Economy Recovery Will Be Faster Than What People Are Thinking, Says Finance Secretary Ashok Lavasa

Union Finance Secretary Ashok Lavasa, in an exclusive interview with BW Businessworld’s Suman K Jha, discusses the economic slowdown, and asserts that the economy is now in the recovery mode.
 
Excerpts:
 
How do you look at the present economic situation in the country?
The results that have come out for the last quarter showed that our quarterly GDP growth was 5.7 %. It clearly represented, perhaps, the kind of a trough in a process which had started more than a year ago. The redeeming feature was that the GVA level which had showed in the fourth quarter was maintained. So our understanding is that the process, which began sometimes early last financial year, has bottomed out. We are now seeing a process of recovery.
 
GDP growth rates have been declining over the last five quarters. Do you think there is any problem with the fundamentals?
In fact, on the other hand, if you see the macroeconomic fundamentals of the economy, our economy looks good, and fundamentals are very sound. Anything that you look at, whether it is the fiscal management in the country or current account deficit, or forex – they are in a good shape. Inflation is under control. All the macroeconomic parameters are strong. I don’t think that the slowing down of growth in any way reflects on the macroeconomic situation in the country.
 
What is to be held responsible for the slowdown?
The slowdown process started more than 5 quarters back. So clearly there are external factors which are beyond the borders of this country. And India was also a part of the overall process of global slowdown which is reflected in the way the export sector performed.
 
The fact that the FDI levels have been consistent shows that there is a degree of confidence in the strength and potential of the Indian economy. Clearly, one event which had an effect is demonetisation where a lot of liquidity was sucked out of the market. And the second is the big structural reform which is the GST. So two major reforms coming in quick succession have had a bearing on the market also.
 
And I would feel that we are going through a process of adjustment and the economy is adjusting to the effects of sucking out of excess liquidity from the market. This is a process of adjustment where the business houses, small industries and all the others who are a part of this taxation process are adjusting to the new tax regime.
 
So are GST and demonetisation responsible for this?
I would not say that they are responsible. But they have come at a time when there was a slowdown of the economy. The changes because of demonetisation and GST have contributed further to the industry gearing itself to work in a new environment. And because of this new environment and the process of adjustment, there would have been a contribution. For example, when we saw the GST was being rolled out from July 1, there was a lot of de-stocking which took place in the last quarter. So clearly these things had their effect.
 
Do you think demonetisation objectives have been met?
It depends on what you consider as the objectives of demonetisation. So basically, several objectives were there behind the policy. You have to look at each of them individually. But on the whole, it is a big step towards formalisation of the economy which is subsequently complemented by the GST.  Because this also is a big measure towards a tax compliant society. And I think tax compliance is an essential ingredient of a formalised economy. Demonetisation was a policy initiative with a view to influencing people to have their transactions in a way which is transparent. A process has been initiated towards a formalized economy.
 
You look at the new tax assesses who have come into the fold or you look at the new business entities which have registered for GST -- that is an indication that more and more people are getting into the formalised system.
 
Why do you think FIIs are leaving the country?
FIIs are never a permanent investment. They invest whenever they feel there is an opportunity of short term gain. There are phases when they will invest in one market, withdraw from that market and go to another market. I don’t think that FII investment is something which is looked at as a long term contributor to the economy.
 
What all do we need to do to revive the phase when India was the fastest growing economy?
I think the government has taken up a lot of initiatives. Right now, if you look at public spending, the expenditure which the government is incurring in infrastructure sectors, there has been a major step-up. Last year also the government incurred an expenditure of Rs. 20 lakh crore, and this year the intent is to invest Rs. 21.5 lakh crore. Not to count the capital expenditure been incurred by the PSUs.
 
The investments in road, telecom, railways, electricity, etc., are going on at a pace higher than in the past. Even drinking water supply or irrigation or medical health facilities, or the roads in the rural areas – investments in these areas have also been significantly stepped up apart from individual asset creation like housing schemes. On the affordable housing schemes, the government has spent a lot of money. On the whole, in the last 5 months in this financial year, there has been an increase of about Rs 1 lakh and 48,000 crore in public spending by the government. I think this provides a fillip to the economy as far as public spending is concerned.
 
And we now hope that the private sector will take the economic opportunities which come in the market and the spending on the private side will also improve.
 
You think you will be coming out with a fiscal stimulus?
There has been a general mention in the media about fiscal stimulus. I don’t know what the meaning of that fiscal stimulus is. If the meaning is the government will increase its spending, in five months I already told you, we have done that.
 
Last week, we had a meeting with all the CPSUs and they have a huge target this year of over Rs. 3.5 lakh crores and they have been asked to step it up wherever they can. We are hoping that the target which was given in the Budget for CPSUs will also see an upward revision. That is an additional spending by Government entities. And I think that should provide a big boost also.
 
Why are the private sectors not so in an investment mode? Why is there a low credit offtake?
The problem of credit offtake is twin sided. One is the financial difficulties that the system had with the NPAs. Other is many companies in India have overleveraged themselves. Probably their headroom doesn’t exists now. When there is a greater pick up of demand, there is a greater headroom created in the private entities or the banks NPAs -- when their problems get resolved, the private investment cycle will resume.
 
For example, there were 100 road projects that were stranded at one point of time. Now we find that at least 90 per cent of the projects are back on track. Railways are investing a lot of money and that opens up opportunities for individual enterprises to invest and participate. Some of the export sectors are showing signs of picking up. Govt had last year announced a package for textiles. The steel sector has shown signs of improvement. From here on, the movement will be northward.
 
What can be done to encourage industrial production?
One, as I said, is exports. You have a large body of industries which is dependent on exports. Government has looked at refund of state levies. Measures were taken for the steel sector. The renewable energy sector is doing quite well. So there are bright spots which are leading the path to recovery and things will be improving in the remaining part of the year.
 
Agriculture sector is distressed and requires more attention?
This year we had a very good production of rabi crops as far as 2017 is concerned. We saw a major increase in procurement, production. The monsoons have been by and large satisfactory. We are hoping that the kharif production would also be good. As far as productivity is concerned, we should have a good year. Strengthening of the rural infrastructure is something the government is giving priority to. MNREGA programme is going on and some unprecedented allocations have been made under this programme.
 
Do you think job creation becomes the biggest challenge for the government?
I think job creation is one of the most important things for the economy and it is something the government attaches a lot of importance to.
 
Do you subscribe to the theory that big bag reforms are missing from the Government agenda? 
According to me, all the reforms that are done are something which are required by the industry, economy and society. So I don’t know what is categorized as ‘big bang’. In the last budget, when the tax rate was reduced from 30 to 25 per cent for MSMEs, that was big bang. It was done in keeping with the roadmap which the government had announced. To bring down the personal income tax to the lowest category is also big bang. Government consistently tries to undertake reforms in different sectors. The dismantling of the FIPB was a bold step forward. The disinvestment of Air India is a very bold decision.  The kind of receipts we have seen by way of disinvestment are unprecedented. This year we are targeting Rs. 72,000 crore. Once we have the complementary of private investment, the economy will be back on the high growth path.
 
What are the major challenges facing the economy? 
One is the resolution of the NPAs. We brought out the change in law and India today has a very fine insolvency law. The bankers under RBI’s supervision are going through a process which is timebound. Case-by-case the resolutions will happen.
 
To sum up, the economy is in a recovery mode? 
Yes, and it will be faster than what people are thinking.
 
Can you put a number to that? 
We should be in the range of the annual growth which we had predicted in the Economic Survey.