ON FISCAL CONSOLIDATION
This has been an unusual year because of demonetisation and GST
. This is well known… There are no surprises… If activity is picking up, inflationary pressure is mounting. You would say that you should actually have a pretty healthy consolidation. So that is what the cycle would dictate for next year. However, you also have to take into account the fact that you can’t make promises which are difficult to meet. Cycle (economic) calls for ambitious consolidation, but the political cycle calls for more modest consolidation.
ON INTEREST RATES
The Indian economy
could have for about a period of 18 months benefited from lower interest rates, in the period when we had really high real interest rates and the economy was weak. But, now clearly the cycle has turned, inflationary pressures have re-emerged. So, stance of monetary policy naturally has to change.
ON CAPITAL MARKETS
The broader point is that we have seen around the world that when asset prices go up very much they always tend to come back and so we have to be watchful. The higher prices go, our vigilance should increase correspondingly.
Indian stock market boom is very different and make no mistake because it reflects a massive portfolio reallocation by investors, households away from gold, financial savings and real estate into stocks
. Part of the reason this happened is because of policy actions, so this makes the Indian stock market very interesting but also that has to be monitored very carefully. (He refrained from calling it a bubble).
We had thought that oil would not go above $55-60 per barrel. We have been proven wrong on that and we should admit that.
There are two things that have contributed to that. We thought shale oil would come back to $50-55. So far it has not come back to the same extent we wanted to because shale producers are now more concerned about profit margins than expanding activity. It was completely unforeseeable thing
. The ARAMCO listing is making oil prices much higher than they otherwise should be
. I don’t want to get into geopolitics of that, but that’s what has contributed to that. The government is committed to its policy of deregulation. We know the rule of thumb: For every $10 increase in oil prices, GDP growth comes down by 0.2% to 0.3%, the current account deficit will deteriorate by 0.4% of the GDP, or $10 million [ or billion ? ] . Inflation will also be higher by 0.2% to 0.3%.
So, I think we need to watch oil prices very carefully.
ON ADDITIONAL BORROWING
Whatever the borrowing that has been done by the Centre and especially the states, the market has misinterpreted. In the case of the states, for example, this year about Rs 40,000 crore is going to be financed through market borrowings. This is not financing new deficit, but just a change in financing away from NSSF (National Social Security Fund) towards market borrowing and that is not new deficit. That underlying borrowing that happened reflects a certain deficit, over and above that markets have potentially misinterpreted, especially what the states have been doing.
ON UNIVERSAL BASIC INCOME
There is a lot of discussion going on about UBI… I can bet within the next two years, at least one or two states will implement UBI. (Subramanian in the Economic Survey 2016-17 had mooted the idea of universal basic income that guarantees all citizens enough income to cover their basic needs and would be easier to administer than the current anti-poverty schemes, which are plagued by waste, corruption and abuse.)
There is robust and broad-based revival in the Indian economy. The direction is very good, but the growth is still below potential. When we give a range between 7 and 7.5%, it is because there are factors working both ways. Unless we get more data I don’t want to assign probabilities to where we are going to be. There is a story of revival and that of macro challenges — both coexist. In a sense, the current macroeconomic conjecture is about both the story of revival and the story of risks. This duality of revival and risk, in some ways, reflects the current state of macroeconomic policy… If you look at the last four quarters, you will see that manufacturing export growth is about 11.3%, which is very healthy and broadly in line with where the world economy is going. So exports are driving growth, the temporary factors are receding. Private investment going forward will depend a lot on capacity utilisation and the progress under the Insolvency and Banking Code. Consumption is going to be a bit of a challenge due to rising oil prices going forward.
Let’s always keep aside fiscal motivation for disinvestment and the real underlying efficiency reason for the same. I think that there is a strong case for underlying efficiency, or just stopping the bleeding. The government is aware of this…NITI Aayog came up with a list of recommendations.
I think this is a classic dilemma: if PSUs are doing well you say it is national wealth, and when you are not doing well it is difficult to disinvest. The principle that we should expand strategic disinvestment for underlying micro efficiency reasons are compelling. Unviable banks have to be shrunk and (there should be) much more private sector participation in good banks.
Climate change is a medium-term challenge. This year there are three or four distinct things that are going on in agriculture. We have actually seen a reduction in acreage under sowing both in kharif and rabi. It is not your typical surplus leading to large decline in prices. For some other crops, there have been a reduction in production. So, we need to have mechanism that would protect farmer against the downside.
Last year we tried to do that in pulses with more effective procurement, effective changes in marketing, (and) post agriculture warehousing. Wage growth has not decelerated; it used to be at 7-8% until a few months ago but this year because the sowing has come down the demand of labour has come down.
ON SINGLE GST RATE
Over some horizon — may be 3-5 years — we can think, in principle, of having one rate, because we see the benefits of that are so compelling. In the short run, there is a case for simplification and greater rationalisation.
ON GST COLLECTIONS
You are going to see a big increase over time both in people who are not paying enough and new filers. The process of compliance is going to improve quite substantially. For such a disruptive change and teething challenges, collections have been very reasonable, almost robust.