We should not take our eyes off IBC, says CEA Arvind Subramanian

In MSP increases, the distributional benefits and the macro economic consequences are directly correlated, said CEA

After helping the government in policymaking since October 2014, Chief Economic Adviser Arvind Subramanian is returning to academics and will be teaching at Harvard Kennedy School on a visiting position. In an interview to Dilasha Seth and Somesh Jha, he says the ease of doing business agenda needs to move forward and India must try to integrate with the global value chains. Edited excerpts.

Given the state of the current economy, what will be your top three recommendations to the government?

The first will be to finish the ongoing agenda, of which a lot is left to be done. Second, privatise Air India. Third, stabilise the goods and services tax (GST). And fourth, maintain macro stability because it is a very uncertain environment. The stabilisation of GST revenues is a good signal, but exports refund and simplification are a work in progress.

What is your opinion on the new five-point agenda for bad loan resolution in public sector banks?

I don’t fully understand what this five-point programme is, because there are issues on how it fits in with the Insolvency and Bankruptcy Code (IBC) process. Also, it’s not clear where all the money will come from to capitalise the alternative investment funds. I do not know how these things are going to be worked out and how the regulator is going to look at it.

Do you think the IBC is the best process?

Yes. My view is that the IBC is a landmark achievement because for the first time we have established a legal framework that can make the exit process smooth. When I proposed the bad bank idea, I did not recognise how serious the issue of stigmatised capitalism was. So the judicial process seems to be the only game in town in terms of public legitimacy and public trust. Therefore, the IBC is a better process than the bad bank and we should not take our eyes off it. However, the question we need to ask is whether the IBC should be the only game in town, or the exclusive game in town. One possible answer to that question is that the IBC process is getting clogged and burdened, and should we find ways of relieving that?

What is your take on LIC buying IDBI Bank?

It is certainly not private sector participation. I think stigmatised capitalism has had, is having and will continue to have consequences. We will get more participation from the private sector only in the case of new assets. In the case of existing assets, getting private sector participation is going to be very difficult. The LIC deal proves that. The Air India disinvestment issue is another manifestation of that.

What’s your view on bank mergers?

There is no point in merging bad with bad or bad with good. The Reserve Bank of India has done a good job with the Prompt Corrective Action (PCA) framework.

How would you rate the economy and governance? How has this government performed on two critical areas — jobs and exports?

On jobs, there is a genuine lack of data to make any assessment. I really don’t know the answer to that question till the National Sample Survey Office (NSSO) comes up with the next survey by the end of this year or early next year. I don’t understand the numbers that are being thrown around. What we did in the Economic Survey are the only numbers I understand. What was new and surprising to me was that the stock of formal sector jobs was much higher than what I had thought. Three sectors did quite well in the past — agriculture, construction and information technology. Those sectors are not doing well now. The jobs challenge is a very real one and it remains. We probably should be creating many more formal sector jobs. The bright spot, however, is that there has been accelerated formalisation of jobs in the last few years.

What about exports? If exports don’t grow, what does it mean for the overall growth scenario?

Unless we get 15 per cent exports growth, getting to 8-9 per cent economic growth will be difficult. Export performance hasn’t been as good as it should have been. Manufacturing exports to GDP has declined. It is partly due to a weaker world economy. Since about January 2014, the currency has appreciated by 20 per cent in real terms. I think that the hope of making the Indian economy globally competitive, especially under conditions when the exchange rate is losing competitiveness and against an international environment of slower growth and tariff barriers going up, is going to be a major challenge for the Indian economy. How do we address that? I think that the whole ease of doing business agenda needs to move forward and India must try to integrate with the global value chains.

Is slowdown in foreign direct investment a concern?

With the interest rates changing in favour of the US and growth coming back, some of it is bound to happen. Capital flows are going to re-accumulate away from emerging markets as a class and you are going to see a slowdown. We should be able to distinguish ourselves as an economy that has much more exciting prospects for FDI. We are also in an election year so there are going to be more heightened questions about where the economy is headed.

You have taken a stance against protectionism in your Economic Surveys. With the global trade war on, sparked by the US, should India retaliate, like it seems to be attempting?

