Tapping On Global Supply Chains & Implementation Of Kelkar Committee Should Be Prioritized: Arvind Virmani

In a recent interview with Arvind Virmani, Chairman of EGROW Foundation, Former Executive Director of International Monetary Fund, Former Chief Economic Advisor and a renowned economist, informed about few significant recommendations keeping in mind the current state of economy in India.    

How do you look at the overall economic environment in India? 
So there are two sets of issues. The first part is the global environment now is highly uncertain. There's, of course, the lightning tariff war, about which I had spoken about 6 months ago, is now becoming a kind of technology war and will likely result in a kind of bipolar technological order. However, the basic point is that there's a lot of uncertainty arising from the dynamics between USA and China. We have all the sanctions including oil sanction, Iran sanctions, Russia sanctions along with the threats of war in the gulf and so on. Nevertheless, the external situation is very uncertain and we need to take account of that. The second part is the NPA (Non-Performing Assets) problem. Some people thought that the ILFS (Infrastructure and Leasing Service) and the NPA problem is getting solved. But the problem is that some of these transitions take a bit of time. So those of us who are a bit optimistic that it will be sorted out very quickly have to come to reality. So, both these factors mean that the economy is a little weak. The main implication is that the new government, whenever it comes in, must take a good look at this issue and do what needs to be done. 

How do you see the distress signals in the economy which includes inflation going up, the auto sector in doldrums, farm distress, challenges in telecom and civil aviation and so on?
For me, inflation is not a problem. In the context of farm distress, we must understand, once the elections are over, that it was a problem of plenty and the problem has arisen because we refused to realize the reality. The so-called farm experts refuse to realize that the old economy of cereals, stocking, MSP are other such practices has worn out. If we keep on following the past, they'll be no chance of any solution. According to me, this cereal sugar mindset is neither the important farm trend nor the crops for the future. We have to start thinking of new things which are happening in some parts of India but it needs to spread everywhere. The new crops include grape growing and winemaking, new smaller things like avocados or turmeric growing and various other new opportunities. Hereafter, we have to start thinking in a new way appropriately according to the market globally and not just think of cereal food. We have moved beyond this and now we are a middle-income country and not a poor country. The whole starving people metaphor doesn't work anymore! 

Going further, inflation and farm distress is opposite.  For me, an increase in food prices is not a bad but a good thing. In terms of the auto sector, problems are due to the kind of freezing of consumer credit because of NPA in banks, ILFS problems etc. Adding to this, the new electric vehicles standards which were to be released in a year later are already beginning to have an impact in the sector. Moreover, other temporary factors include the change in the insurance system. Economists like us who deal in macro-economics tend to ignore these little factors, but there is always a timing issue. Unfortunately, the people who work independently are not in tandem with the industry. If we are aware of all these happenings then one could have informed about not to introduce the insurance factor from this year and have it operational from next year and so on.

So there are such coordination problems which arise often. The temporary factors include the transition period time-frame. For instance, the IBC is working but it also means that when you are in transition from one state of play to the new one, the timeframe in the middle is tend to have extra problems which is common when you make a new reform. So, there are short-term disruptions during the implementation of big reforms. But, in my belief in the last few years, we have not been utilizing 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. This is relevant to all the sectors whether textiles or chemicals etc. So my recommendation would be that whichever government comes in must do more of consultation with the specialized people from the industry. 

Moving on, the Civil Aviation sector all over the world is going through cycles of weeding out. But the problem in India is not just solely to itself but is prevalent all over the world in terms of the civil aviation sector. 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 due to buying of highly expensive aircrafts which involves capital. The latter factor is the huge input of oil. So when you have these two problems coming simultaneously which includes a rise in the cost of capital and rise in 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 either in terms of their assets or the companies. 

Now, the Telecom sector is quite regulated because we have all kinds of taxes. As I have dealt with this area since 2000 because I was involved in 2003 for 2002 New Telecom Policy. However, I am afraid there's some basic problem which has long been identified but the governments have failed to sort out. For instance, when I was a member of the Telecom Regulatory Authority, I had suggested to remove all these extra taxes on the sales etc. and have 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 analyzed 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 were also readily available. 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. 

The factory output numbers for February have shown a 0.1% growth in February as against 6.9% in the year-ago period. 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 stabilizes 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 tariff war between the US and China. The supply chains of China are looking all over the world, and we really need to get ourselves 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% in April, according to CMIE. Do you see that as the biggest challenge for the new government?
I think the CMIE data is been misinterpreted and is been 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% unemployment rate then it goes down till June 17 to around 5% and again it rises to 6 or 7 %. So, the numbers create a ‘U’ shape. In 2019, 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. But 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). This has happened in years before. Hence, this could be one of the factors which led to an increase in the unemployment rate. The complex GST has had something to do with it because those of us who have worked for 15 years on the VAT and GST, we all were saying that having a simple rate will give you more revenues. It will also give less corruption and evasion. But unfortunately, the committee didn't follow our recommendations and as a result, we are the problem. Hereafter, some of the benefits which were expected by people have not really materialized and that could be another factor. Clearly a complex GST has a greater negative effect on the smaller sector.

There has been increased public spending on infrastructure in the last few years. How do we keep the momentum going on infra? Do you think the government will find it tough to maintain the momentum given the fiscal constraints? What / How can the private sector contribute?
So 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, you know what we call populism etc. is a common trend. The question is how badly. I have no idea how is the current situation, the intensity may vary. But it has a negative effect on investment. Hopefully, once the elections are over some of the investment will resume. Secondly, in the private sector, I think though there has been some improvement in the involvement of the private sector. However, certain things like the Kelker Committee Report, after the last government came in 2014-15, Dr Vijay Kelkar was asked to look at the whole PPP framework etc. and he gave a whole set of recommendations for revising the changes to make 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 challenges do you find in the upcoming new government? What challenge is can they face challenges are most important?
The macro challenges and growth challenges are important. But I would go back and re-emphasize the supply chain issue. I think this is the last opportunity we have of making India a manufacturing hub because there is pressure for manufacturing 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 few changes to make sure that a large part of these supply chains don't go to any other country in the world and but to India only. So I would say that is the biggest challenge immediately.