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We Committed To Agriculture Reform As MSP Monies Are Paid Directly To The Farmers: Sanjeev Sanyal, Principal Economic Adviser
Principal Economic Adviser in the finance ministry Sanjeev Sanyal’s work in chaos theory and his belief that economic growth demands perpetual imbalance may be the right recipe for the Indian economy given its complexity. The government though is very conservative on fiscal balance. He talks to BW Businessworld’s Manish Kumar Jha about fiscal support and its multiplier effect, the bold steps and disruptions in opening the economy further, pushing pending reforms, gyrating out of pandemic-led economic disruptions, and more.
Photo Credit : BW
Some of the emerging data shows the second wave of Covid-19 is leading to lower expected growth. Most of the growth projections made in the Union Budget are mired in uncertainty. One cannot read too much even into the record GST collection in April as it comes at the end of the financial year. How do you generally look at the economy?
The second wave will have some impact on the growth momentum which, as you will remember, sharply recovered during the period from October 2020 to March 2021. So the April-June quarter will in fact be affected by the second wave, although since we did not do a full lockdown there are many parts of the economy that kept functioning such as manufacturing and construction. But, of course, there will be an impact on certain services sectors such as travel, tourism and entertainment which have already been affected by the first wave.
Now, in terms of the overall momentum of the economy, we have to remember that we had a very conservative number in the budget, a real GDP growth rate of 10.3 per cent which, incidentally, was significantly lower than what most international agencies at that time were predicting. I think the number will now be closer to 10.5 which is the budget number, although this is still an evolving situation so we have to keep watching. But now I believe that the number will probably be close to our budget assumptions.
Many argue that the fiscal deficit target is irrelevant in the current scenario and that the government should instead focus on a large enough stimulus package. Are we still talking about 1 per cent of GDP? What is your take?
If you see, last year as well as the last six months of the last financial year we mostly targeted the poor giving them free food; it became the world’s largest food programme covering 800 million people. We also did some direct transfer to the very poor. But once the economy was opened up we focused on capital expenditure as in our view that is where the biggest bang for the buck comes from. The second point is that we need to use this to create assets so we are creating assets as well. This general strategy remains in place.
We have decided that both fiscal and monetary tools will be used in the economy as much as they are needed and our focus will continue to be on using capital expenditure to accelerate the economy when necessary.
However, if there are specific sectors, particularly the services sectors that are being truly disrupted then they will have to be provided some special support while taking into account the health concerns. For instance, there are obvious problems with the entertainment sector like live shows cannot be done without jeopardising the health, so in those sectors we will have to think of innovative ways of supporting them. Wherever support can be given will be provided as long as it does not have health consequences.
The Budgetary allocation of Rs 35,000 crore for vaccination needs to be increased due to the severe second wave. How do you plan to go about it?
If you read my social media posts and tweets you will see that throughout government officials including I have been pointing out that there was a possibility of a second wave. Did we know when it will actually happen? No. Nobody knew that but the possibility of a new strain causing a second wave was discussed widely, even the Prime Minister spoke about the safety precautions that should be taken. In terms of vaccination, whatever is necessary will be spent, and the figure is not my prerogative to answer.
The government has targeted privatisation of PSUs Bharat Petroleum and Air India. Do you think the plan will sail through this year? What about privatising banks?
Privatisation of banks or whatever that needs to be done, we have already spelt that out. We now just need to follow through and make sure that the things that are planned gets done. I don’t have anything to add to it.
While it is a valid argument that government must not run factories, a negative view of privatisation still prevails in the public mind. Indian economy has enough loss-making, unproductive and sick industries. Why is this so?
First of all, I don’t think that everybody in the market is against privatization, there are many people particularly the younger generation who understand the need for privatisation and there is public support for privatisation of several kinds of things.
Now, we also understand that not everything will be privatised and the government is also not in favour of privatising everything, so our view is a nuanced one.
