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Continue With The Trade Negotiation Strategy: Bibek Debroy, Chairman, EAC-PM

Bibek Debroy, Chairman, EAC-PM, discusses with BW Businessworld the present economic slowdown and stresses that the slowdown is not particular to the Modi regime.

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Excerpts from the chat:

On the economic slowdown
The slowdown is not something that suddenly started in 2014. It has been going on for a fairly long time. And there are reasons for the slowdown; and a large part of this is because of what has been happening locally.

There was a time when the GDP growth rates in India crossed 9 per cent. That was a period when the external world was kinder. Much of the slowdown is not typical to India and I think it’s important to recognise this if one is not unnecessarily trying to politicise it. It is not as if there has been a sudden slowdown in May 2014. There’s been a continuous deceleration.

On US-China trade war and the consequent recession
There are a few countries in the world that have run into a recession. Some may be heading towards it. Certainly, the word recession should not be used in the Indian context because we have witnessed a GDP growth of 6.8 per cent for the last full year. By no stretch of imagination can this be called a recession.

When you see the global environment, there is not much one can do because of the trade friction between the US and China. Some of it is a consequence of the fact that the multilateral trading system and multilateral negotiations are stuck. Similarly, the regional or bilateral negotiations are also not proceeding fast enough when you have an uncertain environment, which is obviously impacting the export of goods and services.

From the national income point of view, what is important is of course net exports. If there is global uncertainty and a global slowdown then obviously the demand side does not look that bright. The best you can do is to continue with the trade negotiation strategy. The exchange rate has its own issues. So the only thing you can hope to do is to have supply-side improvements, which the government has been doing whether it’s on the logistics side or the custom side.

The moral of the story is that one needs to get the growth rates high enough to get the target of a $5-trillion economy.

The source of growth in the immediate short-term in a macro sense, in a national income accounting sense will not be net exports but it will have to be consumption, and government expenditure in investments.

On the reforms being undertaken by the government

It is perfectly natural that a government should continuously announce reform measures. Any government that acts continuously has reform measures. Exactly as happened with the first tenure of the Narendra Modi government. The Modi 2.0 government has also indicated its intention to reform even if it happens to be a day outside the Budget.

On informal economy contracting even as the formal economy grows
Where did you get this from? No figures exist for the informal sector. One of the big problems we have in an economy like India is that we have a significant section of the unorganised sector. And the process of formalisation cannot happen overnight.

As far as demonetisation is concerned, one can have all kinds of views on it. But even solid critiques of demonetisation have not produced a shred of evidence to suggest that the effects of demonetisation lasted for more than a quarter. Demonetisation is a dead horse.

On the informal sector, the data is difficult to come by. In a national income accounting sense, one doesn’t really know what’s happened to the informal sector. One has a sense perhaps anecdotally, if nothing else, about what is happening to some parts of the informal sector.

For example, construction. Now, construction is an indirect fallout of things like RERA. The real estate sector has also been affected by the scrutiny of cash transactions, not that cash is illegal. There is nothing wrong with cash transactions being scrutinised. Anecdotally, it appears that at least the real estate sector has been affected by that. But now the construction sector is beginning to show signs of recovery.

You can see the signs in commercial real estate, but not in residential real estate yet. You can see that in some of the transport projects and housing programmes.

As for GST, it is not a perfect GST. No one even within the government said it’s a perfect GST. It’s work-in-progress, and yet working towards further standardising, simplifying, and  harmonising to put more and more products within GST.

On the problem of demand
There is a problem with demand, but the problem is on the part of citizens and what they demand.
You want airports like ‘x’ country? You want railway stations like  ‘x’ country? Those are the demands of citizens, but they will not pay taxes. So when there are demands, then the government should do something for demand, its effects will wind down to give more tax concessions.

You can have more tax concessions, but then give up your demands for better infrastructure. You can’t have both.

So I don’t understand the question unless one is saying — “let me go back to the days before the reforms when I monetise the deficit...  I borrow heavily. So that my demand is satisfied, but by that the lives of my children are ruined. Because the debt burden is an overhang that is passed on to the descendants or I have a raging inflation rate.  The trouble with this argument is that they stimulate demand. But the people simply seem to think that the government is an infinite kitty...

The roadmap to re-energise the economy
Fiscal stimulus essentially means the government should spend more. Correct? So where will the money come from?  Either, the government says I don’t care about fiscal consolidation, or the government taxes more. So, the demand for fiscal stimulus typically emanates from people, who want a stimulus for one particular sector. Now the moment you give a stimulus for one particular sector, it is difficult to prevent an argument for stimulus for another sector. That is how the tax structure becomes complicated.

So in a sense, I have already answered this question. As for measures to re-energize the economy, there are different ways of looking at it. One way of looking at it is through the export, which we discussed and does not look that bright.

These are different ways of looking at the same thing. We should  look at making labour markets, land markets, capital markets more efficient, stimulating productivity —  many of the things the first Narendra Modi government already did. And reforms by the second one is also in the nature of enhancing productivity, whether it is through transport connectivity, through electricity connections; all of these in the long run lead to tangible productivity. Land and labour, a large part of it is in the State List or in the Concurrent List. So it’s a broader reform agenda.

On why the private sector is not investing
It is generally true that the private sector is not investing. But there are a few sectors, which I think, has begun to see a slight revival in investments. Part of it is linked to the banking and the financial system. Not just banks, but NBFCs also. The government has announced measures and the finance ministry will continue to announce measures for cleaning up banks and NBFCs.
Private investment does not happen in the Lutyens’s bungalow zone. It happens in states. So many things are actually state government subjects, and more and more states are improving their business climates... So I would expect a revival in private investments to be much more palpable and that will show in about two quarters.

On the genesis of the present crisis

I won’t use the word crisis. The downturn I have said has been going on for a long time. The downturn started in 2008-2009. It depends on how you define it. I would say that the RBI at that time was relaxed about supervision over banks. So the crisis, if that is the word to use, dates to imperfect oversight by the RBI around 2008-2009 or before that.  


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