Macro Economy

90% of our bad export story is domestic challenges, 10 per cent is external environment: Economist Surjit Bhalla

Richa Mishra New Delhi | Updated on November 03, 2019 Published on November 03, 2019

Economist Surjit S Bhalla




“Join the Regional Comprehensive Economic Partnership (RCEP), but do not ignore your internal market and demand. Ninety per cent of our bad export story is domestic challenges, 10 per cent is external environment or external policy,” says Economist Surjit S Bhalla. Seventy-one-year old Bhalla has a tough task ahead — to make New Delhi’s voice louder at the international forums as he is set to take charge as the Executive Director for India on the board of the International Monetary Fund (IMF) shortly. BusinessLine caught up with Bhalla who recently submitted the report of the Committee on Trade and Policy – High Level Advisory Group (HLAG). The HLAG was headed by him. Excerpts:

Core numbers and other data show that we should be worried about our economy. Has this been factored in the report of the Committee on Trade and Policy -- High Level Advisory Group (HLAG)?

I believe that July-September quarter would represent the bottom in the economy. I am not in the camp that believes that there is a worldwide recession – based on inverted real curve. I believe inversion is more due to the fact that inflation is dead.

What the report does is outline both the macro and the micro economic areas of challenges and concern. When working on the report we came across shocking statistics in some areas. For example, financial exports — banking, finance etc — in 2018 were less in absolute dollar terms than agriculture exports were in 1980, when India was a poor economy, a food-dependent economy.

We should ask why the financial sector is closed. Also ask why agriculture has not seen reforms – ever. Actually, it is the only sector to have seen de-reform (financial export sector is just closed, like it has always been). Successive governments have imposed food price controls, export bans etc. The report does not believe there is much logic to these restrictions.

If you were to open up the agriculture sector and allow farmers to produce and sell what they want to and whom they want to, then may be there can be a case that distribution of farmers income will not be what is socially and politically desirable. But, we have technology that will ensure that farmers can be compensated – PM Kisan.

Food stamps were the original mechanism for direct benefit transfer, why did we not take the path? Sri Lanka took that path a century ago, and the US in the mid-sixties. Instead we took the path where we decided how much fertiliser we will sell to the farmer, what price the farmer will sell the produce, we buy and set up the Food Corporation of India which, in turn, sent it to the “poor”. Only, 50 per cent of the food sent by the FCI disappeared into thin air. This mechanism is still being defended. So the report asks us to think.

You say agriculture and financial sectors need attention. But, isn’t the government doing the needful?

Our cost of capital is the highest in the world. In the last four-five years of the economy, if you see, in 2014-15 we had a drought, 2015-16 we had a drought, which is only the fifth time in Indian history that we had two successive droughts. In the third year 2016-17 we seem to have had good agriculture year, but we had demonetisation.

All these three were supply shocks and introduced demand concerns as well as uncertainty in the economy. In the fourth year 2017-18 we had two very important economic reforms — GST and IBC — which everybody knew before the reforms were introduced that you won’t get it perfect the first time.

So for four successive years Indian economy faced unprecedented uncertainty. In India, we saw the real repo rate to climb the Himalayan peaks and register the highest real repo rate in the world — this has never happened before in India. This kind of monetary policy has not been followed anywhere — when uncertainty increases, the rest of the world reduces real policy rates. And this historical increase in the presence of historic low inflation.

In the fifth year now, the RBI has been trying to reduce the real rate, but not succeeded, they have reduced the nominal rates, but inflation has declined even more than the reduction in repo rate. On top of this we have NBFC challenges which has further constrained the capital market, so it is not a surprise that things are not good.

The big discussion these days is should we join the RCEP. Given the state of economy should we?

It is a hot and topical debate. However, I want you to pose this question — assuming for a moment we join RCEP in best of terms, but with cost of capital, inflation, agriculture and financial sectors as they are here, what will happen to growth — agriculture growth, export growth? Growth will take a back seat.

While I believe fully we should join in the best terms, but if we do not correct our domestic policies none of our targets will be met.

Put your house in order first while doing this. Ninety per cent of our bad export story is domestic challenges, 10 per cent is the rest of the world.

How do you read the recent setback at the World Trade Organization in a dispute against the US that had challenged our key export subsidy schemes including the one for special economic zones?

When China joined the WTO in mid-90s they made sure that their internal policies changed. They did big reform — unified the exchange rate at an ultra competitive level and other measures — to ensure they take advantage of them joining the WTO. Globalisation primarily and almost exclusively benefits the developing countries — developed economies are at the frontier. We are the ones below the frontier. So take advantage of technology and foreign firms, who want to come where labour is cheap.

Nobody is saying to stay competitive we have to earn the same wage as the Americans. That’s what catch up is all about. And we have to start taking advantage of this. We have had rapid expansion in education, particularly female education – so the labour force is much better prepared than ever before.

Our labour is potentially very competitive. But, the laws that we have inherited for example in textiles — firm size the lowest in the world. Everybody has given up on archaic labour laws not India. But at least we are now trying.

So should there be stimulus for exports?

If we do reforms we should not be worried at all. We have so much low hanging fruit, forget low hanging, they are lying on the ground, but we keep stomping on the fruit. Let us do a mental experiment — so we have freed up agriculture and we have PM Kisan to do direct benefit transfer and also we have liberalised remittance scheme for individual foreign investors. With these at one stroke you make tax revenues and create jobs. People go outside to manage money, why cannot we do it here.

We have different bond schemes, we want infrastructure investments. We have savings investments gap for whatever reasons. Most developing countries have it. We have about $1.5 trillion Indian money abroad, why cannot we get the money back and put it for investments here. Tax and penalty components are so high so no money comes back.

What we are talking about is then tax reforms?

Reforms in taxes have to come. The impression is that all that the government does is to raise the tax rates and get more revenue. In the report we say that we need to change the mindset. It is happening but we still have a long way to go.

If you cut tax rates, tax revenue will go up; and inflation is dead. The report says spend on infrastructure, spend through DBT etc. If economy grows fiscal deficit will reduce.

When there is political will then what stops them from bringing reforms? The government has full mandate to take strong decisions.

I think there we are being a bit unfair. We are sitting on premise that the central bank gets instructions from Finance Ministry, which may not be true. While there has been open disagreement the situation remains the same.

Report challenges the conventional wisdom that rates have to raised and explicitly states that our cost of capital should be close to the average of OECD countries -- and that average real rate is close to -0.5 per cent, which means we need a 300-400 bp reduction in the nominal rate.

What about small traders, exporters?

RBI controls both the repo and reverse repo rate. What stops them to make reverse repo rate less than 3 per cent? There are several options. We need to think policy. China despite trade war etc cut the repo rate, tax rate – even personal income tax rate. But, we say we cannot do it in India as it will benefit the rich.

Should we not question RBI/MPC on monetary policy? Every story has two sides.

Do you agree with the thinking that changing the exchange rate will work?

Many believe that economy in trouble, so change the exchange rate and you will get nirvana. When the exchange rate reduces profits increase but not by as much as when the tax rate is reduced. Our real effective exchange rate hasn’t changed for almost two decades – more and less flat it has remained.

Improve your competitiveness. We are big internal market. Reforms will induce production and incomes to go up as we sell more to each other. But the approach always is “Oh god we are dead!” if the economy opens up, if economic reforms are introduced. But, since 2014, this has changed. The welcome attitude of the Modi government is that if China can do it, so can we.

Published on November 03, 2019
This article is closed for comments.
Please Email the Editor