Maybe Even 4.5% Growth A Rosier Picture, Arvind Subramanian Tells Prannoy Roy: Full Transcript

New Delhi:

Former Chief Economic Adviser to the Government of India, Arvind Subramanian, spoke to Dr Prannoy Roy on the state of economy in an exclusive interview, saying the government’s figures of GDP growth – 4.5 percent – could be a “rosier picture than the underlying reality.” Mr Subramanian further said the economic downturn the Indian economy is facing is not an ordinary slowdown, but something that hasn’t been seen in the last 20-30 years.

Following is the full transcript of the interview:

Hello, and welcome it’s a very very special program because we are all worried about the Indian economy there are some positives there are some negatives but if there is one person who can really analyze it through experience is Arvind Subramanian. We have done programs before when he was Chief Economic Advisor now he is teaching at Harvard University and he has done a lot of amazing work on the Indian economy – the good, the bad and the ugly and the overall summary is India’s great slowdown.

In the preparation for this, I must also thank one of your researchers for many years Navneeraj. He has been a great help Navneeraj Sharma who really helped simplify and make us understand exactly what is going on. Wonderful!

We kind of divide this program into three parts – first will be it’s like a patient and a doctor. Arvind is a doctor. First, he looks at the symptoms. How bad is the Indian economy? What are the signs and symptoms of things going right and wrong? Secondly, okay given the symptoms, what is his diagnosis of the problem? Why is it happening? What is the disease? What are the positives and what are the negatives? And finally, as a doctor, what remedies does he prescribe?

Dr. Roy: Arvind, there is a lot of work on it and for once you have worked in your life. How long is this, I mean, you have you been working last two-three days?

Arvind Subramanian: Firstly it’s a coauthor with a colleague of mine who is the IMF representative Josh Feldman. He is my Chief Economic Advisor. Together we worked on this for three-four months now.

Dr. Roy: Three-four months on this one paper and it’s causing quite an impact but I think it’s more when I read it I feel I do follow the Indian economy quite closely but I learned a lot. Let’s start with the most simple straight forward fact. Most of know this but just put it in stark terms just have a look at this. Is the Indian economy heading for ICU?

Just look at the figures here, the figure suggests that the growth rate is plummeting in India. Plummeting meaning it was 8% a short while ago and now it’s 4.5% in the most recent quarter and these are government sources. So Arvind when it was 7-8% you wrote that very strong paper with a lot of analysis of why our data is not too good it’s probably 2.5% higher so 8 would have been 5.5, so 4 is bad enough even its correctly 4 could it be even less than that?

Arvind Subramanian: Well, you see as you know that the GDP numbers are you know becoming you know not as informative as it used to be, I mean there are difficulties with those numbers.

Dr. Roy: Is it around the world recognize now that there are some problems with the numbers because it never used to be.

Arvind Subramanian: Yeah, I think now globally accepted that you know GDP numbers need some you know looking at carefully. So the answer to your question is four and a half and four and a half. You see, I can’t be precise but as we go through the indicators that we are going to go through now, you know to look at the more detail macro indicators, you know you get the impression that in fact maybe even four and a half is a picture a rosier picture than the underlying reality.

Dr. Roy: That’s shocking because I would be feeling awful about the country if it’s going about four and a half percent, I mean it’s back to old school Raj Krishna days and it could still be really 3%. That is just horrifying.

Arvind Subramanian: I can’t give a number. As we go through the indicators we will see that in fact, it is something that we are going through as you said is a great slow down it’s something that probably we haven’t seen for a very long time; 20-30 years you know the real economy is in it’s not just any ordinary slowdown.

Dr. Roy: I really feel that’s the point that you highlight in this paper and I don’t think everybody has understood the magnitude of the problem, I knew we were in bad shape. But till I read your paper, I felt that that was a problem and I look at some of the indicators that make you even question whether 4.5%, 4.5 is depressingly low. But if it’s lower than that and some of these indicators suggest that just look at this. If you look at imports, how bad is the Indian economy? Imports are almost as bad as 30 years ago. As you were saying we have never seen bad indicators for the last three decades. So in the current growth, imports are down to 6% and the capital goods industry really important almost proxy for investment down 10%. When you have gone -6 and -10 you have to go back 30 years to find things similar. Look at that imports okay -16% and little more and capital good industry -9 very comparable and what was the growth rate 30 years ago? 1.1 with that kind of figures. So when we look at the figures today -6 and -10 what is the GDP growth? Is it really 4.5 based on the comparison we would have to question it?