One thing is that we do pure retaliation within the WTO framework. But the bigger issue is that we raised tariffs more broadly in this year’s Budget. That is where we need to be much more careful because if you believe that we want to become globally competitive and become part of global value chains, those actions are not going to help us. We would lose out on global opportunities. On the other hand, if globally, people are repudiating globalisation and openness, it becomes easier for some people in India to demand protectionism. I worry more about that.

MSP has been raised on 13 crops.  Is this increase an adequate response to the agriculture challenge? What impact will it have on inflation?

I think in these MSP increases, the distributional benefits and the macro economic consequences are directly correlated. The more successful we are in the procurement part of it, the more will be the benefit to farmers and therefore greater will be the fiscal cost and inflation. It is a natural adjustment mechanism. We know that the pie is being shifted, so the more effective is the benefit, the higher the cost. We have to wait and see as the government hasn’t announcement the mechanism, whether it is going to be procurement or deficiency payment or anything else.

What do you think about the direct tax law? What are the big ideas that you have brought on the table in the committee that is revamping the direct tax law?

I don’t want to pre-judge it, as the Arbind Modi committee is going to come up with a report soon. Let me share my perspective. There are two or three learnings in the last two years. The first is the huge premium on simplicity and lower rates. The way forward is lower rates and broadbasing. Second, lwer corporate tax rates are now necessitated by global corporate rates, especially the US tax slab. And remember we have to attract capital with many other disadvantages – difficult procedures, ease of doing business, etc. But the third point you can’t have a system in India where rich people is perceived to be not paying taxes. So you need simplicity and sharp progressivity. The discussion should be on how to achieve that progressivity.

What about increasing the tax slabs in personal income tax?

I will die in the ditch for this. That threshold should never be raised. We want India to become a nation of taxpayers. One way to do is to crack the whip and get more but that has cost. The other way is as natural incomes grow, by doing nothing, people come under tax slabs. By moving the tax slabs up, you undermine your own objective. So the best way and politically easy way to get more taxpayers is inaction and not to raise any tax slabs.

How advisable is the decision to change the base year of GDP calculation again?

Base year changes have to take place. Remember, in most advanced countries, you have chain-weighting so that base gets changed every year. Changing the base year every five years should be the minimum you have to do as it will make everything consistent with the present reality. That’s separate from giving a back-series that reassures people about the methodology. We should have back series as a natural way of doing it but ideally the base year has to change.

What has been the most disappointing phase in your tenure? Is it demonetisation when your views were not taken on board?

Any job like this is going to have highs and lows. If it doesn’t, then it means you didn’t have an eventful and a productive tenure. The ratio of highs-to-lows has been extraordinarily positive. Sometimes you just have to accept that politicians have to do what they have to do.  You can’t second-guess their choices up to a point. There are some things you should try and resist internally and some you have to accept. In that sense, you have to accept some of them.

What are the ideas that you would have liked to present in your next Economic Survey?

There are four ideas or topics the world will not get to see. One is, computing purchasing power parities for the Indian states (like the Penn World Tables does internationally) so that incomes across states and standards of living can be truly comparable; Second, I would have liked to calculate employment flows based on EPFO/ESIC data. Third, or the first time in India I would have liked to come out with preliminary estimates for GDP national and state-wise and district-wise GSDP from the demand side based on GST data. Lastly, there would have been a chapter on trade wars and currency wars and the impact on India

Your predecessors went back to academics. What is your next port of call?

I am going to the Harvard Kennedy School on a visiting position next year. I will also be a Non-Resident Senior Fellow at the Peterson Institute for International Economics. The choice of location at Boston is completely dictated by the grandchild-to-come because my son and daughter-in-law live in Boston. The point is that I am going back to a life, like my illustrious predecessors, of teaching and researching, apart from some serious babysitting.

You seem to be more at peace with the political class now than what you were earlier. For example, you talked about NCLT being a better idea than bad bank, which was your pet idea.

There used to be a famous expression – a neoconservative is a liberal who’s been mugged by reality. So I think I have also been mugged by reality. On the bad bank versus NCLT, I think it’s a kind of genuine learning from the fact that how deep stigmatised capitalism is and (NCLT is) the only realistic solution going forward. On the Universal Basic Income, I am going to say that it has become a part of the discourse. There are trailblazing experiments like Telangana. I had a great discussion with (Bihar Chief Minister) Nitish Kumar who is totally sold on this idea of the direct benefit transfer. I think this idea will catch on more going forward. I will view this as a legacy of the CEA in the Economic Survey.