New Delhi: The rhetoric over import substitution does not bode well for economic growth, said former Niti Aayog vice-chairman Arvind Panagariya, pointing out that policy actions over the last three years have turned the clock back on trade liberalisation.
In an email interview to ThePrint days before the Union Budget, Panagariya, a professor of economics and the Jagdish Bhagwati Professor of Indian Political Economy at Columbia University, also said an increased fiscal deficit could hurt rather than help economic recovery.
He advocated an aggressive programme of privatisation and asset monetisation, besides implementing structural reforms, and forecast that the economy could grow at a “steady 7 to 8 per cent” beginning 2021-22.
Panagariya added that the current policies fall short of helping India take advantage of the opportunities afforded by the US-China trade war and batted for policy stability to attract foreign investments. Edited excerpts:
What are the challenges facing Finance Minister Nirmala Sitharaman in her budget?
Arvind Panagariya: Creating jobs that pay decent wages and sustaining 8 per cent-plus growth are the two key long-term challenges for any government at the helm in India. Achieving these objectives requires numerous long-term reforms, into which I need not go here.
Immediately, the finance minister’s challenge will be to raise expenditures on defence and infrastructure in the face of tepid growth in tax revenue and yet adhere to fiscal discipline. I think going for aggressive programmes of privatisation and asset monetisation offers a way out of the conundrum.
The two measures would not only raise much-needed revenues but also add to the long-term growth potential of the economy.
Is fiscal consolidation the right answer at a time that growth is expected to fall to an 11-year low of 5 per cent?
While there is merit in the argument that further compression in fiscal deficit can wait until the next year, it will be imprudent to let the deficit rise. The reasons are not so hard to appreciate.
Fiscal consolidation has been a hard-fought achievement of the government. But more importantly, even conservatively estimated, combined deficit of the public sector — the central government plus states plus off-budget borrowing — is already 8 per cent of the GDP. This is almost equal to the total household financial savings in India.
If the government were to borrow even more, it would end up starving more productive private investors of investible funds. Seen this way, increased fiscal deficit by the government would hurt, not help, growth recovery.
What steps do you propose to arrest the deceleration in growth?
The problem is largely rooted in the dislocation of the financial markets. The government has taken many steps to address this problem, including, most notably, recapitalisation of banks to the tune of Rs 2.1 trillion over the past three years.
It has also promoted effective use of the Insolvency and Bankruptcy Code (IPC) process to address the NPA (non-performing assets) problem of banks. Perhaps some more could be done to improve the health of NBFCs (non-banking financial companies).
But beyond that, my advice is to be patient and stay course on structural reforms. We have been here before: the current slowdown is the third such slowdown since the 1991 reforms. The first slowdown was from 2000-01 to 2002-03 and the second from 2011-12 to 2013-14.
During each slowdown, we have witnessed media commentary predicting doom, only for it to be forgotten once growth recovered. My expectation is that we will see a small turnaround in the second half of the current fiscal and more significant recovery in 2020-21. A steady growth of 7 to 8 per cent will return beginning in 2021-22.
Do you think India has missed the bus and failed to capitalise on the fallout from the US-China trade war?
Not really. This being said, it must be pointed out that our current policies fall well short of taking advantage of the opportunities available to us.
It is not just the US-China trade conflict that offers us the opportunity to capture world markets on a larger scale. High wages, shrinking labour force and decelerating growth rate in China are also an important factor. On the latter count, the window will remain open much longer, possibly a whole decade. The real question is whether India or some other countries will take advantage of it.
Are foreign investors questioning the credibility of India’s data given the doubts cast of late on methodologies as well as ‘suppression of data’?
I certainly do not see any of that in the behaviour of foreign investors. Even during the first half of 2019-20, when growth took a major hit, foreign investment saw a 15 per cent rise over the corresponding period in 2018-19.
In my own interactions with foreign investors, I find them quite savvy. On balance, they exhibit a much better understanding of how Indian data are gathered than Indian media, which lives in its own echo chamber.
I am yet to come across a single critic who has pinpointed implementable changes to the existing methodology that would significantly improve the quality of our statistics.
By ‘suppression of data’, I assume you are referring to the government’s decision not to release the 2017-18 expenditure survey, perhaps because the survey had shown a decline in real per-capita expenditure over that in the 2011-12 survey. I doubt that foreign investors would have paid any attention to that.
This being said, my personal view is that the government should release the survey so that researchers can figure out why it has shown a decline in per-capita expenditure.
Such investigations will help improve future surveys. The government need not fear any political fallout since no serious economist worth her salt would believe that per-capita expenditure in 2017-18 was lower than that in 2011-12.
Does India remain a preferred destination for foreign investors? How do they perceive some of the recent statements made by the ruling establishment — more specifically made in the context of Amazon CEO Jeff Bezos’s $1 billion announcement? Do they fear rising protectionism in India?
This is definitely an area in which we need greater caution, both in terms of what our policymakers say, and the actions we take.
Our policy actions in the last three years have turned the clock back on trade liberalisation. The rhetoric over import substitution (exclusion of imports to replace them by domestic production), a policy we abandoned in 1991 and stayed course on until recently, has also been disconcerting.
This may not have a major impact on foreign investors, who may themselves choose to go into protected sectors. Automobile sector, which has had more than 100 per cent tariff protection since 1991, is a case in point.
But this does not bode well for our economic growth. I know no nation that has successfully transformed on the back of import substitution.
This was also the single-most important policy that denied any measure of prosperity to my generation of Indians for the better part of their lives. We all grew up trying to write with fountain pens that were mostly fountains rather than pens.
According to you, does India need to take more steps to roll out the red carpet to foreign investors?
I think we need a lot more policy stability. Frequent changes in policies, especially retrospective changes that render profitable investments unprofitable, can have a chilling effect on future investments by both foreign and domestic investors.
As regards further liberalisation of foreign investment, we have come quite a long way in this area, with each successive government since 1991 making its contribution. Some scope for further liberalisation in areas such as defence and media remains.
The Modi government worked hard to distance itself from the label of being a “suit-boot ki sarkar”. Do you think it has alienated businesses from the government?
Thankfully, the effect of the “suit-boot ki sarkar” label is now well behind us. If it had still been with us, the government would not have had the courage to knock down the effective corporate profit tax to just 17 per cent for new manufacturing firms and 25 per cent for others.
The origin of current complaints from the business community is the government’s anti-corruption campaign. Here, I endorse the government’s basic motivation and sentiment. This is the first time that an Indian government has taken the fight against corruption head on rather than look the other way.
This being said, the government does need to start punishing its officers who are using the campaign as a cover to amass personal wealth at an even faster pace and in larger volumes than in the past.