In the past five years, India’s average growth rate stood at 7.3 per cent — the highest for any government since liberalisation. This high growth was amid global headwinds and despite weak credit growth. Given that the inflation fell to a historic low of 2 per cent and as the effects of structural reforms like IBC roll out, the potential for growth if bank credit takes off will be phenomenal, says Krishnamurthy Subramanian, Chief Economic Adviser, Government of India.
What should one make of the frequent revisions in GDP growth estimates?
We have to understand that the changes made for the collection of GDP data, based on senior economists’ recommendations, are in line with the UN system of national accounts. We brought in more proxies and better ways to measure GDP. For instance, in manufacturing sector, IIP has been replaced by companies’ financial statements, which go through audit scrutiny, and because they have more checks and balances, we can capture finer and accurate version of economic activity. Because of increasing formal economy, we now have two study states — before and after demonetisation and GST.
Between them is a transient phase and while we are trying to recalibrate proxies, there will be some errors, which aren’t biased or motivated. Till you understood the change fully, there may be some errors and proxy changes are a continuous process as the extent of formalisation increases. Also, in a democracy like India, the touch points for policy are so many that it’s extremely hard for any individual to be able to portray nothing but the truth. And any process of measuring has to live with some element of imperfection.
Given the election season, several states have announced farm loan waivers. Your thoughts?
There are a few things you have to keep in mind. First, formal credit is availed only by 40 per cent of farmers. By definition, loan waiver can only go to them and these 40 per cent are typically the rich.
Second, I’ve done some research using the UPA debt waiver and what we found was that benefits of the debt waiver, even among the 40 per cent, were cornered by not the desirable, but the rich and the undeserving. They are not only undeserving, but also don’t repay, which makes it even worse as banks subsequently become averse to extending bank credit. Eventually, loan waiver adversely affects the farmer and overall, it’s a bad economic idea.
How concerned should one be about the likely fiscal deficit breach?
Fiscal deficit has been consistently coming down, and fiscal prudence has been maintained despite having higher devolution and after implementing the Seventh Pay Commission recommendations. Earlier, when pay commissions were implemented, fiscal deficit spiked. Despite these two, deficit has been moderate because tax collections and tax payers increased in the past few years.
Moreover, the actual change (fiscal deficit breach) is 0.02 per cent, which isn’t much. Plus, if you take the revised GDP numbers, even for FY19, it’ll much lower as the growth base will be higher. We are very much following the glide path to the FRBM (Fiscal Responsibility and Budget Management) targets.
Your thoughts on private investments?
If the recent slowdown in private investments was a cyclical phenomenon, it would have been back. But right now the change is structural and corporates and banks are, and will be, extra careful. In the past, as there was easy credit, and together with phone banking, a lot of excess capacity got built up.
Typically in India, capacity utilisation doesn’t happen beyond 80 per cent and only when it reaches beyond 80, firms start investing. Right now, some firms are reaching closer to that level and will start investing. But unlike earlier, mistakes can be costly now. So, banks and corporates will be extra careful.
Are you comfortable with the way cases under IBC are progressing?
IBC is a seminal legislation, enhances the credit culture and is bringing in a cultural change. Borrowers earlier had no fear of their companies being taken away. When you look across countries where such seminal changes happen, the cultural change doesn’t happen that quickly and takes time because the ecosystem has to develop.
Here as well, the ecosystem for bankruptcy including specialised skill, whether it’s judiciary, resolution professionals etc, takes time to develop... The change is happening and you have to be patient.
What will be the impact of structural reforms?
If you see, banks have already recovered I3 lakh crore through IBC. Together with decrease in the probability of default and increasing recoveries, when credit spread reduces, slowly interest rates will come down, cost of capital will become cheaper, especially for smaller firms without a track record. Because, those are the firms that end up usually getting affected. This round, when investments happen, they’ll be healthier because corporations will be mindful about bankruptcy.
Following the indiscriminate capacity increase that happened till 2014, banks too will be careful in evaluating projects. Earlier, real rates were negative, money was cheap and there was no governance.
As a result, money went into projects that were undeserving, leading to the twin balance sheet problem. The result of structural reforms will start manifesting and I don’t see why we can’t hit have high, higher growth from now.