Arvind Subramanian: See, I think you know many many not just there are also export figures, consumer goods, figures tax revenue figures. In fact in the paper what we do is that we take all these indicators and then say let’s look at you know a previous era of a slowdown which is 2000 and 2002. Yeah, there what you find is that even though the GDP growth around then was four and a half all these indicators were positive. It’s only you have to go back to 1991 when growth was close to 1%.

Dr. Roy: In a terrible slowdown of 2001-2002 these two indicators we’re actually marginally positive and others and you still had 4.5% with positive, now it’s negative and you have to go back 30 years to find that, that is a real shocker! And that really does make you question whether with this king of figures you can have 4.5. But anyway we will get into as you say there more figures to point out to, let’s have a look at the Indian economy the great slowdown more indicators of that just have a look at these first for example. In fact, if you look at finding consumer good production, growth rate, consumer goods, it’s not just capital goods, consumer goods production growth rate is falling. Look at that from 5%  just 2 years ago to 1% now. 1% in consumer good production is worrying isn’t it that kind of that growth rate?

Arvind Subramanian: So I think one way of thinking about it is if you look at all these indicators Pranoy yeah, they are either in negative growth territory or they are barely positive growth territory. Right. And you know what it says is like this is not any slowdown that’s why it’s India’s great slowdown. See the comparison with 1991-1992 we have to be careful because you know we don’t have macroeconomic crises at all, in fact, one of the achievements of the government has been to stabilize the macroeconomy, you know inflation has come down our reserves are very healthy. We have no external debt problem so we are not going to have a currency crisis. Inflation is relatively low. In 1991, we had this BOP crisis major destructive that’s not the comparison, the comparison is with what happened to the real sector of the economy. You know growth, investment, exports and imports which matters for jobs, which matter for lives it also matters for how much revenue that the government has to spend on social programs. So the interesting thing is that and maybe we can talk about that later. What’s you know the way this slowdown is going to manifest itself or is manifesting itself is not in terms of you know oh exchange rate collapse or inflation rate going up.

Dr. Roy: One thing we have done over the last thirty years is this huge foreign exchange reserves. So we don’t need to go rushing to the IMF and ask for money.

Arvind Subramanian: Yeah not even close. Very robust macro-economy but on the real sector economy is slowing, jobs, you know, people’s incomes, people’s wages and of course government revenues and what it does to social spending programs.

Dr. Roy: See, okay these are all index of industrial production and various other forms of symptoms. One of the symptoms you point to, which actually rings very close to everybody’s understanding is how much electricity is being generated. If that’s up, it’s a good sign, if everything is down and that’s up, something’s wrong. But look at what electricity generation growth is happening in India. It is really really serious. It’s a sign of a major crisis, the great slowdown. Electricity, the lowest growth in 30 years. 30 years! Look at that, of course, it goes up and down over different cycles but look at the two earlier terrible low points, 2001, 3 %, 2008-09-10 again after the great financial crash, 2,5. And now electricity generation has grown by 1.8?  That really makes you feel, that’s serious.

Arvind Subramanian: You know, this is of course one amongst many indicators and it is an important indicator. You know that the Chinese Prime Minister Li Keqiang, he did an index, he said he also had doubts about Chinese numbers on growth rates so he said, no let’s measure it some other way, and in that, you know, electricity is a very crucial component.

Dr. Roy: Okay, yeah.

Arvind Subramanian: So this only reinforces all the other indicators that we’ve seen, which suggests that something serious is happening in the economy.

Dr. Roy: Yes, imports down.

Arvind Subramanian: Exports down.

Dr. Roy: Consumer goods down, exports down.

Arvind Subramanian: Capital goods down, tax revenues down.

Dr. Roy: Capital goods down, tax revenues down okay. Let’s just have a look at tax revenues. Well, let’s quickly look at exports, what you mentioned and then come to tax revenues because again, historically, exports show whether your country’s really booming, whether there is…There is some external factor, the lack of global trade, it’s shrinking. But still, a growth rate of 9%, 2 years ago which was not great by the way. 9% exports is not great, down to -1 now. And this is non-oil. Both imports and exports are non-oil to be comparable. So why is this happening? -1%, again part of the same problem or combination?

Arvind Subramanian: So I think that on the export side, part of it is related to global factors, even if there is of course, the global economy is not doing as well as it used to. But there’s also the question of whether, now there are domestic factors at work, you know, for example, the ease of doing business, the exchange rate has been slightly strong for some period of time. And you know, the competitiveness of the Indian economy, the competitiveness of our manufacturing, and you know and also our services exports, you know they did very well earlier, now they’re doing just modestly well. So all of these I think are, they all kind of, the pattern is the same with all these indicators.

Dr. Roy: The pattern. As you were saying earlier, all these are real factors that affect jobs and people’s life, even exports do. Exporters are going bust and you know, -1%.

