US-based economist Arvind Subramanian
was appointed the chief economic advisor (CEA) yesterday in a long-awaited decision. A former International Monetary Fund economist, Subramanian has advised the Indian government in various capacities earlier. He has also written about the macro challenges facing India and analysed the government's various measures.
In June this year, before the BJP-led government had presented its first Budget, he put out a ‘graded report card’ on the government’s reform initiatives since taking charge in mid-May. We decided to revisist Subramanian's opinion of the government and here is what India's new CEA had to say at the time about Prime Minister Modi’s initial measures.
India has been dogged by persistently high inflation, which has dissuaded the central bank from cutting interest rates, citing upside risks to food prices ahead. In a post for the Peterson Institute for International Economics, where he is a fellow, Subramanian termed the government’s various measures to tackle India's sticky inflation
as a step in the right direction. The move to increase the minimum support price of rice and pulses and asking states to liberalise the movement of fruits and vegetables will help moderate the rate of price increase, he said.
On the government’s decision to impose minimum export price for vegetables, Subramanian called for more basic reforms, but nevertheless said it should help tackle inflation, calling it 'not an unreasonable measure'. He gave both of these measures an ‘A’
Rollback of labour laws, which were initiated in Rajasthan, will help boost manufacturing output and employment, Subramanian said, and recommended a similar rollout in other states, giving the move an ‘A’. The government yesterday launched new labour schemes to end the so-called 'Inspector Raj' and increase transparency in the inspection process.
Nonperforming loans of the corporate sector
Subramanian said the move to extend forbearance on nonperforming loans of corporate sector was at best an ambiguous move.
"On the one hand, it gives time to address the problem of weak balance sheets, and the hope is that if growth picks up in the meantime, balance sheets will self-correct to some extent. On the other hand, this action delays and even fudges ("extend and pretend") the real adjustment that corporates have to make." This likely prompted the ‘B minus’ grade on this measure.
He added that a credible framework was needed to make this action effective. Given that A known ally of RBI governor Raghuram Rajan on policy reforms, it will be interesting to see how the two move forward on this issue.
Excise concessions for the automobile sector
Calling special handouts such as this problematic, Subramanian said the automobile sector had 'few claims for legitimate help' even though the state objective of such concessions is to push manufacturing and provide stimulus. Given that the automobile sector in India is fairly robust, such concessions precipitated a ‘C’ grade, which is considered a failing or borderline failing grade at most schools.
Sugar subsidies, increasing import duty on sugar
Calling this as an inefficient move made to appease the sugar lobbies in Maharashtra and UP, Subramanian said it would lead to water-intensive and water-wasting resource allocation, which is bad for the medium term, especially since 2014 was considered a drought year. No wonder, then, that he gave it a resounding ‘D’.
Two other key measures were delayed – an increase in natural gas price and the phase-out of diesel subsidies – earning them a deferred grade, which is awarded when a student is unable to complete a test due to reasons beyond his/her control.
On the whole, Subramanian said at the time that government had made a good start, but also ended up criticising some of its measures, including Finance Minister Arun Jaitley's budget for undue optimism on revenue estimates.
The challenge before him as CEA now will be not to only to advise on, influence and help frame policy but also to defend the policies and actions of the government, some of which he has opposed earlier, such as India’s stand at the World Trade Organization (WTO).