Data indicates that the second wave of Covid-19 is leading to lower expectations of growth. Most of the growth projection that the Union Budget was built around are now mired in uncertainty. How do you assess the prospects of the economy now?

Bibek Debroy: The second wave of Covid and how long it will last is still uncertain. A lot depends on the progress of vaccination, because the answer to handling Covid is vaccination, not lockdowns. The decentralized lockdowns this year are different in nature from the lockdown last year. Therefore, while there will be an impact, it is unlikely to be as severe as last year.

There is a difference between growth in 2021-22 and growth in 2022-23. Growth is year-on-year. Hence, growth in 2021-22 is a function of the low base in 2020-21. The Budget for 2021-22 was conservative in its nominal and real growth estimates. Real growth was 10 per cent. Despite the second wave and lockdowns and despite adverse impacts in some sectors, I don’t see the Budget’s real or nominal growth projections being significantly off the mark.

Moody’s projection cuts GDP forecast to 9.3 % from 13.7%. What is your take? Even if we grow at 13% in 2021-22, it would still be 7% below the pre-pandemic levels.

Bibek Debroy: As I said, at one level, 2021-22 growth figures are irrelevant. What is relevant is the absolute GDP level in 2021-22 and growth figures from 2022-23 onwards.

Effectively, Covid has made us lose two years of growth. The pre-pandemic figure depends on the timeline. One could argue, depending on the timeline, that it was more like 5.5 per cent or six per cent. In 2022-23, we should certainly get back to six per cent real growth.

A seven per cent growth will take time, because the supply-side changes the government has introduced work with a time-lag, after recovery from Covid.

Many argue that the fiscal deficit target is irrelevant during an extraordinary situation such as this and that the government should rather focus on a large enough stimulus package. And, we are still talking about one per cent of the GDP. What is your take on this?

Bibek Debroy: There is not much point making comparisons with other countries, with more favourable fiscal balances. Per se, the fiscal deficit, or the three per cent share of the GDP, is not important.

What’s important is an ability to service debt (meaning, in this case, the Union government’s debt). The fiscal deficit numbers are derived from that.

This is extra expenditure because of Covid and revenue (non-tax revenue too) suffers. Given that, and the Finance Commission recommendations, there are a few degrees of freedom for the Union government. One must remember many items of revenue expenditure are fixed in the short-turn and a slowdown is not the best of times to increase effective tax rates.

The Budget does provide $4.75 billion for health and vaccination. Now that is required to be stretched further due to the severity of the second wave. How do you plan to address such situation?

Bibek Debroy: Budget numbers are estimates. Additional expenditure is always possible, as and when required. This may involve re-switching of some expenditure.

More importantly, the question is of efficiency of health expenditure (entirely a State subject under the Constitution).

More than fiscal issues, one should be concerned with the state of health-related human resources and health infrastructure, especially in rural India.

You said all efforts should be made to attract investment into India so that India can play a major role in the global supply chains, but two factors impede this. The constant flow of FDI has not made Indian industry competitive enough to be part of the global supply chain, and India is still not comfortable with many global trading blocs. How do we scale up then?

Bibek Debroy: Pre-Covid, I don’t quite agree that India is not becoming part of the global supply chain. It depends on the sector. I am not suggesting that everything desired has happened. Investments occur in States and there are time-lags and required clearances. But I don’t buy the argument of it being a binary, that there was no integration into supply chains across sectors. Covid has disrupted matters.

So far as regional trading agreements (RTAs) are concerned, there is a quid pro quo ‒ what one gains in market access as a result of what one grants in market access. In some historical RTAs, India’s hopes were belied. There are some that are now under negotiation, bearing this objective in mind.

The Indian government targets further reforms through privatization of assets such as Bharat Petroleum and the loss-making Air India. The public perception on privatization still tends to be more negative towards such move whilst there is actually a sound economic sense that Govt. must be out of this. Do you see such privatization proposals sailing through this year?

Bibek Debroy: There is a timeline for privatization and a process, after a decision to privatize has taken place. In some cases, legislative changes are required and those have to go through Parliament. The Union government is quite clear about the decision to privatize several PSEs (public sector enterprises). However, the processes still have to be completed.

One of the breakthroughs of this government was the approach to consolidating the public sector banks. It will certainly have a far-reaching impact on making our banks relevant in the 21st century. Would you continue to build on that?

Bibek Debroy: The agenda for reforming public sector banks has already been announced. One cannot tar all public sector banks with the same brush. In the template, there are different options for different categories of public sector banks, including privatization and consolidation.

Even though the government has focused on reforming many sectors, defence is an elephant in the room. The case of the ordnance factories (51 factories with massive NPAs) scattered across India is a drain on the economy and the verdict to privatize them is almost unanimous. Why do we delay such reforms which only impact security but a huge drain on the taxpayers’ money?

Bibek Debroy: As with privatization, there is a process and there is a political economy of reforms. Had there been an unanimous verdict, why was it not done before 2014?

Privatization has two nuances, privatizing existing equity and allowing private entry.

Have reforms in agriculture brought any significant dividend?

Bibek Debroy: That depends on what one means by agricultural reforms, because agricultural reforms cover many areas. In places where agricultural marketing and distribution have been opened up, there is both anecdotal and empirical evidence of commercialization and diversification having helped farmers, leading to an increase in incomes.

By agriculture, does one mean only rice and wheat? One should think not. Any significant reforms in agriculture, also require a reform of rural land markets, with clear surveys and titles.

The progress of that varies from state to state. Agriculture itself varies a lot from state to state and the historical Green Revolution areas are not the only examples of what is happening in Indian agriculture.

Still, largely, our growth model is based on domestic consumption unlike the export orientation of major economies in Asia. Do we have a strong export policy to back us up? Also, we are not competitive in global supply chains. Where will the sustained economic growth of an average of ten per cent of GDP come from without export?

Bibek Debroy: For a large economy, the share of trade in the GDP is never going to be as large as the share of trade in GDP of smaller economies. That is not a fair comparison. If one adds inter-state trade to trade figures, India’s trade to GDP would be quite high. It is worth bearing this in mind. I agree that exports are a major source of GDP growth, in addition to consumption, investments and government expenditure.

It is also true that export growth is necessary to drive an eight per cent plus GDP growth.

Exports depend on (a) supply-side improvements; (b) demand; and (c) the exchange rate. Demand is largely exogenous and the external environment is not as benign as it was when the economies in East Asia drove their growth through exports. The government’s reforms and there are several of these, have focused on supply-side improvements.

The reforms in the Indian Railways will have a far-reaching impact on the economy. Could you share what is that you propose to make the Indian Railways viable and how the bullet train will be a leap from the rail technology of the British era?

Bibek Debroy: There are many aspects to reforming the railways – human resources and organizational structure, proper financial accounting, opening it up to the private sector, a regulator, monetization of assets, rationalizing tariffs and so on. The Railway reforms have followed the template set out in the Debroy Committee Report. There is a long list of reforms that have been done.

The bullet train is a bad example from that point of view, because this is through external and additional resources, not internal resources of the Indian railways. Having said that, the bullet train brings in technology, competition and resources. As with every other sectors, competition is desirable.

The Union Government Is Quite Clear about Its Decision To Privatise Several PSEs: Bibek Debroy, Chairman, Economic Advisory Council To the PM