Arvind Subramanian: Just to give you a benchmark, between, so in the 1990’s, between 1992, 10 year period when the economy did quite well, our exports were growing in double digits. Similarly in the 2000s, when we were doing very well, exports were growing double digits and now it’s you know -1.

Dr. Roy: This kind of, trend downwards is a big worry. Now all this affects not only jobs as you said, it also affects how much revenues the government gets. If the economy is doing well, it has a huge impact on revenues. Let’s have a look at how much direct taxes, there’s a big squeeze currently on government and you as the finance ministry, and I was there many years before you were born, feel sorry for finance minister who looks at this direct tax, direct tax. We are not even talking about GST here. Direct tax revenues are falling. They were growing at 16%, these are nominal of course.

Arvind Subramanian: But this is adjusted for inflation.

Dr. Roy: Oh yes, you had adjusted for inflation. So we would’ve been maybe 19 so adjust it by about 3-4%, maybe 16, 10 and now 0% growth. That is terrible.

Arvind Subramanian:  So essentially, with both direct taxes and the GST, we’re collecting for the first 8-9 months for which data were available, were about 3 and a half, 3.6%, which in inflation, adjusted is virtually 0%. So essentially, the government is squeezed for resources.

Dr. Roy: Right and when you say direct taxes, you mean personal tax and corporate tax?

Arvind Subramanian:  So direct taxes are personal income tax and corporate tax, the main ones. And GST is very similar, the GST, aggregate GST for the country as a whole.

Dr. Roy: Really makes a Finance Minister (task difficult). You’ve got some sympathy for somebody who has got no growth in revenue, no real growth in revenue.

Arvind Subramanian: I think the only point to make, one important point to emphasize is that, you know there’s a lot of talk about, say, you know the GST is not performing well, they look at the numbers and say. And today we wrote a piece saying that I think that’s actually being very harsh on the GST. I think actually the GST revenue performance has been quite good. Revenues have come down not because the GST is doing badly, it’s because the economy is very weak.

Dr. Roy: I mean you can tell by direct taxes. So it’s almost the same, in fact, may be doing marginally better than direct taxes, marginally, like 0%-1%.

Arvind Subramanian: Exactly, so I think that we should not be harsh on the GST because the GST itself has done…

Dr. Roy: It’s a reflection

Arvind Subramanian: Yeah, it’s a reflection of the economy.

Dr. Roy: Right so, those are symptoms which I find I didn’t realize how serious it was. Now, remedies, doctor, sorry diagnosis, then we’ll go to remedies. So what is the cause of the problem? So diagnosis now, what is the cause, as a doctor you’ve given 3 or 4, kind of reasons for the slowdown. Let’s have a look at some of the reasons that could be causing this great Indian slowdown. Just have a look at this. The reason for the slowdown is basically a breakdown of our financial system. And there have been so many other diagnoses but this one is the key one that you focused on. And it kind of relates long term and short term problems.

Arvind Subramanian: So you know, obviously, we simplified a little bit that what is, I think the reason we are where we are today is because of a combination of long term factors and short term factors. But they’re both connected by the financial system, what we’re going to call the, first the twin balance sheet formula…

Dr. Roy: The famous twin balance sheet, yeah.

Arvind Subramanian: One and then the second wave of the twin balance sheet yeah. But remember the long term factors also include the fact that our exports have you know completely compared to the previous decade, they’ve slowed down remarkably as we showed you. So that’s one lockdown factor. Investment also is down, but the investment is critically related to this twin balance sheet, a challenge. We’re going to come to that.

Dr. Roy: One of the things, I just wanted to ask you. We had talked about exports, but we’ve been so lucky with imports in oil. I think in about 2014-15, oil prices came down by half. You’d think India was just an oil importer, I mean largely. When oil prices come down from 110 dollars per barrel to 60 or 65, you think we’d boom.

Arvind Subramanian: It’s a good point Prannoy but what we say in the paper is that you know these structural factors, when exports and investment kind of collapsed quite a bit, then why did the economy sink even further? And the answer is that oil price is actually, it gave us a boost, gave a boost to revenues, it gave a boost to consumption. So it propped up, shored it up and prevented it from becoming much worse than it otherwise would have been.

Dr. Roy: That’s very kind. It’s like when you go to a doctor and he gives you aspirin and you say my head is better but it’s not there and he says it would’ve been so much worse if you hadn’t had the medicine.

Arvind Subramanian: No but that is true, the oil price gave us a bit of a cushion for you know, 3-4 years.

Dr. Roy: Yeah, if you drop from 110 to 60 or 65, that’s wonderful for a country like this.

