The Arvind Subramanian interview: ‘GDP growth unlikely to be less than 7% in 2018-19’


New Delhi: Chief economic adviser in the finance ministry Arvind Subramanian on Monday presented his fourth successive Economic Survey and perhaps his last one if the government does not extend his tenure beyond October this year.

Like each of his previous Economic Surveys, Subramanian has brought in rigorous research with readability in the latest iteration. Subramanian, who is on leave from his post as the Dennis Weatherstone Senior Fellow at the Washington-based Peterson Institute of International Economics for public service, speaks on the challenges and opportunities before the Indian economy. Edited excerpts:

The key criticism against your latest Economic Survey is that there are too many ‘ifs’ in the Survey for a growth revival.

Some people are saying I am too bullish and some are saying there are too many ifs. Make up your mind. But there are risks and challenges. We have to be aware of everything.

But do you think growth revival is on a weaker wicket?

It’s not about weak or strong, it’s about what is the baseline and the upside and downside to it. This year, growth is 6.75%. There are reasons to believe that economic growth will be better because the negative drag will fade. Exports will be better because world economy is picking up, so that’s a positive. But oil price might be higher, so that’s a negative drag. If you put together, growth could be 7-7.5%. It’s simple arithmetic calculation.

If investment picks up, then growth could be on the higher side. If something happens—(higher) oil prices, (tighter) monetary policy, asset price correction—you get a bit of the downside. But it is true that the macro situation today is a bit different from say a year ago as oil prices are much higher.

Are you saying growth cannot be below 7% next financial year even with all the risks including possible oil price rise?

It is unlikely. It is a low probability scenario. At the current level of oil prices, we will get 7-7.5% GDP growth next year.

The Economic Survey seems to rely a lot on exports for growth revival even while protectionism is rising around the world?

At the moment, protectionism is not a factor. Our exports are growing. Even the (proposed restrictions on) H-1B visas are being discussed but no action has been taken. Manufacturing exports are growing at 11.3%, it’s not bad at all.

Do you agree that seven million jobs have been created in 2017-18 as claimed by the SBI report based on EPFO data?

We have done a stock calculation (in the Survey), we have not done a flow calculation (using EPFO data). On the stock, I can confidently say that the size of the formal sector is much larger. (The Economic Survey said that the formal economy is much larger than estimated). The fact that the size of the formal sector is larger is good news. But we need more employment and more formal sector employment. To the extent that labour laws and land laws come in the way of investment and hiring, we should always be willing to look at them.

There are concerns of asset bubbles on account of abundance of capital. How do you think asset prices will play out in the near term if interest rates rise in developed economies?

It is something we have to watch out for. If you find interest rates rising in the world, it will have an impact on capital inflows into India. I feel that, at the moment, of course, we have a lot of reserves, we are relatively well cushioned against that.

But still, it is something that we need to watch out for, especially when the stock prices are so high. I think we should be extra vigilant and extra careful, with more regulatory oversight and information flow to investors.

You talked about shrinking unviable public sector banks. Are you referring to consolidation among public sector banks?

Consolidation is not a panacea. Consolidation of banks is not the same as shrinking bank balance sheets, which is about selling non-core assets and reducing the scope for activities to profitable ones. Not all banks can do everything. Once the balance sheets are stronger, you can consider merging.

Do you think raising foreign ownership limit in state-owned banks from 26% at present is desirable?

I think so. Public sector banks do need more private sector participation. How much of it should be domestic and how much foreign is another question. Let us see.

Can the 10.5% nominal GDP growth you have projected for 2017-18 be used in budget calculations?

Let us see. We use whatever we think is a more realistic number. Similarly, the CSO (Central Statistics Office) wished if they could take into account all the recent developments in their estimate. I do not think T.C.A. Anant (chief statistician of India) will have any difficulty with the projections we have.

So nothing prevents the government from using 10.5% nominal GDP growth rate for 2017-18 in budget, which will obviously help contain fiscal deficit.

Not much. Between 9.5% and 10.5%, there is a difference of only about Rs7,000 crore or so (on fiscal deficit front).

But last year, you went by CSO data although they were in a similar situation of having only data for three quarters.

Good point. My view last year is exactly the same as my view this year. Last year, they did not take into account demonetisation. That’s why the Economic Survey figure was lower. CSO has also been consistent. Economic Survey too has been consistent. Whether the government has been consistent, we have to see.

One issue that affects the competitiveness of our manufacturing sector is subsidy and inefficient pricing in the power sector. You had advocated a federal framework for power sector reforms as had been adopted in the case of GST. What is the progress on this?

We will look into this issue after the budget. The NITI Aayog, the ministry and the others will be looking at what should be the next step after the Ujjwal Discom Assurance Yojna (UDAY), the turnaround scheme for debt-ridden state owned power distributors.livemint