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US-China Trade War An Opportunity To Enhance India’s Share In Global Trade, Says CEA Krishnamurthy V Subramanian

Chief Economic Adviser 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 $5 trillion economy by 2024”.

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Q: Various economic indicators suggest that we are in a period of economic 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 firm productivity, thereby fostering exports and creating jobs, which in turn contribute to demand in the economy by enhancing the purchasing power in the economy. 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.

Q: Is it an India-specific phenomenon, or we are part of a global recession? What do you think?

While the global economy is slowing down, India remains a bright spot in the economy 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.

Q: The US China trade wars will further deepen recession. IS India prepared for such a phase?

The US-China trade war presents an opportunity for us as we have enormous scope for enhancing our share in global trade. But for that, we have to focus on enhancing the productivity of our enterprises as sustained growth in exports can only stem from enhances in productivity. Remember any consumer buys an imported product instead of the 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 enhancements in productivity are essential for us to enhance our share in global exports.

Q: In India, while the formal economy is growing at over 7 per cent, the informal economy continues to contract. DO you think this is because of demonetization and even a complex GST?

In any mature economy, the formal economy predominates when compared to the informal economy because the formal sector enjoys greater productivity when compared to the informal one. For instance, firms in the formal sector enjoy significant benefits with respect to the availability of credit and the cost of credit when compared to firms in the informal sector. And as part of the natural progression of the Indian economy towards becoming a more developed one, several steps have been taken to enhance the presence of the formal economy.

Q: There is a problem of demand today. It is being said that the govt has failed to improve demand. What do you think?

I must highlight that, as we showed by providing carefully constructed evidence in the Economic Survey, investment is the key driver of growth for an economy at the stage at which India is. 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 in India, 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 there can be multiple macro variables that are simultaneously moving, the distinction between a key driver and a force-multiplier is extremely crucial. After an economy reaches the $10000 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 affected the speed at which the virtuous cycle rotates, thereby affecting purchasing power of consumers. Corporates need to complete their process of deleveraging their balance sheets. Similarly, our banking sector needs to imbibe recent learning to expand credit at about 18-20% per annum without compromising on quality. This is because credit represents the lifeblood required to further investment and thereby growth in the economy. The government’s focus on reforms will help in fostering investment in the economy.

Q: What do you think could be a roadmap to reenergize the economy?

As outlined in the Economic Survey, we need to revitalize the virtuous cycle by focusing on reviving investment and focus on enhancing productivity of firms in the economy. We must note that part A of the Budget speech focused significantly on investment in general and infrastructure investment of 20 lakh crores per annum in particular.

Q: What do you think of a fiscal stimulus?

In a market economy, a government may intervene to stop contagion from spreading in the economy, which typically happens only when the financial sector is in trouble. Even if we look at the Global Financial Crisis, when countries intervened, they did so to stop contagion in the financial sector affecting the real economy. To understand this, take the airline sector as an example where 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 temporary hiccup is over. Applying these principles, the Government has undertaken a swift recapitalization of the public sector banks of 70,000 crores and has announced the liquidity support for NBFCs in the budget. But, to create sustained growth, we must work to remove frictions that inhibit the smooth operation of the economy – the various structural factors.

Q: Do you think the present crisis started with banking, and subsequently other sectors were impacted?

That the quality of credit given by the banking sector from 2008-09 onwards contributed to the current situation is now well recognized.

Q:  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 has also recently announced several policy steps along this direction.

Q:  Why is the government not working on reforms / What are the reforms that are in the pipeline?

The Government has already undertaken some important structural reforms such as the enactment of the Bankruptcy Code. To understand its importance, think about someone who has taken a car loan to buy a car. If he stops paying the loan, the bank would repossess the car. This fear forces him to repay the loan in 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 passed. 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 therefore expect that several such structural reforms will happen going forward.

Q: What would you say to assure the business community and the country at large that better days are ahead on the economic front?

The Government is committed to enhance 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.

Q: How confident are you on the five trillion dollar economy vision by 2024?

Let us undertake 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 crores 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 crores in the last 5 years. If the Indian economy can grow about three times more in the last 5 years than it did during the first 55 years, and that too from a higher base, we certainly can grow at about 8% 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.

Q: What can be done to create jobs?

As Chapter 3 in the Economic Survey points out, our MSMEs can grow much more, thereby creating jobs and advancing exports. We showed in the chapter that, in the U.S., when compared to the number of workers employed by an average firm when it is less than 5 years old, the average firm employs 7.5 times as many workers when it is 40 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 5 years old. Even in Mexico, a 40-year old firm doubles the number of workers when compared to the workers it had when it was less than 5 years old. Thus, if a firm starts with 100 workers in all three countries when it is less than 5 years old, it has 750 and 200 workers respectively in the U.S. and Mexico when it is 40 years old. In contrast, in India, the average firm has grown from 100 workers to only 140 workers when 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.


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