 "Krishnamurthy Subramanian")
Just a day before the Union Budget 2019-20, Chief Economic Advisor Krishnamurthy Subramanian said asset monetisation and disinvestment were expected to make up for the expected shortfall in revenue. Subramanian, after presenting the Economic Survey 2018-19, told Arup Roychoudhury and Somesh Jha the topics not covered in the Survey, like banking sector reforms, would find place in the next Economic Survey seven months from now. Excerpts:
The Survey states the fiscal consolidation road map needs to be adhered to. But we also have a massive shortfall in direct and indirect taxes.
Money has no colour. What I am saying is that non-tax revenues have the potential to expand and make up for the revenue shortfall. Our public sector undertakings are sitting on large pools of land, which can be monetised. This is also an opportunity for greater returns from divestment. To be classified as a state-owned firm, instead of looking at the government retaining 51 per cent, you can perhaps look at 40 per cent of the government and 11 per cent by LIC. That will get in more capital receipts. Divestment is expected to fill in some of the gaps in tax revenue. We have to adhere to the fiscal glidepath.
The main plank of your Survey is that investments will lead to more growth and, in turn, job creation. Where will the investment come from, given the under-utilisation of capacity and slowdown in private consumption?
When we wrote this chapter, we had the choice of trying to get into each of these details or focus on conveying the big picture message of moving to 8 per cent growth. We had the answers to these questions but we wanted to stay focused on the Survey. Let me answer a couple of important things. Some overhang from the previous period has unwound completely, banks have cleaned up their balance sheets, and credit to large firms has started going up. There is also an important opportunity we have not tapped enough. If you look at the global environment, in terms of liquidity, surplus and interest rates, it is as benign as it ever was. There is a lot of flush liquidity. If the economy is growing at 8 per cent, this money will find it profitable to invest in such opportunities. We have to rely on some foreign savings. They can come in and create investment and once that starts, it will be the beginning of the virtuous cycle of productivity, jobs, and demand. And, people have asked me questions on jobs, exports, and investments — in silos. These are complementary to the macroeconomic formula. The other key departure we have made is that economists love to think of equilibrium whereas the eastern Asian economies, including China, went on a virtuous cycle. And we are saying “double down on investments” and as long as that happens, other things will come through.
The Survey gives banking reforms, which you have been talking about since assuming office, a miss, and it offers no solution to the NBFC (non-banking financial company) crisis. Any reason?
We will write another Survey in six months — January 2020 for the Budget. So, we had to make the choice. This is a Survey for a new government that will have five years to implement policy.
But don’t we have to immediately address the NBFC crisis?
On the NBFC crisis, we have to ensure we don’t perpetuate a situation of private profits and public losses. We have to take cognizance of the moral hazard that comes from it. People use the global financial crisis as an example but that was a one-off case. And there too, the US government made money. We cannot use that as an example. Instead, we have to think about structural issues, especially the asset-liability mismatch in NBFCs. If you look at the short-term money they raise, the ratings in almost 95 per cent of commercial papers is L1 plus. This means there isn’t any distinction between these firms. Their long-term ratings are substantially different and this creates an incentive for the asset-liability mismatch. We need to fix structural problems.
You have spoken about the need to access foreign capital, perhaps through instruments such as sovereign bonds. Are India’s macroeconomic indicators strong enough to issue such bonds?
We have had average growth at 7 per cent, and inflation is low and stable. These are the components of macro-economic stability. We are following the path of fiscal consolidation and should look at opportunities that are there for us. You look at the US, Japan, Europe — the cost of capital is so low. If our economy grows at 8 per cent, and the other global economies don’t, it would be a real opportunity to take overseas debt.
Is further liberalisation of foreign direct investment on the cards?
If you are growing at around 7 per cent, foreign money will want to come in. Liberalising FDI further is one aspect we can think about.
Do you think flashpoints like US-Iran or US-China will cause headwinds to your growth forecast of 7 per cent for the current fiscal year?
Some of these are important factors we have accounted for. These tensions affect our current account deficit, but given the FDI flows and more policy certainty, I would not be that concerned on the macro front, especially on the current account deficit.
You have used the term ‘dwarf’ to define older MSMEs. Are a large number of dwarf firms mainly a consequence of rigid policy or because they have misused the policy incentives for too long?
When we create policies we have to recognize those policies are being created for humans. If we have policies which says you won’t get certain benefits if you go above 100 employees, so what it does is incentivize people to stay small, say below 95. We need to tell our MSMEs that when you grow, you are the first beneficiary of that, you create productivity and contribute to national prosperity more. Let’s unshackle these MSMEs and let them grow.
You talked about adopting labour law reforms initiated by the Rajasthan government and how it has helped them in growth and job creation. But a study by the VV Giri National Labour Institute they didn’t find any such evidence...
We have done a proper analysis based on the ASI data. We have employed a careful methodology and found that the measures have indeed helped.
You have advocated a simple national minimum wage system but have also suggested various categories based on skill sets and geographies. Will it not create a complex system?
It is far better than 2,000-odd minimum wages prevalent in the country.