There are certain activities where the government should not be there like running hotels or airlines, but there are activities which are strategic and where the government does have a role, for example, in defence. Even if you let the private sector come in, the government will always have a role in defence production; the government will always have a role in the financial sector, even if you allow more private sector participation we still believe some part of the banking system will remain under government. So there is a list of strategic sectors.
You have focused on reforms in energy and aviation, but defence is the elephant in the room. The ordnance factories (51 of them with massive NPAs) scattered across India are a drain on the defence budget and everybody feels they should be privatised. Why do we delay such reforms which not only harm the country’s security but economy as well?
I don’t think the situation is completely black and white. It is very clear that in certain sectors the government doesn’t have a say and that includes the larger part of the economy. But it is very clear that we want to privatize it.
If any government has been unapologetic about privatization then it is this government. The question is: which sector do we want to privatize and to what extent? And for the vast majority of the sectors we have said that we should privatize and deregulate also. So it is not only privatization, we are opening up as well. But there are certain sectors where you do need public sector participation.
For instance, in the financial sector, everybody agrees that the banking sector is over-dominated by public sector banks. You want to know if we want private players to become the larger part of the banking sector, and the answer is we do but there is a specific role for the public sector. So the point being made is that let’s mix it up so that it balances out, and also makes for a more resilient system.
Health is a very good example of this, as you do need the private sector in it for not only does it do certain kinds of innovation but also provides certain kinds of specialized care which is difficult to provide in a public sector setting. But at the same time you need a public health system because it provides competition to the private sector and the market forces do not work in this field for the simplest reason that this is one sector where the supplier decides what the demand has to be. The hospital tells you how much care you need, so this is a very strange sector, since the market does not quite function in this sector you need the public capacity which is significant to balance it out. Education also has this problem, so there are certain sectors where you need a significant public presence.
This is not to say that the private sector should not function in a particular sector. Wherever possible you should allow the private sector to function but the public sector does need to also exist and we need to invest in it and make it run well. This is a very different argument in favour of the public sector. Wherever the public sector is doing a good job let it do it, don’t interfere with that.
Our growth model is based on domestic consumption unlike the export orientation of major economies in Asia. Also, we are not competitive in global supply chain. Where will sustained economic growth come from?
In the Economic Survey two years ago we made a very strong case that India’s growth model for the next several years has to be driven partly by export and partly by investment.
So if you look at our policies, even the fiscal policy, they are heavily oriented towards capital expenditure. So there is no doubt in our minds that an export and investment-driven growth is what we have a preference for, not to suggest that we don’t need domestic demand.
Of course, our domestic market is an important part of our economic system and it has to be supported especially for non-tradable. But certainly for areas that are tradable we have put in a lot of effort, and a lot of investment is still coming despite the second wave. A lot of champion sectors were identified also. And there is something called the PLI scheme to encourage creation of large clusters where we leverage the scale of the domestic market in order to get scale so that we can compete in the international market.
But if we look at our external trade, we have a huge trade deficit…
I don’t think our external accounts are a problem, we have surplus from the other countries, and overall, our current account is not an issue. We need to be very careful about bilateral deposits, because you will not be able to run the economy if inputs come from certain countries and output goes to another country; you will have a lot of difficulties if you try and balance bilaterally.
We don’t have a problem with being a part of large trading blocs; the problem with RCEP was specific to RCEP, it is not an ideological problem with trading blocs. We have a free trade agreement with almost all the RCEP members. But we are all negotiating with the countries in Europe. We believe in free trade and we are in favour of it, but this does not mean we will sign any free trade agreement that comes by, we have to take in account the national interest.
Has agriculture reform brought any significant dividend?
It is a long-term reform. We have made the case very strongly from the beginning that it is something that has been debated for 30 years and at some point is time it had to be done, and we continue to be committed to these reforms as these are necessary for upgrading agriculture.
Now we recognize that there are some states that have apprehensions about it, but as you may have already seen we have worked quite hard and made sure that the MSP monies are paid directly to the farmers and that has got a very good response.