Economy sending mixed signals: CEA

Chief Economic Advisor Arvind Subramanian fielded questions on reforms, growth, his warning of deflation, and China, from The Hindu. Edited excerpts:

You'd said India's closer to deflationary territory but at the same time you maintain India's GDP growth this year will be 8 per cent plus. Are the two trends consistent?

When I mentioned it, I said price-wise we are close to deflation. Now, there is no accepted word for negative inflation and disinflation is too complicated a word. So whereas I meant deflation to connote rapidly decelerating inflationary pressures, it was interpreted as an indication about economic activity which it was not meant to be.

In a sense, there are at least two manifestations of the deflation I am talking about. One is agriculture. Prices are down. Apart from onion prices, of course, and one or two commodities, in agriculture we do see depressed incomes because prices are down and the monsoon is what it is. The second thing is that when nominal GDP starts decelerating as it has, it has implications for the fiscal as well. So, that’s another manifestation of deflation.

But now we come to your question about how do you reconcile growth with this. The projection that we had in the Economic Survey was based on four factors.

One was oil prices coming down sharply, second the cumulative effect of reforms, three was the monsoon and at that stage the monsoon was predicted to be good… and fourth what I said in the Survey was that as inflation comes down, the monetary situation will ease. That 8 per cent is conditional on what we expected about monetary policy. So, one could argue that if monetary policy deviates from expectations, our growth projections have to be correspondingly different.

The second point is that the economy is sending mixed signals. The signals are unambiguously pointing to an improvement in economic activity. But on the pace, we do get mixed signals. For example, indirect tax revenue numbers are doing very well, direct tax revenue numbers are not doing so well. Real credit growth numbers are actually doing better than people think. Stalled projects have also come down, but at the same time exports are in negative territory. Private investment is still challenged. So, in that sense, therefore, the economy is still well below potential and that’s the sense in which you can completely logically say that even though it’s recovering and full of potential, therefore it needs monetary policy support since we are not going to aggravate inflationary pressures.

What economic policy strategy does India need to deliver on PM Modi’s promise of creating 100 million jobs?

The 8-10 per cent growth target is a necessary condition for generating all these jobs. And also remember that the view in the Economic Survey was, and I stand by it, that because we are a complicated democracy and not in crisis, the appropriate yardstick for measuring performance is whether we are seeing a “persistent, creative and encompassing incrementalism.” That’s something we must recognise. Much as we may wish things get done quicker, this is the reality.

Can India get back to 8 per cent-plus growth within the term of this Government?

Oh, yes, that should hopefully be possible earlier than 5 years. What are the bottlenecks? The balance sheet of firms, that’s why clearing the stalled projects is important. Discoms are a big problem. The government is going to treat those with urgency. The tax issues have led to a lot of uncertainty and bad blood. Addressing that will be a great start. GST of course is another very important reform, an an area where all of us are disappointed it couldn’t have been done faster. But it can hopefully get done soon and that should help in kick-starting public investment. For banking balance sheets, we have started on the whole recapitalisation thing.

Without sorting out the issues surrounding labour, land and capital can India really hope for double-digit growth?

Each one has his or her list of priorities of what is important. Some will say labour laws, some will say land, some will say GST, and some will say ease of doing business. I can’t honestly and in good conscience say I know what is more important than the other. We have to do a lot of what is on this list. And then the challenges are, one, how fast we do it, what are the political constraints, and two, do you do it at the Centre, or do you let the states do it? One of the striking differences between China and India is that China has had convergence within the country. Poorer regions have been growing faster than the richer regions. In India, even now, 30 years after our growth took off in the late 70s to early 80s, we don’t see convergence across regions in per capita GDP growth. And it also struck me that possibly one reason could be that we don’t have enough labour mobility within the country.

People don’t want to move to Bombay because the higher salaries don’t compensate for the rental costs and the quality of life.

So maybe employment creation has as much to do with rental markets. The other thought that struck me is that to the extent that you have social constraints, what it means is that the expected differential has to be that much greater to offset the greater rentals and social cost of mobility.

In that sense, China being much more homogenous, the expected differential has to be less than in India because you don’t have the social cost so that’s why we need more rapid growth and need to address the urbanisation constraints. The returns have to be much higher to compensate for these high social costs.

Regarding land laws, the decision to let the states take the lead on this is a very good one. States are in a better position to address some of these issues. Similarly, labour laws being done by the states, as Rajasthan has shown, is a good way of doing reforms.

What is the state of the Chinese economy? And, what does it imply for the world and for India?

What is going on China is really important but we don’t know fully how it is going to pan out. There are at least three defensible views. One view is that there is over-hype about manufacturing declining. If you look at the services indicators, which is now a much more important part of the economy…

50 per cent…

Yeah, exactly, and that’s not doing badly so it is over-hype.

The second view is that there is something going on but it is a temporary wobble and that the authorities maybe lost control to some extent but they will regain it and things will be back on track. The third view, which is probably a low-probability view but not something that can be ruled out, is that actually the interaction between economics and politics could generate something that is much more serious. I veer towards the second view that it is a temporary wobble and that China will regain its footing but it will regain its footing at 5-7 per cent growth. Not 10.5 per cent.

If that is the medium term forecast for China, then it throws up more challenges and opportunities for India. If China grows rapidly, it is good for the world and for India. If China slows down, it will throw up challenges.

China is slowing down by moving away from manufacturing to services so the net effect is that we are in for relatively soft oil prices, which gives us a cushion. It will allow us to maintain that macro stability which is so important for the launch to 8-10 per cent growth going forward. In some ways, you can think of this as a positive supply shock for infrastructure in the sense that prices are down for all the things that go into building infrastructure.

(Full text of interview at

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