The BL Interview. Must ‘keep to macro stability path to ride out turbulence ’

What is your take on India’s economic growth?

When we came, the international environment was more in our favour. I think oil prices were coming down, the government had come to power, and it was ​kind of possible for us to chart out where the economy should be headed. But, of course, we recognised that twin balance sheet was there that needed to be solved; over time we knew what big reforms were in the pipeline like GST. So I think over the course of four years some major reforms we have put in – I would say the GST was the huge one, the IBC was another huge one. I think the fact that we maintained micro stability was very important and, of course, as we said in the survey, the ​PM’s​ vision ​was providing essential goods and services to specially the poor – toilets, Ujjwala, housing, bank accounts, power. So there was a growth side and the social side. But, now four years on, the external environment has changed, growth has been picking up now but slow. Hopefully the results of the reforms done will kick in. We have also seen a new challenge in agriculture in the last few years. World economy has kind of been deteriorating. So if we maintain our macro-economic stability, if we finish the reforms commenced​ – twin balance sheet, stabilise the GST, strategic disinvestment – we can do it. I still think if we keep chugging along, I think 6-7 per cent growth is kind of automatic; 7-8/8.5 per cent if we continue on path of reforms, but to get to double-digit, the world economy also has to grow, which at the moment is not happening.

No, I don’t think so. The common shocks – oil prices, US interest rates, dollar fluctuations – affect emerging economies like ours . I think the integration with the global economy and the financial ripples that come with thatare continuing. But we have to just keep to the path of macro stability. The government has done a terrific job in oil pricing and not succumbing to populist pressures, and that will continue to maintain fiscal stability. We should be able to ride out this period of turbulence, and hopefully, we will be set in continued path of reforms.

See when oil prices came down, the choice was how much to pass on to the consumer, how much to save, and how much to spend. And broadly, I think what the government decided was that maybe one-third must be passed on to the consumer and the rest be used for deficit reduction and public investment expansion. So, I think it is a very reasonable way of spending a windfall because, after all, deficit reduction is a bit like saving because you are improving your ability to borrow, spend in the future. So I think it is a very reasonable way of allocating a windfall. And now that prices are going up again, we have a ​situation where we introduced deregulation of oil prices. Thegovernment has stuck to that and, in these circumstances when the markets are so volatile, anything that would smack of retreating on the fiscal commitments would have repercussions. So I think in that sense government response has been exactly right.

Remember I said that at a time when the circumstances were very different. In f​irst three years​, ​inflation was coming down dramatically, our growth had slowed down, and private investment was down; therefore, we said this was right time for public investments to step in. But now inflation is higher, world circumstances are much more volatile, and growth seems to be coming back. So to expand at this phase of the cycle would be somewhat risky. My views are completely consistent because at that point we needed public-investment expansion. Remember it was not so much about fiscal expansion, but the debate at that time was more about if we consolidate more rapidly or should we consolidate more slowly. My view was that we should consolidate more slowly and not on expansion. But then those were completely different circumstances, and now the circumstances are so different, so we have to be bit prudent and not add to the volatility.

When we first diagnosed the twin-balance sheet, the challenge at that stage of growth was reasonable. So it was very difficult to say then that, ‘Oh actually the economy is doing quiet well so unless we do this, this, and this, there will be a lot of problem. Politically it is very difficult to make that argument when growth is happening’. Besides, I think at that stage we also felt that the legal framework was not in place – IBC framework was not in place. Of course, I had said that we should go for a bad bank, but I think in retrospect, IBC and the legal approach was the only politically sustainable approach. Finally, only when the asset quality review started results were seen because before that people thought that NPAs were much less than what we see today.

Let us wait and see how it ​pans out. You can ​have ​different views. Some say that unless you have the administrative apparatus it won’t be ​e​ffective. MSP is ​a kind of subsidy​. ​Here the beneficiar​ies ​are farmers, but because it is a transfer, it has to be paid for, and usually it is paid for by tax payers because the fiscal subsidy goes up. So like any​ scheme, it ​i​s a transfer scheme with some benefits to some people and some costs. So the political system makes an assessment of what the trade-off between benefits and costs are. Loan waivers are a problematic as the RBI has spelt out clearly what it does to credit culture.

There are issues in power on the NPA side, distribution side, the whole Disscom situation, and then there are issues on whole energy mix – thermal and renewable. There has to be cooperative federalism between the Centre and States to help resolve these problems. Some progress has been made, but still a lot more must be done. At the heart of power problem is how much can we make people pay for power? If people are not going to pay for power, you will always have these distortions of subsidy and cross-subsidy. ​For g​etting people to pay for power, ​metering has to happen​. ​Give DBT, but the market price has to be paid. These are difficult political situations, and unless we have cracked that, political economy distortions will be difficult to eliminate.

Firstly there has been much more discussion around it because we wrote the chapter. Second, I think certain States have actively considered it. I think more States will consider it. I think the this whole Telangana scheme is moving in that direction. I think it has a huge impact. I will​ explai​n. Suppose​ you have targeted scheme: targeted given in kind and targeted given in cash and then less targeted schemes. When it is completely non-targeted, then it is universal basic income. These are not completely different things, all on a continued process. And in India we have never had universal basic income because some rich will always be excluded from the scheme, that is why the phrase quasi-universal basic income. Now the question is how close are we to quasi basic income? My point is that if you say everyone except the rich will get cash transfers, that is quasi-basic income, but if you say I will give money to all farmers, that is getting towards quasi-basic income because that is identifying the easily identifiable, then it is universal within a broad category.

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