It Is Just A Slowdown, Along With A Global Slowdown: Rajiv Kumar, Vice Chairman, Niti Aayog

Demonetisation and the Goods and Services Tax led to a greater formalisation of the economy, says Niti Aayog Vice Chairman Rajiv Kumar in a conversation with BW Businessworld’s Suman K. Jha

Do you think the economic slowdown that we are witnessing here is an India-specific phenomenon, or is it part of a global phenomenon?
I would say it is part of a global phenomenon. Even the IMF has brought down its estimate of global growth from 3.6 to 3.2 per cent. We are beginning to see a substantial slowdown in the European region as also in Japan. It is also to be noticed that the effect of fiscal measures taken by President Trump  for boosting growth in the US have started to wear off. In our case, the slowdown is a result perhaps, because of global factors and the inevitable uncertainty caused before the elections. Also there is a lingering impact of the problems in the financial sector.

 Do you think that demonetisation and an imperfect rollout of GST have also contributed to the slowdown, especially a contraction of  the informal sector?
I have been a strong supporter of demonetisation and I don’t attribute any causation to it. If, however, you mean that demonetisation and GST have led to a greater formalisation of the economy, I would agree because that is what is required, and it results in more sustainable economic growth. So, the informal economy has contracted and that also means that the nature of economic activity in the country is changing. Therefore, we need more liquidity and facilitation to support the emergence of  the formal sector of  the economy and in a more robust manner.

There is a school which says that there is less demand in the economy and the government has failed to create demand…
In the last few years, the government has significantly invested in the infrastructure and housing sectors that had kept up the demand. Now, it is paying attention to improving export demand. In fact, during his Independence Day speech, the PM talked about promoting exports. In fact, he is the only PM to have given so much push to exports. Hence, a major role would be played by external demand. I think if  you want to increase investments in the economy, you need to increase savings and if you want to increase savings, you have to depend upon external demand.

 What could be the roadmap to re-energise the economy?
I talked about some elements of boosting demand, and the government has talked about Rs 100 lakh crore outlay for the infrastructure for the next five years. In other words, Rs 20 lakh crore for every year – this would generate substantial demand. We talked of export demand.  The PM has also announced Rs 3.5 lakh crore for the next five years for the water mission. All these factors will contribute to raising the growth rate.

Some sectors like auto are badly affected. Do you think they should be offered some package?
I think the PM in his interview to The Economic Times has said that the economy is big enough for both EV and ICE to survive but I think there is some merit in incentivising scrapping of old vehicles. It could generate a good demand for the auto sector.

Do you think the current crisis began with the NBFC crisis and a crisis in the financial markets? Do we need something urgent and long term for the financial markets?
This crisis has its roots in the 2005-11 period, when banking credit grew enormously and that led to the emergence of NPAs and then banks were in no position to lend. This role was then played by the NBFCs and their assets grew at a fast pace. Some of this resulted in serious asset-liability mismatches as seen in the case of IL&FS collapse.

Also, crisis is not the right word. It is just a slowdown – along with a global slowdown.
One of the primary reasons is that the financial sector is not in robust health, and its credit to different sectors has declined. Handling NBFCs became much more difficult because of  the IL&FS. But you are right taht this is a sector  that needs attention and the government is committed to doing so.

In the last few years, only two private sector bank licences have been given. Don’t you think more private sector banks should be encouraged, because PSU banks except a few, are in any case stressed?
I don’t know what you mean by banks being stressed. They are reasonably flush with liquidity and have relatively low credit to deposit ratio.

Yes, the banks need some fresh capital for meeting the Basel norms. The government has already announced in the Budget that Rs 70, 000 crore is coming their way. If it is based on merit and performance, it will help the banks to improve lending.

Do you think we need to have more private sector banks?
There is no reason to believe that the RBI is discouraging emergence of new banks. Maybe there are not many private sector players who want to apply for the licences, so the onus is on the players who want to open banks and get licences and not on the regulatory side.  I cannot see any regulatory impediment on this count.

Are we on course towards the $5 trillion economy vision? Some people say that we have to grow at 14 to 16 per cent to reach that milestone, do you think it’s achievable, especially in the current scenario?
The estimate of 14 to 16 per cent is wrong. What we need is about 8.5 per cent in real terms and add inflation to that, say, about, 4 per cent, which means 12 to 12.5 per cent.

Today, we are witnessing a slowdown. So we need to reverse it to reach there in the remaining five years. I am confident that we will be able to do it, with all the attention that the leadership is giving to the economic situation.