US-China Trade War An Opportunity For India: Chief Economic Advisor Krishnamurthy V. Subramanian

Chief Economic Advisor Krishnamurthy V. Subramanian discusses with BW Businessworld’s Suman K. Jha the current economic slowdown,  and says “we can certainly grow at about 8 per cent in real terms to reach our goal of becoming a $5-trillion economy by 2024”.

Excerpts:

Various economic indicators suggest that we are in a slowdown. What are your thoughts?
As the recent Economic Survey has pointed out, investment, especially private investment, is crucial to drive the virtuous cycle that enhances productivity, thereby fostering exports and creating jobs, which, in turn, contribute to demand in the economy by enhancing the purchasing power. In this context, the Survey also pointed out that investment rate has been slowing down in India over the last several years. As investment affects growth with a lag, the current situation stems from this slowdown in investment.

Is this slowdown India-specific, or are we part of a global recession? What do you think?
While the global economy is slowing down, India remains a bright spot and will continue to be among the fastest-growing economies in the world. That said, by focusing on reviving the investment cycle, we hope to raise our growth rates.

The US-China trade war will further deepen recession. Is India prepared for it?
The US-China trade war presents an opportunity for us as we have enough scope for increasing our share in world trade. But for that we have to focus on boosting the productivity of our enterprises as growth in exports can only stem from it. Remember, a consumer buys an imported product in place of a domestic one only if it is available at a lower price for the same quality or at a higher quality for the same price. Therefore, sustained growth in productivity is key to  exports.

In India, while the formal economy is growing at more than 7 per cent, the informal economy continues to contract. Is it because of demonetisation and a complex GST?
In any mature economy, the formal economy dominates the informal economy because of greater productivity. For instance, firms in the formal sector enjoy significant benefits with respect to the availability of credit and the cost of credit compared to firms in the informal sector. And as the Indian economy becomes a more developed one, several steps have been taken to expand the formal economy.

There is a problem of demand today. It is said that the government has failed to boost demand. What do you think?
As we showed in the Economic Survey, investment is the key driver of growth for a developing economy like India. By carefully examining all those countries that grew at high rates over sustained periods of time after the Second World War, we showed that investment, especially private investment, is the crucial driver while consumption if the force multiplier, not the key driver. Even when we were growing at a high rate, we grew on the back of high levels of investment. Therefore, we need to understand that in a complex market economy, where  multiple macro variables are simultaneously moving, the distinction between a key driver and a force-multiplier is extremely crucial. After an economy reaches the $10,000 per capita stage, consumption becomes the key driver, but till then investment has to be the key driver. As I mentioned earlier, the slowing down of the investment cycle has impacted the speed of the virtuous cycle, thereby affecting the purchasing power of consumers. Corporates need to deleverage their balance sheets. Similarly, our banking sector needs to expand credit at about 18-20 per cent per annum without compromising on quality. This is because credit is the lifeblood of further investment and thereby growth in the economy. The government’s focus on reforms will help in fostering investment in the economy.

What can we do to reenergise the economy?
As outlined in the Economic Survey, we need to revitalise the virtuous cycle by focusing on reviving investment and enhancing productivity of firms. We must note that part A of the Budget speech focused significantly on investment in general and infrastructure investment of Rs 20 lakh crore per annum in particular.

What do you think of a fiscal stimulus?
In a market economy, the government may intervene to stop a contagion from spreading in the economy, which typically happens when the financial sector is in trouble. Even during the global financial crisis, when countries intervened, they did so to stop the contagion in the financial sector from impacting the real economy. Let’s take the airline sector as an example. There was a temporary hiccup when Jet Airways stopped operation. After a temporary rise in fares due to the sudden shrinkage in supply, market forces have ensured expansion in supply and the hiccup is over. Applying these principles, the government has undertaken a swift recapitalisation of the public sector banks to the tune of Rs 70,000 crore and announced liquidity support for NBFCs in the budget. But for sustained growth, we must work to remove frictions that inhibit the smooth operation of the economy —he various structural factors.

Do you think the present crisis started with banking?
That the quality of credit given by the banking sector from 2008-09 onwards contributed to the current situation is now well recognised.

Entrepreneurs are complaining of tax terrorism in the country. Do you think this is a genuine issue?
The tax department has been focusing on taking the necessary steps in this direction. The finance minister also recently announced several policy steps in this direction.

Why have reforms taken a backseat? 
The government has already brought in some important structural reforms such as the Bankruptcy Code. To understand its importance, think about someone who has taken a loan to buy a car. If he stops repaying the loan, the bank would repossess the car. This fear forces him to repay the loan on time. If there was no fear of the car being repossessed, some people may not repay their loans. This was indeed the situation before the Bankruptcy Code was enacted. In ensuring a better credit culture in the country, the Bankruptcy Code has been a very important piece of reform. As the finance minister announced recently, the government remains committed to structural reforms. I expect more such structural reforms going forward.

How would you assure the business community and the country at large that better days are ahead on the economic front?
The government is committed to enhancing wealth creation in the economy. As the Prime Minister rightly pointed out, wealth creators need to be respected in the economy. After all, wealthy businessmen do not stack money under their pillows and sleep with that money. They invest their wealth in factories, offices and firms that provide employment to our youth. So, we need to respect the national service they do in this process.

How confident are you about India becoming a $5 trillion economy vision by 2024?
Let us do some back-of-the-envelope calculations to understand this goal. In the first 55 years since independence, the Indian economy grew by about $1 trillion. Assuming an average exchange rate of Rs 20 per dollar during that period, that translates into an increase of about Rs 20 lakh crore in the first 55 years. From 2014 to 2019, the economy grew from about $1.7 trillion to $2.7 trillion. At an average exchange rate of Rs 65 per dollar during this period, the $1 trillion increase translates approximately to about Rs 65 lakh crore in the last five years. If the Indian economy can grow nearly three times in the last five  years alone, and that too from a higher base, we certainly can grow at about 8 per cent in real terms to reach our goal of $5 trillion by 2024. To achieve this goal, we need to focus on the structural reforms that will enhance investment in the economy.

What can be done to create jobs?
As Chapter 3 in the Economic Survey points out, our MSMEs can grow at a faster rate, thereby creating jobs and advancing exports. I the survey we have shown that in the US, an average firm goes on to employ seven and a half times more people compared to when it is less than five years old. In India, a 40-year-old firm on average employs only 1.4 times as many workers as it did when it was less than five years old. Even in Mexico, a 40-year-old firm employs twice as many workers as it did when it was less than five years old. Thus, looking at these three countries comparatively, if a firm starts with 100 workers when it is less than five years old, it goes on to have 750 and 200 workers respectively in the US and Mexico when it is 40 years old. In contrast, in India, an average firm grows from 100 workers to only 140 workers by the time it is 40 years old. To create employment for our burgeoning youth, our policies need to focus on providing incentives to our MSMEs to grow. After all, an MSME that grows not only creates greater profits for its owner but also does national service by creating jobs in the economy.