Arvind Subramanian: Another thing to mention is that, in terms of the short term factors, several people have said you know, weak agriculture performance, which may be true as well, you know demonetization in GST.

Dr. Roy: You know, but, sorry, weak agriculture means, it’s not been a terrible monsoon every year. We’ve been pretty lucky with that.  

Arvind Subramanian: Yeah, but, prices, agricultural prices were down. So, agricultural incomes were down, so that’s a short term factor.
 
Dr. Roy: Output not down, incomes down which matters to the average farmer.

Arvind Subramanian: Exactly, and then, of course, everyone has spoken about the demonetization, GST, that has also probably has a short term impact as well.  But what we argue in the paper is that these may be important but the key short term factor is a second wave of the twin balance sheet.

Dr. Roy: So it’s now four balance sheet problems.

Arvind Subramanian: Yeah, we’re going to come to that, hopefully. But essentially to summarize, the first balance sheet was when the public sector banks led to the infrastructure companies and you know, there was over-exuberant lending, there was also some cronyism, you know a lot of bad lending went on. And that created the first wave where, then, see, and the way to understand the twin balance sheet crisis is that you know, the infrastructure sector had too much debt right, and this was actually first pointed out by Ashish Gupta of Credit Suisse, he did that famous house of debt. In fact, the regulators and the government were all behind so.

Dr. Roy: So they were just hiding the non-performing assets and he said its way higher.

Arvind Subramanian: Yeah, the debt was way higher for the corporates

Dr. Roy: Let’s have a look at what your paper says about the double twin balance sheet or twin-twin or four balance sheet problem.  It’s linked to the breakdown in the financial system. Earlier, the twin balance sheet problem or the crisis was banks and infrastructure companies, corporates of the infrastructure area, right, mainly. Everybody was affected but banks were giving in to infrastructure and they were not being able to pay back.

Arvind Subramanian: Because remember, growth slowed down considerably. These loans were made in the boom period and then when the growth slowed down, many of these investments went sour.

Dr. Roy: So bank loans to infrastructure corporates and others that could not be repaid. They could not repay them so they both had the infrastructure company balance sheet affected the banks’ balance sheet.

Arvind Subramanian: Because they couldn’t repay the banks

Dr. Roy: So what’s happening now is the four balance sheet crisis. The first twins, and another twin, this is NBFCs. Now for those who are not quite familiar with these…

Arvind Subramanian: Can I just explain NBFCs?

Dr. Roy: Yes, please.

Arvind Subramanian: So NBFCs are essentially Non-Bank Financial Companies. They do, on the lending side, they do lending like the banks but they don’t take money from depositors, so that’s why, so in a sense, they are less sacred in some ways because, with the banks, depositor money is involved, you want to be ultra-sure that you know everything is safe. NBFCs take a bit more risk because they don’t borrow from depositors but they do the same lending with banks too. Yeah, so in the second wave…

Dr. Roy: So they, NBFCs gave a lot of money to real estate companies and real estate has had a real hit so they’ve not been able to pay back NBCs. We’ve seen a major NBC, ILFS…

Arvind Subramanian: No, ILFS is not… ILFS is an NBFC but ILFS is, well, let’s just come to ILFS…

Dr. Roy: Okay, just generally NBFCs, they are all in the doldrums right now and ILFS is a special problem. They’re just one kind of NBFC but generally NBFCs, and for the same reason more or less.

Arvind Subramanian:  So just to summarize, the first twin balance sheet was public sector banks lending to infrastructure companies.

Dr. Roy: Infrastructure meaning roads, bridges.

Arvind Subramanian: No, like the companies that built the roads, the airports, the bridges. In this second wave what happened and remember, it’s important to emphasize, also is that this second wave, essentially, credit picked up after demonetization, that’s important. From about March-June of 2017, for about 4 to 6 quarters, these Non-Bank Financial Companies and also the banks, lent a lot and a lot of it went to the real estate sector. So now when the real estate sector has not done well, the real estate companies which do real estate have, you know, taking a hit and you know the NBFCs who lent to them have taken a hit. So that’s why the four balance sheets now.

Dr. Roy: Very clearly explained and really important. But it was all that, because of high expectations, people expected the economy to do well, infrastructure to do well, and just look at the housing sector. What has happened to it? It has really belied all our expectations, it’s failed all our expectations I should say. So, the collapse in the real estate sector, the real estate bubble. Have a look at this. Housing sales are 2 lakh crores a year. This is the housing sector, 2 lakh crores a year.

Arvind Subramanian: This is housing top 8 cities.

