De-regulation can be pursued independently by State, Centre: CEA Nageswaran

The central theme in the Economic Survey is de-regulation. A key issue is numerous regulations both at the central as well as the State level. What is the mechanism to proceed further?

It will be difficult to spell out a precise mechanism. That can be discussed later in policy circles. But these are steps that can be pursued independently by State governments as also by the Centre with respect to areas that they are responsible for. It doesn’t necessarily have to be a combined mechanism. There can be separate mechanisms.

There is a certain disconnect between the wage growth and the profitability of the corporates. When you nudge the corporates to increase wages, isn’t that against the principle of de-regulation?

No, no! Who said we should nudge them in a true policy intervention and force them to do it. Nobody is recommending that that there should be a policy nudge all the time.

How can it be done then?

It is in the natural self-interest of the corporates because that is what will give them more demand visibility. Economics tells you that private sector, which consists of households and businesses, is a closed loop in an endogenous system. Public policy, which is fiscal policy and external demand, are exogenous by nature, and therefore these two agencies within the private sector can mutually reinforce each other, either positively or negatively. And if private sector were to re-examine its post-covid hiring and compensation practices, that can itself result in enhanced demand visibility, giving them a good rationale for undertaking investments. That itself can set off a virtuous cycle of employment, income, growth, spending investments and so on.

The midpoint of the growth range which you have given is 6.55%. And if I compare with the midpoint range of 6.75, which you projected in the 23-24 Economic Survey, there seems to be some deceleration.  Isn’t this going to impact the roadmap towards Viksit Bharat which is to be achieved by 2047?

You are splitting hairs here as they say. My 6.55 per cent can be also taken as an improvement over the 6.4 per cent which has been given in the first advance estimate for FY25. I think 10-20 basis point that way is the equivalent of splitting hairs. The point is, we are at this stage in the absence of global tailwinds where growth prospects are somewhat muted. And that’s the point. Whether it is 6.4-6.5-6.7 per cent, it doesn’t really matter. You may think that it is going to come in the way of our development aspirations. But we are looking at a growth rate of 7.5-8 per cent to achieve that kind of number. That may not necessarily happen every year. There could be years in which we may grow well above 8 per cent. There could be years in which we grow less than that. And right now, the context in which we are attempting to grow has changed. And that context is geopolitics, geoeconomics which are much more uncertain.

The tailwinds that we used to enjoy from exports and investments in the first decade (of the century) are not there at the moment. Once these conditions change and stabilise, then naturally export prospects will improve. In the meantime, let’s get our internal processes and production, productivity, capabilities, R&D, etc in shape and when the external environment changes, then we can take advantage of it and be able to grow at a faster rate.

You have also talked about financial regulation impact assessment. What exactly does it mean?

Financial regulations impact assessment is exactly what it means. Assessing the impact of the regulations. Have they boosted stability and if so, what is the growth sacrifice that we paid for it? And is the sacrifice ratio worth it? In which case we continue. Otherwise, we take a break, we tweak it. So, it’s all about assessing the impact or the social consequences, the economic consequences, the costs and the benefits. And assessing if the trade-off has been worth it. Are we conscious about the trade-off, or were the consequences different from what we anticipated?

And in which case do we need to revisit it, revisit the assumptions and thought process. And what exactly are we trying to control, which risk, and in which section? What is the proportion in terms of the economy that is impacting. Can it be done in a selective manner? All these questions are almost like a checklist which we need to have in terms of the regulatory impact that may apply very well in the case of financial and non-financial sectors except that in the case of the financial sector, it gets transmitted to other sectors of the economy through the financing channel.

That is why I think the obligation on the part of financial regulators to be able to undertake impact assessment is more than it is for non-financial regulators whose impact is confined to their specific sectors.

The Survey is saying that inflation is under control. But one concern is regarding the depreciation in rupee. There is some fear about imported inflation. How big is this concern?

These are the questions that need to be answered empirically, that is, we have to go back and look at episodes of rupee depreciation, at the magnitude and the duration, and then see what happened to the imported prices, and therefore what happened to domestic inflation rates and also examine the context in which such transmission happened. Then we ask ourselves whether that context exists today or not.

And if that is so, we can come to some kind of an estimation of what it would mean for domestic prices. Without that, this is purely a conceptual or a theoretical concern which can be expressed for any country, not just for India. That the falling rupee going to boost the cost of imports, feeding into domestic prices is a theoretical statement that one can make. But the answer is actually in the data, in terms of the previous episodes, and what contribution they made, and whether the same context prevails here or not. So, for example, right now. energy, crude oil prices have come down, they’re remaining stable. They were not at the beginning of the year.

If you go to the website of the petroleum planning and analysis cell, you see the landed cost of crude from the Indian angle. In April 2024, it was $84. Now it is down to mid-seventies. So, there has been a decline of more than 10 per cent in the landed cost of crude. And therefore, if a rupee depreciation of 2, 3 percentage or 4 percentage point happens, it need not necessarily result in higher inflation.

The Survey mentioned that agriculture is going to be the sector of future. But there is no political consensus for reforms in the farm sector as we saw in the case of the three farm Bills. How can this sector grow?

Look, the path lies in analysing services allied to agriculture have been growing and whether some of those practices can be replicated in food, grains, and crops, etc. Sometimes, political economy may take longer for some of these reforms to happen but that has not really stopped Indian agriculture sector developing an export prospect of close to $50 billion in the last few years.

In that sense, and even without that, several state governments are also nudging their farmers into diversifying into different crops. I think it is possible even without big bang reforms. I am not saying that big bang reforms are not necessary. I’m saying we don’t have to wait until these reforms happen to realise the growth potential in agriculture.

State governments can encourage land pooling. Some of them are encouraging contract forming. Many States are also undertaking micro irrigation, projects, etc. And micro irrigation in the country has grown more than 3x in terms of the acreage that is covered, etc. These are all the ways in which we can extract more growth out of agriculture. If and when more farmer empowerment happens, and in terms of policies allowing them to sell at whatever prices, to whomsoever whichever market, without restrictions and without policy interventions, then the ability to extract more value addition on agriculture will only go up. Before that, there are many other incremental steps that can be taken.