GDP likely to grow at around 7% in FY20: CEA Krishnamurthy Subramanian

The government should work on the three factors of production, which are capital, land and labour, says CEA Subramanian

Chief Economic Advisor Krishnamurthy Subramanian, busy in preparing the Economic Survey, projects India’s gross domestic product (GDP) growth for 2019-20 to be around 7 per cent. In an interview to Arup Roychoudhury & Indivjal Dhasmana, he says the next government should focus on capital, labour and land reforms, and that the debate on the accuracy of the official data is misinformed. Edited excerpts:

There has been a lot of talk about a slowdown in consumption, rural wages and private investment. What is your take?

A significant decline in private investment till last year was because of two reasons: building up of capacity and excessive leverage because of the twin balance sheet issue. That happened over a period of six to seven years. Unwinding that has taken its time. When corporates were doing that, investment could not happen as much. In a complex economy like ours, the effects are felt with a lag. The current situation is an overhang of that. A good part of that unwinding has already happened. If you look at capacity utilisation, averages are now getting close to 74-76 per cent in some sectors. There is an important change because of the Bankruptcy Code, as it alters the way investment gets done. What one can say is that there have been important structural reforms. One will have to wait for the benefits to start showing. Hence, I am not as pessimistic as some of the narratives.

How do you explain the slowdown in rural wages and consumption?

An economy is a sum of several parts, and the whole itself is different from the sum of parts. I like being a little bit careful when I am looking at three to four parts. I would focus on the fact that there have been important steps taken to reduce cronyism in the economy. Let’s recognise that cronyism impacts the economy. I look at the long run. There is the effect of lowering of investment. But we will get over this phase.

How many quarters this slowdown is expected to last?

I tend to be very careful about such crystal ball gazing. I still maintain my 7 per cent or thereabouts projection of GDP growth for this year. Given some of the narratives that you are talking about, 7 per cent is pretty healthy. It is also a healthy base for clocking better growth once the full effects of structural reforms start showing. I do expect things to get better. Another point I would like to make is that the world over, whenever there is an electoral cycle, it brings uncertainty, and people adopt a wait-and-watch mode. Once that uncertainty dissipates, you will see activity picking up.

What can the government do to boost the economy?

I will focus on the long term again. The government should work on the three factors of production, which are capital, land and labour. We need to be working on long-term competitiveness, and these three factors become important in that context. The real cost of capital, which is high, needs to come down. My emphasis would be a lot more on credit spread. We have to work on reducing the cost of acquiring land, both directly and indirectly.

Are we headed towards a liquidity crisis, given what has happened in the NBFC sector?

What a lot of market participants call liquidity is actually related to solvency. You have NBFCs which have long-dated assets and their liabilities are short term, which they roll over. Whenever you have this asset-liability mismatch and the going is good, there is no problem. Whenever the situation becomes tough, the rolling over of liabilities becomes more difficult. What is important is to monitor the mismatches very carefully so that there is monitoring of liquidity.

Questions have been raised again on the GDP data since an official report said a number of companies under the MCA 21 database could not be traced.

On the employment data as well as the GDP data, I have a few points to make. Having been in the government for four months now and having looked at a number of touchpoints, I can say that in a democracy like ours, it is very hard to develop a narrative that is different from the truth. There is this NSSO (National Sample Survey Office) survey of the services sector. They have taken the sample frame from MCA 21 and then have gone and checked. It is a survey of services, not of the economy. There may be firms found to be not in services but they definitely count in the economy. Therefore, we have to careful in comparing apples and oranges. The blow-up factor, which is used to account for those companies which have not given the data, is only 12-15 per cent. It is not a large number. Secondly, this affects only the level of GDP. Growth rate is about change. Even if there is a slight overestimation or underestimation of the level of GDP, it does not necessarily translate into the growth rate. 

On the job data as well, the narrative of unemployment being at its highest in decades is misinformed. You have the unemployment survey and periodic labour force survey. The sampling procedure in the former was based on household expenditure. In the labour force survey, the sampling was based on level of education, particularly individuals who have passed class 10. About 75 per cent households have at least one individual who has passed class 10. If somebody has passed class 10 that individual will not go and work as a daily wage labourer. If you look at the Census, and at the number of households which has at least one person who has passed class 10, the unemployment rate will be higher. If you put a 75 per cent weight on a higher number and a 25 per cent weight on a lower number, you will indeed get a higher number. But that has nothing to do with fundamentals. It is just about sampling.