Dr. Roy: Top 8 cities, 2 lakh crores and look at the amount of unsold houses, 8 lakh crores a year. And it’s been this kind of, for the last 3 or 4 years, so we are just about building enough to, we are building about 2 lakh crores a year because that 8 lakh crores unsold remains every year. This is huge.

Arvind Subramanian:  Yeah, so the way to understand, see, we call this in the paper, a non-bubble bubble. And I’ll explain why that is the case. You see this is kind of a little bit counterpart of what happened, you know in the global financial crisis in the United States and in some other countries. So when all this lending goes to the real estate sector, what normally happens is that prices go up, houses get built and there is a very buoyant market. In India, what was different was all this money that was going, remember, lending to real estate was growing at 20% a year, 20% per year, both the banks and the NBFCs. But it was mostly or largely financing the buildup of unsold inventory. So essentially, you’re not lending to build, but you’re lending to just maintain the inventory. So how does this bubble kind of burst as it were, maybe if you show the next graphic.

Dr. Roy: We’ll have a look at the next one, it’s a big collapse in lending.

Arvind Subramanian: Commercial credit, yeah.

Dr. Roy: In commercial credit, right across the board of which housing is one major important part. So collapse in commercial credit and part of it is the impact of ILS bubble crisis, we’ll come to that. But as part of the collapse in commercial credit, housing loans have also plummeted. Just look at commercial credit, how it’s dropped from 22 lakh crores, that’s a lot of money, what is it now, 1 lakh crore.

Arvind Subramanian: This is like savage, savage. It’s a savage credit crunch, but this is where I want to spend two minutes explaining.

Dr. Roy: Yes, yes.

Arvind Subramanian: Whenever something like this happens, it’s like a major financial sector crunch, or you know the episode. It happens because of two reasons, there’s a trigger and there are some fundamentals which are unsustainable. So the trigger for this was you know ILFS going into default in August 2018. Now, why was it a major trigger, it was a seismic event. It was a seismic event for at least two reasons, one, how did this appear out of nowhere? 90,000 crore ILFS company, you know regulators, no one sounded a warning about it, no one knew about it. So 90,000 crores and it turned out to be a huge behemoth. But over and above that, people said look, if this can happen, what else is wrong in the financial system?

Dr. Roy: All the other NBFCs and the other sectors, yeah.

Arvind Subramanian: Then they looked at the real estate sector. So that was the trigger. The fundamental is that you know, essentially this lending was financing the buildup of housing so it was not a profitable business right, it was a bit like a Ponzi scheme, what we call ever-greening right. You just give money to keep that same level of thing and people said this is unsustainable. And it’s the combination of the trigger plus these fundamental lending, then the crunch happened, because then the banks, everyone says, what happened was that…

Dr. Roy: These things suddenly happen.

Arvind Subramanian: The people who were funding the NBFCs, some were banks, some were mutual funds we don’t have to go into, they suddenly withdrew. And then everyone…

Dr. Roy: All the NBFCs got badly affected.

Arvind Subramaniam: Exactly, and then the banks and the NBFCs suddenly stopped lending altogether because they said, you know, it’s a risky business.

Dr. Roy: They’re not getting money, it’s a risky business. It was like a…

Arvind Subramanian:  And this is the credit crunch that now has, you know, really severe in its intensity, which has caused the growth to come down so sharply.

Dr. Roy: From 22 to 1. I’m going to ask you a ridiculous question, is this ILFS almost like the Lehman crisis that are you seeing something really serious happening in this 22 to 1?

Arvind Subramanian: This is you know, what’s impacting the economy. Credit is the grease that runs the economy. If you don’t have credit, you know everything slows down. We’re seeing manifestations of this everywhere. But I think the fact of you know ILFS plus these NBFCs because now is where the four balance sheets really are operative right. Banks are still, although the NPAs, the banks have come down they’re still quite high, now we have NBFCs…

Dr. Roy: NPAs we should say are Non Performing, bad loans, bad debts…

Arvind Subramanian: And now the NBFCs are there and then you know the corporates and the real estate sector are that’s the source of the problem as it were. Why I think the outlook is a bit somber is when we come to the next chart, which is that the fact of the slow growth itself and the credit crunch is itself going to aggravate the problem.

Dr. Roy: That’s what I was going to ask you. Pretty bleak up to now, is it going to get worse? Let’s have a look at what Arvind Subramanian has written about looking a little ahead and what are the fundamental, underlying problems that are causing this and could be a worry for the future. Is the crisis going to get worse or not. Or is it just temporary? Companies are actually now paying more in their bank interest than their expected earnings. That’s a huge statement and it really is a worrying statement. If every year, you’re paying more out on servicing your loans, just the interest than what you’re earning in profits, it’s a big worry. Look at company finances according to this paper; interest rate on loans currently is 10.5 % to companies. And look at what their expected earnings are; likely earning 6.1%. So look at that gap. That means there’s a gap, a shortfall annually of 4.4%. Now tell us, how you get these figures.

