Supply-side reform is the only way to attract investment and spur growth, says KV Subramanian
India’s Chief Economic Advisor KV Subramanian on Thursday exhorted State governments to focus on ushering in supply-side reforms and increase capital expenditure to attract private investment, instead of spending taxpayers’ money on revenue expenditure in the form of freebies and doleouts.
In a veiled reference to Tamil Nadu – known for its populist schemes and ‘freebie culture’ – Subramanian said, “If I give television or mixer-grinders as part of the State policy, then it is revenue expenditure. It is easy to create a rhetoric that it is something that is helping the common person, but, often, what seems obviously good is not necessarily good, and understanding the policies is extremely important.”
Subramanian was giving the keynote address at a virtual session of the Global Linkages Summit titled ‘Mystic South’, on the theme ‘Towards a $1.5-trillion economy by 2025’, organised by the Confederation of Indian Industry (CII).
“Now that some of the southern States have really taken a lead in bringing some of the stalwarts in economics to help them on policy, I think their advice must be heeded,” said Subramanian.
The Tamil Nadu government recently appointed an economic advisory council that includes former Reserve Bank of India (RBI) governor Raghuram Rajan, Nobel laureate Esther Duflo, former CEA Arvind Subramanian, development economist Jean Dreze, and former union finance secretary S Narayan.
Subramanian compared the revenue expenditure towards freebies as the minute hand of the clock and the supply-side policies and capital expenditure to the hour hand.
“You cannot see the hour hand of the clock moving but it genuinely moves twice in 24 hours. The same goes with supply-side policies with capital expenditure, especially in infrastructure, because it has the effect of crowding in private investment, which will pave the way for further growth,” said Subramanian.
Highlighting the findings of the 2018-19 Economic Survey, Subramanian said sustained growth of the economy begins with a virtuous cycle starting from private investment, and that was the one common element about every country that grew at least 5-plus per cent over the last 100 years.
The CEA, however, said that it requires a visionary leadership and mindset shift for the industries and the government to move from revenue expenditure to growth-accelerating capital investments.
“This is where visionary politicians need to recognise that it is easy to actually do revenue expenditure and fall to the populist choice of giving out grinders or TVs, but far harder to take the same taxpayer money and invest in infrastructure,” he added.
He also referred to a study from the National Institute of Public Finance and Policy (NIPFP) to highlight that for every rupee invested in revenue expenditure, the multiplier for the economy is 92-98 paise. In contrast, for every rupee put in capital expenditure, the addition to the economy is ₹2.25 within the year and ₹4.80 over the course of the capital expenditure.
“If any of us are investing our own money, we would never ever invest ₹100 to get anywhere from ₹92-98 in return; instead we will choose to invest where we will get ₹480 in return. It is the dharma of an economic policymaker to treat the taxpayer’s money as his own money,” he added.
Later, during the Q&A session, B Santhanam, CEO Asia Pacific and India region and Chairman, Saint-Gobain India, asked the CEA if there was a shift in political thinking and leadership mindset in Tamil Nadu from investing for today’s benefit to investing for the future.
“I strategically chose to focus on States where things are happening, and I think you can read from it what I meant,” Subramanian responded.