We are trying to give structure to govt inputs to RBI: Arvind Subramanian

Interview with chief economic adviser

Chief Economic Adviser Arvind Subramanian says the government needs a simple fiscal policy, and that his recommendations in a dissent note to the Fiscal Responsibility and Budget Management (FRBM) committee were simpler and more realistic than what the panel had provided. In an extensive interaction with Arup Roychoudhury and Nivedita Mookerji, Subramanian also says the goods and services tax (GST) rate structure should be made simpler over the coming years. He also wants India not to become protectionist in response to similar measures by other countries. Edited excerpts:

You have been the chief economic adviser for almost three years in the Modi government. What have been its major economic achievements?

There have been some big achievements. The first major achievement is macro-economic stability, as everything feeds off that. Our macro-economic situation is very robust and provides foundation for inflation below three per cent. The central government’s fiscal deficit is on a steady downward path. The current account situation is comfortable, and foreign reserves are high. Second, in terms of investment opportunities, India is among the fastest (growing) large economies. Then, there are policy initiatives. The GST is a transformative policy; the Jan Dhan-Aadhaar mobile push is huge; there has been FDI liberalisation. There are a series of legislative reforms like the bankruptcy code and the monetary policy committee. Not to forget the sense that the government is clean, and auctions of public assets are being conducted in a transparent manner. That is what attracts investors.

The challenges that we face are non-performing assets and the twin-balance sheet problem. Then there is the problem of job creation and employment. It is easier to diagnose the problem than to know what to do about it.

What more can the government do to create jobs?

As to what can be done about it, you aim for double-digit growth and you attract more investment. That will help in creating jobs. I think the government is very keenly aware of the fact that jobs have to be created. Another way to do that is helping selected sectors like clothing, textiles and footwear. If you remember, in the boom years, construction, agriculture and IT were the sectors which did well. Those are the sectors that the focus should be on, again.

What are the differences between what the FRBM panel, of which you are a member, has suggested, and your own recommendations which were part of a dissent note?

There are some fundamental differences between what the committee has recommended and what I have written in my dissent note. The panel’s objective is to reduce the Centre and states’ combined debt-GDP ratio to 60 per cent, while I suggest a declining trajectory with no end-target. In terms of operational targets, they suggest two – fiscal deficit and revenue deficit. I say one – primary deficit. They suggest a serpentine path to achieve those targets, while I suggest a gradual reduction and I say no revenue deficit. They say only if growth goes up or down by three per cent should escape clauses be triggered. I say, that is too extreme. I have suggested a more realistic 1.5 per cent change.

Why do you think your recommendations are more realistic than what the panel has suggested?

You have to learn from experience. And, the FRBM panel’s recommendations do not reflect the lessons from previous slowdowns, including the post-Lehman crisis. The 60 per cent debt-GDP target has no basis. We say we have to do it because rating agencies ask for it. Remember that fiscal stability is about the political will to meet your obligations. So, more and more we are realising that these hard and fast numbers like 2.5 and 60 are arbitrary. The fiscal deficit target in the existing FRBM Act, of three per cent, was not arbitrary. It was consistent with a 60 per cent debt-GDP ratio. The panel’s end target of 2.5 per cent is not consistent with that. It does not follow from the 60 per cent target. We should aim for a simple architecture. Multiple targets do not achieve that. Revenue deficit has also been given as one of the targets by the panel. That serves no purpose.

Yet, fiscal deficit and the debt-GDP ratio are key fiscal health indicators which rating agencies look at.

There is an overhang among policymakers on what the rating agencies look at. The FRBM panel was an opportunity for us to bring in new thinking and not be slavish to what rating agencies want. That is how you gain credibility. In normal discourse, people may not be familiar with primary deficit, but rating agencies are. If your target is debt, your conceptual operative target should be primary deficit.

Do you think that when the government finally comes out with a new fiscal responsibility bill, your recommendations will also find space?

A part of my suggestions has already been accepted. When it comes to the 2017-18 fiscal deficit target, the FRBM panel had said three per cent. I had said 3.2 per cent, since that would be a steady glide path. That has already been reflected in the budget.

There is also your recent criticism about rating agencies, that they seem to have different parameters for India and China. What can be done about such a situation?

We evaluate everything else; we should also, maybe, evaluate rating agencies and see how they have done. Maybe someone needs to rate the rating agencies. Maybe government should rate these agencies. Also there needs to be more competition. There should be more rating agencies, foreign and domestic. By the way, today I am vindicated. They (Moody’s) have downgraded China. I do think that all the fuss that we made about India and China registered somewhere.

There is this group within the finance ministry consisting of you, Economic Affairs Secretary Shaktikanta Das and Principal Economic Advisor Sanjeev Sanyal. You will be meeting the members of MPC to present your views on whether there should be a rate cut or not. Is that not interference in MPC’s functioning?

The Act very clearly says the government should be allowed to provide inputs to the monetary policy committee. This group is just consistent with that. Under the previous governor there was no MPC. Here we, this set-up, are trying to give structure to government inputs to the MPC. This three-member panel is doing that. Remember, these are inputs, we don’t pressurize them. They are free to take our views into consideration or not. We will meet them before monetary policy meetings to present our opinions.

How do you think GST will impact inflation? Are you concerned that the rate structure is more complicated than originally envisaged?

I am very pleased by the fact that incidence is going to be lower. There will be significant compliance gains. In fact, there should be no inflation concern at all. If anything there should be a slight coming down of headline inflation. The GST is less complex than the current system in place. It is still more complex than it should be, no question about that. I think that if we can, on an ongoing basis, keep chipping away at the complexity, that would be a good way forward. If it remains complex, then that is a problem. There should also be an ongoing continuous review to bring health, education and petroleum into the GST fold.

What do you think India’s response should be to global protectionism?

We have to grow at 10 per cent to be able to have an impact on these issues. So, if some country imposes measures against us, we should be able to prevent that from happening. Second, we should see what is good for us. For example, if there are more restrictions to H1B, we should adapt accordingly. What we should not do is become protectionist just because others are becoming protectionist. Our actions should be dependent upon what is good for us. We should use our growing markets to bring down protectionism elsewhere.