Arvind Subramanian: So just to explain this a little bit, remember so companies borrow, they make profits and they repay their interest and the loans on that. A kind of proxy see for any one company, you want to proxy it by their profits but for the corporate sector as a whole, generally what we say is that earnings are likely to grow on average with nominal GDP growth. So that’s a kind of indicator of how earnings and profits are likely to go. So that is what you get and then you have to repay what you borrowed and for the corporate sector as a whole, it’s about 10 and a half percent. In boom periods, like you know in the 2000s and the 1990s, it was completely the opposite. The nominal GDP growth was like 15- 20% and interest rates again were like 13-14 % so the difference was kind of +5 +6 +7, now its -4 -5 -6. And this is going to add to the stress on the corporates and therefore, that’s why we have to have this in mind when we assess the outlook going forward because what this suggests is that things probably are going to get worse before they get better.

Dr. Roy: Things are going to get worse before they get better.

Arvind Subramanian: And I think that’s important to understand because in some way we have to break this cycle of you know earnings, growth, nominal GDP growth being much lower than the cost of borrowing. We can come to that later but this is also going to affect the government because the government is going to be squeezed as well.

Dr. Roy: So the government is facing a similar squeeze, you know the income tax revenues are down to 0 and they are paying interest rates so…

Arvind Subramanian: So this squeeze on the private sector and the government sector is going to add to the current uncertainty and somber mood and that’s why I think we need a real package of actions, both what shouldn’t be done and what should be done in order to break this cycle quickly.

Dr. Roy: Otherwise, if we don’t do all that, is this like heading for a debt trap? Cause if you’re going, shortfall of 4% a year, that’s not good news.

Arvind Subramanian: Yeah so, if you look at in fact Ashish Gupta’s latest numbers for a measure of corporate stress, it actually jumped in the latest quarter quite substantially. It’s basically measured by, what is the debt with companies that find it difficult to repay their interest. He has a very nice measure on that and it jumped from about 42% to 45% in the most recent period and it reflects as exactly this. So if this continues, that corporate stress is going to go up and that’s why we need to break the cycle and that’s why the doctor now needs to turn…

Dr. Roy: Now we’ve done the, you’ve had a look at the symptoms, now we’re going to the diagnosis and treatment. So we looked at the symptoms, you gave a diagnosis of the problem we saw. Now, what are the remedies and how are you going to treat the economy. Let’s have a look one by one at some of things. First, what should you not do. ‘Cause given your diagnosis certain things you would treat would exacerbate the problem, so what not to do first in the solution of the crisis. Budget deficit currently does not reflect the true picture because it’s got hidden expenditures, so stop those what do you mean by that? Hidden expenditures?

Arvind Subramanian: Yeah so something are in control of the auditor general pointed out are headline deficit have been coming down but you know some major expenditures like for the subsidies for food, Food Corporation of India, some of the infrastructural spending like National Highway Authority, it’s not reflected in the budget of balance sheet. Therefore, the true budget deficit the control auditor general is quite a bit higher than that.

Dr. Roy: So, the declared budget deficit is around what, is between 3 to 3.5%

Arvind Subramanian: So, if you consolidate center and states

Dr. Roy: Just take center loan for the time being

Arvind Subramanian: Yeah the center I think the headline somewhere 3.5%

Dr. Roy: If you include these hidden factors of the balance sheet 5.5% and sorry with the state?

Arvind Subramanian: States I think the number, one number it’s kind of something the private sector, it’s between 8.5% and 9% of GDP and this year the number it’s probably going to deteriorate…

Dr. Roy: We have been so proud of the central government budget deficit coming down to 3-3.5% but actually its 5.5% that’s awful. You are just putting more and more stuff out of balance sheet. That has to stop.

Arvind Subramanian: So, I think there are two lessons in this actually. One is that I think just to follow CAG and get the accounting to be you know much clear.

Dr. Roy: And what you are saying here is that don’t think your budget deficit is low and just increase the budget deficit, oh that’s the second point.

Arvind Subramanian: Second implication is that we actually probably don’t have any space at all.

Dr. Roy: If you are 5.5% increase in budget deficit to boost the economy

Arvind Subramanian: And remember if you look at the combined end, you don’t want to get into the double-digit deficits for the center and the state governments, that happened just after the global financial crisis and then it happened in the 80s. So, we know that makes a debt fiscal situation much more tricky and fragile.

