
only 18 per cent of USD 2.6 trillion GDP. Do you agree with Prabhu?
A7:
An open economy is one of the drivers of growth in a connected and
liberal world, which is why I have continuously argued for reform and
liberalization of EXIM policy(agriculture) and of import tariffs and
export duties. I continue to do so. However, given the anti- free trade
sentiments sweeping the world, we have to be a little more selective and
cautious in dealing with non-market, non democratic countries which
find it easy to follow non-transparent policies that harm our interests.
This poses a challenge for instance in concluding the RECEP agreement.