Chief Economic Advisor Arvind Subramanian, who expects a transitional adverse impact on the economy due to the demonetisation of high value currency notes, spoke to The Hindu’s TCA Sharad Raghavan and Vikas Dhoot on the Economic Survey 2016-17.
You expect a slowdown of 0.25%-0.5% in the economy’s growth rate in 2016-17, due to demonetisation, which seems a bit conservative in comparison to other forecasts
We have spelt out how…We have looked carefully into the cash implications because it is a liquidity shock to the system. But it’s a very unusual thing because cash in terms of liquidity has come down, but deposits have grown enormously. So a lot is going depend upon how much cash and other forms of money are substitutable.
Interest rates have come down, the price of cash has gone up and the price of other money has come down. How it is all going to play out and how much of it is in the informal and formal sectors is to be seen.
Then there is the question of what is measured and what is not measured. Remember, my estimate is very clearly for recorded headline GDP measurements. The impact on the informal sector is not going to be captured fully because we don’t measure that in the way we measure the economy.
So, our reduction is probably kind of middle of the pack in terms of the others, maybe a little less. But let’s see how it pans out.
You have called demonetisation an unusual and unique monetary experiment, for which there is no model to measure its efficacy. But, before its announcement, how would you have analysed its pros and cons?
I would have analysed it as I have analysed it now. As they say, counterfactuals are for historians. In the government, counterfactuals are a luxury one can’t afford.
You have expressed concern about the fears of tax terrorism in the aftermath of demonetisation.
I think we have to allay anxieties about over-zealous tax follow-up in the aftermath of demonetisation. There is a bit of a balance to be struck. On the one hand, the whole purpose of this is to say we are going to really go after the bad guy, the penalties are punitive and strong. But on the other hand, you don’t want it to degenerate into a trawling expedition that creates uncertainty for the good guy.
You have revisited the twin balance sheet problem (of banks with NPAs and indebted corporates) but have identified corporates as the bigger problem now…
We’ve always thought of it as a banking problem. It’s never been that. The ultimate problem is that companies are not profitable and can’t pay. That is the root of the problem. It is as much, if not more, a corporate problem as a banking problem. The banking thing is a manifestation of an underlying reality.
But as you have said, bankers are reluctant to write-off debt for fear of showing favour to a particular group. With banks awash with money and credit growth slumping, do bankers need an assurance to avoid a paralysis in bank credit decisions?
We have been trying to provide assurance to bankers, like with the oversight board. But it’s hard. Can you imagine a middle level banker writing off a prominent company’s debt? Then the guy says ‘no no, I was promised assurance’. Is that enough? It’s tough.
You have suggested a Public Sector Asset Rehabilitation Agency… So are you losing confidence in the private sector asset reconstruction companies (ARCs)?
The evidence is there. Nothing has prevented the private ARCs from functioning. But what have they done? Whatever agency comes will have to deal with the debt of private and public companies. Remember, most of the stressed debt is with large private companies so that’s what makes it even more difficult.
Do we need a more aggressive approach to implement your suggestion to privatise sectors like aviation, banking and fertilisers?
This is something on which my thinking has really evolved in the last one year or so. We have some meta challenges in India. One of them is this ambivalence towards the private sector and private property rights in general. We have listed all the manifestations of that — fertiliser plants, civil aviation, strategic disinvestment. You name it, and there is ambivalence towards the private sector.
That I think is a meta challenge because it is not about saying ‘oh, do strategic disinvestments.’ I think society as a whole is not ready to accept it. It’s not a matter of one government saying do this, and another government saying, do that. I think it’s more about how do we shift ideas at a broader level. What is the sense of shared diagnosis and shared solutions. It’s very easy to say ‘why don’t you privatise,’ but it has not happened for 45 years and it’s not seeming very easy. So the question is why.
In some sense, what I am saying is that these meta challenges require more fundamental and broader shifts at the level of ideas. And how you get there is not easy.
How did the idea to link the Universal Basic Income (UBI) concept to Mahatma Gandhi strike you?
I was asked to give a talk in the Sabarmati Ashram on October 2. And it just struck me that this captures the heart of the UBI conflict. On the one hand, it is a radical way to eradicate poverty. And on the other hand, it’s not just about eradicating poverty. Gandhiji said that poverty is much more than imbibing a few more calories. It’s about dignity, self-respect, independence.
On whether the UBI could achieve that… Gandhiji the moralist would say you shouldn’t give uncompensated rewards (as it would harm responsibility and efforts), Gandhiji the baniya would say you should be fiscally conservative, and then Gandhiji the astute politician would realise that in India today, the programs quickly become add-ons rather than replacing anything. And if it becomes an add-on, then it is not viable.