Dr. Roy: Very important point, 3.5 you had a little room and you could say and what you are saying the second you raise is that do not try and boost the economy, do not raise government spending, don’t boost the economy by raising government spending, a lot of people are saying that’s what you need to do.

Arvind Subramanian: So, exactly a better way to put is don’t increase the deficit anymore because it is already very high, yeah we just don’t have room.

Dr. Roy: And that’s the third point you said again which everybody is saying and you are saying do not cut personal income tax rates because you are 5.5 budget deficit and not 3.5 so don’t think you have got room to play well.

Arvind Subramanian: Here there are two points here Pronnoy, one is whether we have room for this or not, right, but the second point is that look there is a general concern that we have to boost the consumption which is a valid concern, right. But then you have to ask that if you cut the tax rates to boost consumption who does this benefit? Because who pays the individual tax? The top 4-5% of India, the bottom 90% are much poorer, you know those are the people whose consumption you want to boost so if you want to boost the consumption in limited space you have an allocation problem you know to give it to the rich, salaried middle class and they are also very high up in the distribution system. So, I would say therefore, if you have to boost consumption, a much more effective and just way of doing this would be to give something like transfers – Direct Benefit Transfers, you know universal basic income or even expand programs like PM Kisan, much more effective and much more equitable way.

Dr. Roy: Taxes just affect relatively rich lot. Then you also say, do not raise GST rates and your final point is do not blame GST for all this. Explain this.

Arvind Subramanian: Look there is lot of pressure to increase the GST rates coming from what’s happening between the center and states. States say give us 14%, center says we don’t have money in the GST so that’s why the pressure has come to increase the GST. So, I think the reason not to increase the GST rates now is when an economy is kind of slowing down you shouldn’t raise rates and second it’s very odd, you know on one hand you want to reduce the income tax rates to boost consumption and the other you are also raising the GST rates which is actually going to affect the consumption.

Dr. Roy: And by the way both contradictory as well as one is for the rich and other one is for everybody. It just doesn’t make sense.

Arvind Subramanian: So what I think, we need to do is we need a wholesale re-evaluation of the GST rate structure but once the economy has recovered in a kind of slowdown is not the time to tinker with these things, let the economy stabilize and then we need a wholesale review and then we should probably go much more to the structure that I suggested in my revenue-neutral rate report, just have 3 rates and we should you know kind of stop tinkering.

Dr. Roy: Everyone now says three rates even one is fine but these rates where cashew nut here almond is here. It’s too complicated but implementation has been a problem.

Arvind Subramanian: You know but all that being said it’s not the time and GST is one of the fantastic achievements of this government both politically, administratively, technologically because revenues are down. The GST revenue reflects the weak state of the economy. GST is doing quite well we do need to revisit it but now is not the time.

Dr. Roy: Only problem I think you mentioned and many others said that 5 rates or 6 rates is so complicated so it’s a great idea, implementation lacked a bit of…

Arvind Subramanian: I mean you simplify that it absolutely

Dr. Roy: We should just stop here because most economists know what not to do you have gone one step further which is really very brave of you. What you should do and you have got a list of things, let’s go to it one by one. What does the doctor order for the economy now? Dr Arvind Subramanian. What does he say? What should be done? Number 1, this is a crucial issue although a bit academic – fix India’s data problem, we need to know whether we are growing at 10% 8% 6% 4% 1% we need to know that.

Arvind Subramanian: Prannoy, I am going to push back you a little it’s not an academic problem. Not just an academic problem because I think there are two huge problems that come to fixing it if we solve the data problem. One is it just gives confidence and trust in the government goes up. Globally, investors and that, remember, has an impact on the animal spirit. But I think the second reason is that how can you navigate an economy when you know some basic number, remember that depends not just on GDP, in an article we wrote. I can pose now 4/5 basic question that policymakers need to answer for which the data are not reliable. Just take the budget for example, the headline is 3.5 but the CAG says more. Which is it? The second example on the loans, bad non-performing loans, the bad loans are they under control or they have again gone out of control because of the NBFC crisis

Dr. Roy: The data on that has been hidden, you are right it’s not just academic

Arvind Subramanian: And let me say one more thing there a new sharp point about why it matters, let me give you an example this whole debate on compensation of 14% to the states it’s come up and people say its been so high and states are saying you have to pay, Prannoy the thing is that when that 14% was kind of devised we had a sense that the economy is growing at a rate of 7-7.5%% so you said oh 7-7.5% inflation is what 4-4.5% that gives you like 12% compensation of 14% for the state is not unreasonable because your revenue was going to grow but if actually the GDP is growing at say 3% your compensation would have been really different, not academics actually, very very crucial for so many policy decisions.

