India will require to have an economic model that is flexible and quite agile in its response to the evolving global situation, according to Sanjeev Sanyal, member of prime minister’s economic advisory council. Speaking at an FE Boardroom session recently, the former principal economic adviser in the finance ministry noted that the dynamics of the post-Covid world will be ‘fundamentally different,’ with sudden changes in geopolitics, supply chains, technologies and consumption patterns and also in the way these interact with each other. He also responded to the criticism that the NDA government has been ambivalent to the concept of free trade, by stating categorically that commitment to free trade won’t necessitate an unthinking adherence to the Washington Consensus. What’s required is an approach that is calibrated and best serves the national interest, he stressed. Edited excerpts:
How do you re-assess the state of the Indian economy and its short- and medium-term prospects given that the Russia-Ukraine war has complicated the external sector after the Economic Survey 2021-22, of which you were the lead author?
As far as the Indian economy is concerned, the sectors that have remained closed for long due to the pandemic are now opening up. Macro-economic stability and a financial sector that is in robust health are there to support economic recovery. A series of supply-side measures taken by the government is also beginning to yield results. Inflation has largely been under control, except oil- and commodity-driven component of it. Banks are well-capitalised and the banking system is much healthier today than 2-3 years ago. With reduced non-performing assets (NPAs), banks are ready to go out and lend again.
There is considerable momentum in many sectors; in the technology field, for instance, a lot of hiring is already happening. If there aren’t any major disruptions, we can achieve 9% real GDP growth and sustain it for a period of time.
Of course, there are several challenges before us, some of which new. The events in Ukraine have inflated prices sharply. Being a net importer of energy, India has no choice but to take this in its stride. To what extent the spike in crude prices could feed into global inflation is still an open question. Though it may be debatable as to how the burden of costlier oil could be shared between consumers and public accounts, it is the country that gets hurt ultimately.
The dynamics of the post-Covid world will be fundamentally different, as sudden changes are likely in geopolitics, supply chains, technologies, consumption patterns etc. and also the way these interact with each other. So, we have to maintain an economic model that is flexible and agile in its response to evolving situations.
The Economic Survey assumed that oil prices (Indian basket) would average at a rather benign $70-75/barrel through the next fiscal year. Now that this assumption looks unreal, do you think there is scope for coexistence of the waterfall and barbell approaches to deal with the eventualities?
A waterfall strategy would have required us to have planned for a war in Ukraine, which we obviously we could not have done. The only way you can deal with uncertainties is through having a feedback loop. From here on, the things that we have to adapt to will be different. While we were adapting to the pandemic earlier, we will now have to respond to the evolving geopolitical situations and oil prices. Waterfall situation works only for a mechanical project where the parameters are all known; it may work, for instance as you a build a structure, but not necessarily when a whole city is to be built.
Do you think the evolving situation will make policy choices more difficult for the RBI, especially since the threat of imported inflation has now risen?
I don’t want to comment on what the monetary policy committee prerogative is, but I think the growth momentum is still strong. Crude prices and domestic consumer prices are what we should be wary of. Up to a point you can have cushion against (imported inflation). Almost all the inflation is imported now. But we don’t yet know how long (high energy prices) will persist.
Having said that, our ‘reaction function’ will also partly dependent on the same of the rest of the world. What the US-Fed will do will matter. There are many emerging markets including some in our neighbourhood that have begun to face severe economic headwinds. There are many emerging markets that will face a payment crisis. Some of our responses will depend on what the international response to these will be.
The NDA government has deliberately chosen to use the public capex route to crowd in private investments and engender a virtuous cycle that could potentially ensure high GDP growth for a period of time. There is little proof of this strategy having worked as yet…
The question is what we must spend on, given our limited resources. We should invest in public infrastructure for two reasons: first, there is a need to create assets against the debts that we will run into for creating this infrastructure (so that debt is repayable); secondly, evidences suggest infrastructure investments have higher multiplier effects.
The assumption that private sector is not investing at all is not true; there areas where such investments have begun to trickle in. In some cases, there are supply-side problems. For example in the automotive industry, supply of chips are constrained, while the demand is apparently strong. There is nothing we can do about this in the short term.We are dependent on global supply chains for many ingredients including energy. So, our job is to keep investing in those activities that will over time ease these up.
The informal sector is bearing the brunt of the economic slowdown, as is evident from the high growth in GST collections in recent months, which is somewhat inconsistent with other high-frequency economic indicators. While formalisation may have long-term benefits, the large-scale shifting of business from small to big units has resulted in considerable job losses.
We can get the informal sector back on its feet only by keeping the economy open. The biggest beneficiaries of infrastructure creation is MSMEs because they use public infrastructure more than the big firms. Having said that, we also want to have a few companies which are of global scale. For a limited period, we have chosen a few sectors where we can have companies of global scale. We have given them time for scaling up rapidly, as this is important for productivity enhancement. Once that period is over, then we will look at other sectors and do the same thing (for them) too. It is not possible to provide the same kind of facility for all because we have limited resources.
How do you react to former RBI governor Raghuram Rajan’s comment that the production-linked incentives amount to return to the old License Raj where you are subsidising some of the biggest industries in India?
I don’t know why he (Rajan) is holding such views, which are patently wrong. As I said, MSMEs will benefit from better infrastructure, deregulation, and a cleaner banking system. In the last two years, a lot of support was provided to the MSMEs through liquidity support and other measures. Contrary to the perception among many, MSMEs, being suppliers to large companies, thrive with them. That there is a trade-off between the two is a misconception. We are creating an ecosystem for sections of MSMEs to become larger and start-ups to grow. We definitely don’t have a view that large companies are antithetical to economic prosperity, on the other hand, we want them to be flourish and become globally competitive.
