Tap Global Supply Chains And Implement Kelkar Panel Proposals: Arvind Virmani
Arvind Virmani, Chairman of EGROW Foundation and former Chief Economic Advisor of India as well as Executive Director, International Monetary Fund, shares his views on the economy and offers significant recommendations in a conversation with BW Businessworld’s Sheena Sachdeva.
Excerpts:
How do you look at the overall economic environment in India?
There are two sets of issues. One, the global environment now is highly uncertain. There’s, of course, the tariff war, about which I had spoken about six months ago; it is now becoming a kind of technology war and will likely result in a kind of bipolar technological order. Basically, there’s a lot of uncertainty arising from the dynamics between the US and China. Then, we have all the sanctions -- oil, Iran sanctions, Russia sanctions -- along with the threat of war in the Gulf and so on.
The second part is the NPA (non-performing assets) problem. Some people thought that it is getting solved. But some of these transitions take a bit of time. So both these factors mean that the economy is a little weak. The new government must take a good look at these issues and do what needs to be done.
What do you make of the rising inflation, farm distress, slowdown in the auto sector, challenges in telecom and civil aviation, and so on?
For me, inflation is not a problem. As for farm distress, it’s a problem of plenty. The so-called farm experts refuse to realise that the old economy of cereals, stocking and MSP has worn out. If we keep on following the past, there will be no chance of any solution.
The cereal-sugar mindset is neither the farm trend nor the crops of the future. We have to start thinking of new things which are happening in some parts of India and need to spread everywhere. Things like grape growing and winemaking, avocados or turmeric growing and various other new opportunities.
We have to start thinking according to the market globally, and not just think of cereals — we have moved beyond this. We are now a middle-income country and not a poor country. The whole starving people metaphor doesn’t work anymore! Going further, inflation and farm distress are opposite. For me, an increase in food prices is not a bad but a good thing.
As for the auto sector, the problems are due to the freezing of consumer credit because of NPA issues. The upcoming new electric vehicle standards are already beginning to have an impact on the sector. Other temporary factors include the change in the insurance system.
The temporary factors include the transition period time-frame. So there are short-term disruptions during the implementation of big reforms. But in my view, in the last few years we have not been utilising the experts of our country well. For example, if there is a problem in the automobile sector we need to consult people who have an expertise in the sector.
The civil aviation sector all over the world is going through cycles of weeding out. Overall, there are two factors that are important to the industry. The first part is the capital because the airline sector is very capital-intensive, as aircraft are highly expensive. The other factor is the huge oil bill.
So when you have a simultaneous rise in the cost of capital and the price of oil, the solution would be to build an efficient competitive structure where companies which don’t do well exit and the better-performing ones take them over.
The telecom sector is quite regulated because we have all kinds of taxes. However, I am afraid there’s some basic problem which has long been identified but successive governments have failed to sort out. For instance, when I was a member of the Telecom Regulatory Authority, I had suggested removal of these extra taxes on the sales etc. and having a pure and simple auctioning system. But the incumbent government during that time introduced the auction system on top of everything else. Now, this was the incorrect way of implementation. You can’t have everything piled into one telecom kitty.
Also, I think the regulatory system has weakened. When I was a member of the regulatory authority, people in the sector were very careful and we had extremely good procedures wherein we had a system where we analysed everything. We use to put out the recommendations on the website and also received inputs from everybody including objections, feedbacks etc., along with information about proper procedures.
A good regulator needs to have that and I haven’t seen that kind of standards since my tenure. So half of these problems are self-created due to lack of tax reforms and regulation.
In February, the factory output grew 0.1 per cent compared to 6.9 per cent a year ago. What is happening to our manufacturing sector?
We already have talked about manufacturing as auto is a big part of that. The other parts of the manufacturing are also linked to the fundamental issues of banking which include the IBC, NPAs and NBAFs and due to this the whole financial structure is in transition. However, once this stabilises the industry might recover. The other part is linked to the external situation where the whole trading system is now being shaken by the tariff wars.
So I would suggest that we should go back and look into the last 10 years because in these years we didn’t look at our external tariffs and the cross-border issues. My third recommendation for the new government would be to go back and look at our past and see what further reforms need to be done to smoothen these external problems.
However, we actually have a great opportunity in the supply chain sector because of the US-China tariff war. The supply chains of China are looking all over the world, and we really need to get our act together and attract them because this is a golden opportunity. There are threats and problems, but they could be balanced if we grab these opportunities.
India’s unemployment rate rose to 7.6 per cent in April, according to CMIE. Do you see that as the biggest challenge for the new government?
I think the CMIE data has been misinterpreted and used politically and ideologically. Let me tell you exactly what the CMIE data on unemployment rate says. The data starts on January 2016 at 9 per cent unemployment rate then it goes down till June 2017 to around 5 per cent and again it rises to 6-7 per cent. So the numbers create a U shape. In 2016, it was because of two consecutive droughts 2014-15 and 2015-16. However, when we had normal environment then it started going down. So what perhaps needs an explanation is why it started rising again.
I’ve already given you one reason but that’s not the only possible reason there can be other factors also. The pattern of the unemployment rate suggests that the excess supply of agricultural commodities, which led to a sharp decline in prices due to the decrease in Consumer Price Index (CPI), could be one of the factors.
The complex GST has had something to do with it because those of us who worked for 15 years on the VAT and GST, we all were saying that having a simple rate will give more revenues. It will also give less corruption and evasion. But unfortunately, the committee didn’t follow our recommendations and as a result, we have the problem.
Some of the benefits which were expected by people have not really materialised and that could be another factor. Clearly, a complex GST has a greater negative effect on the smaller sector.
How do we keep the momentum going on infrastructure? Do you think the government will find it tough to maintain the momentum given the fiscal constraints? How can the private sector contribute?
In terms of public infrastructure, I think the momentum has been disturbed by the election and this happens every election. Unfortunately, it’s a pattern. In the last six months before an election, there is less emphasis on investment and more on consumption. So what we call populism etc. is a common trend. The question is how badly. I have no idea how the current situation is, the intensity may vary. But it has a negative effect on investment. Hopefully, once the elections are over some of the investments will resume.
Secondly, I think there has been some improvement in the involvement of the private sector. However, after the last government came in 2014-15, Vijay Kelkar was asked to look at the PPP (private-public partnership) framework and he gave a set of recommendations for making them easier and more profitable both for the government and the private sector to come in. So my next recommendation would be to go back and look at that those recommendations and introduce some of them to get the private participation.
What are the key challenges before the next (new) government?
The macro challenges and growth challenges are important. But I would go back and re-emphasise the supply chain issue. I think this is the last opportunity we have of making India a manufacturing hub because if you recall China is called the factory of the world.
Here is our opportunity. We don’t need revolutionary changes, but we do need a few changes to make sure that a large part of these supply chains don’t go to any other country in the world but to India only. So I would say that is the biggest challenge immediately.
