Arvind Subramanian, Chief Economic Advisor in the Ministry of Finance, was seen as ‘arrogant’ but ‘gutsy’ by his friendly neighbours in the North Block. He has often ruffled feathers since he joined in October 2014 as he went about changing the role of the CEA with a series of measures – the twin balance-sheet problem, conceptualised JAM (Jan Dhan, Aadhar, Mobile), revenue-neutral rate for GST, removal of “subsidies for the rich”, universal basic income, climate change, and a focus on public spending as a means to spur the economy. His decision to exit comes several months ahead of the expiry of his contract in May 2019. BusinessLine caught up with Subramanian as he prepares to move on, leaving behind some unfulfilled expectations from the CEA’s Economic Survey. According to him, “How much can I fulfil, let me leave with excess demand rather than excess supply.” Excerpts :
Is India in a position to isolate itself from the turbulences in the global economy?
No, I don’t think so. The common shocks – oil prices, US interest rates, dollar fluctuations – affect emerging economies like ours. I think the integration with the global economy and the financial ripples that come with that are continuing. But we have to just keep to the path of macro stability. The government has done a terrific job in oil pricing without succumbing to populist pressures, and that will continue to maintain fiscal stability. We should be able to ride out this period of turbulence, and hopefully, we will be set in continued path of reforms.
Do you agree that when oil prices were soft the government did not pass on the benefits to the consumers?
See, when oil prices came down, the choice was how much to pass on to the consumer, how much to save, and how much to spend. And broadly, I think, what the government decided was that maybe one-third must be passed on to the consumer and the rest be used for deficit reduction and public investment expansion.
So, I think it is a very reasonable way of spending a windfall because, after all, deficit reduction is a bit like saving because you are improving your ability to borrow, spend in the future. So, I think it is a very reasonable way of allocating a windfall. And now that prices are going up again, we have a situation where we introduced deregulation of oil prices. Thegovernment has stuck to that and, in these circumstances when the markets are so volatile, anything that would smack of retreating on the fiscal commitments would have repercussions. So I think in that sense government response has been exactly right.
You had said you don’t believe in one number for debt or deficit. Do you still hold on to those thoughts?
Remember I said that at a time when the circumstances were very different. In first three years, inflation was coming down dramatically, our growth had slowed down, and private investment was down; therefore, we said this was the right time for public investments to step in. But now inflation is higher, world circumstances are much more volatile, and growth seems to be coming back.
So, to expand at this phase of the cycle would be somewhat risky. My views are completely consistent because at that point we needed public-investment expansion. Remember, it was not so much about fiscal expansion, but the debate at that time was more about whether we should consolidate rapidly or should consolidate slowly. My view was that we should consolidate more slowly and not on expansion. But then those were completely different circumstances, and now the circumstances are so different, so we have to be bit prudent and not add to the volatility.
Why wasn’t the twin balance-sheet argument accepted when you first flagged it?
When we first diagnosed the twin balance-sheet problem, the challenge at that stage of growth was reasonable. So it was very difficult to say then that, ‘Oh actually the economy is doing quiet well so unless we do this, this, and this, there will be a lot of problem.
Politically it is very difficult to make that argument when growth is happening. Besides, I think at that stage we also felt that the legal framework was not in place – IBC framework was not in place. Of course, I had said that we should go for a bad bank, but I think in retrospect, IBC and the legal approach was the only politically sustainable approach. Finally, only when the asset quality review started, results were seen; before that, people thought that NPAs were much less than what we see today.
MSP versus farm loan waiver… which do you think would be better?
Let us wait and see how it pans out. You can have different views. Some say that unless you have the administrative apparatus it won’t be effective. MSP is a kind of subsidy. Here the beneficiaries are farmers, but because it is a transfer, it has to be paid for, and usually it is paid for by tax payers because the fiscal subsidy goes up. So like any scheme, it is a transfer scheme with some benefits to some people and some costs. So the political system makes an assessment of what the trade-off between benefits and costs are. Loan waivers are problematic as the RBI has spelt out clearly what it does to credit culture.
You have been raising issues on power sector reforms. Has any thinking gone into it now?
There are issues in power on the NPA side, distribution side, the whole disscom situation, and then there are issues on the whole energy mix – thermal and renewable.
There has to be cooperative federalism between the Centre and the States to help resolve these problems. Some progress has been made, but a lot more must be done. At the heart of the power problem is how much can we make people pay? If people are not going to pay for power, you will always have distortions of subsidy and cross-subsidy. For getting people to pay for power, metering has to happen. Give DBT, but the market price has to be paid. These are difficult political situations, and unless we have cracked that, political economy distortions will be difficult to eliminate.
via Must ‘keep to macro stability path to ride out turbulence ’ – NEWS – Business Line
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