Dr. Roy: I take my words back because you are academic and I have to dig it and that’s a fact that that you need to know to decide your policies.

Arvind Subramanian: It’s like a very complex car you know if the speedometer doesn’t work you, don’t know how much air pressure is, you don’t know how the fuel tank is full or not, I mean it’s not easy to navigate economy in such circumstances. Not academic at all.

Dr. Roy: This would take a bit of time but this needs to be done as fast as possible because you don’t know, to a say a little academic, you go 8 to 4 or 6 to 2 you know you are slowing down. You can say this data at least gives you direction but, I suppose actual numbers also matter in terms of say deficit you have room to play with, you know direction in terms of you can see your revenue is going down, how much are you going down, what’s the plan, this is your practical side, finally. Ok let’s move on to other factors that need fixing. First fix the financial system several points here number one, independent assessment of bad loans really focus on that

Arvind Subramanian: A bit of history, I think part of the reason why this problem has festered for  so long because I think collectively government, regulator RBI we have been in denial to the true state of the problem, I think once we saw what is the true state of problem we mobilized policy actions and the government deserves a lot of credit for enacting the IBC, the bankruptcy code under which some real progress have been made but today now again after this new bout of lending to the NBFC we similarly need to know how much is the bad stuff. Unless you don’t know that.

Dr. Roy: Again more of a symptom than an actual problem because part of the problem is the phone call “Inko loan de do otherwise you will lose your job” that has to also change.

Arvind Subramanian: That has to change but that is a much deeper problem but for the moment lets come clean on what we know so that we can take the requisite action.

Dr. Roy: We can see whether more phone calls are being made or less. Like many people say that elections cause black money, actually, it’s the money you can make after the election when you are in power and then invest in the next election, so unless if that changes the phone calls you will be getting loans, here is an indicator of how many phone calls are being made.

Arvind Subramanian: The other point to make in the current context I want to emphasize is that people are saying now that the new problem is the NBFCs which made all these real estate loans. No, I don’t think that goes far enough because NBFC are connected to the banks, it’s the banks that also lend to NBFCs, so in the  new assessment we have to also see that the true state of the banks themselves are

Dr. Roy: So the point here you raised is and I will put two of them together now you mentioned improve the bankruptcy code, it’s working reasonably well but there are lot of delays and there are few anomalies and they have made some changes recently and the second point which is related to the first two is that create a bad bank for power and real estate, a bad bank you mean?

Arvind Subramanian: Two bad banks. Essentially the way a bad bank works the government sets up an agency, it takes all the bad loans off the books of the regular banks and then it tries to extract the best possible value from it. Either you change the management. You find the best bid through a transparent process.

Dr. Roy: That’s a separate set of skills or maybe a separate banks for those sort of skills.

Arvind Subramanium: You know but the risk of getting, complicated because the IBC was meant to address this precise problem but the point we make now is, say for the power sector the IBC may not be the appropriate avenue so let me try and explain it as simply as I can. IBC essentially the way it should work, you have a kind of transparent market for determining the true value, that’s it, then either you liquidate or you change management and you extract the maximum value, you have to write off the loans, but the thing is what if the true value as it were depends on the other actions the government has to take. So in the power sector, many private-sector plants are built which are highly efficient but they are not working for whatever reason. Supposing the tariff goes up to reasonable levels, suppose we could phase out the inefficient plants, the value of these assets go up, so where true value depends upon other government action that has to be taken it has to be done through a specialized bank. That’s what a bad bank is.

Dr. Roy: Let’s have a look at your next point which is increase the supervision of the NBFC. Now they have been reasonable success until the big collapse now but totally unsupervised and that really was a mistake.

Arvind Subramanian: See here this is actually a much bigger point than NBFCs. If you were to look back at the financial system for the last ten years I mean there has been a series of catastrophic neglects as it were there. You know if you look at the series of things, first all this lending, how many collapses have you had. ILFS, Punjab and Maharashtra cooperative bank, we have the Punjab National Bank, the Nirav Modi thing and you know series of things then now Deewan Housing. I mean where was our regulative mechanism why didn’t we stopped it. There is no easy solution for this but going forward we need to really really strengthen this.

Dr. Roy: In a professional way, you don’t want people to be threatened, you have good system, you have good auditors, maybe private auditors but somebody who doesn’t threaten, nobody will move an inch then.

Arvind Subramanian: I think the important principle is somehow you know, we kind of lost sight of the essential principle that in business the principle should be innocent until proven guilty.

Dr. Roy: And that is also affecting the investment

Arvind Subramanian: And I think because if people are guilty, if they are defaulters, by all means, go after them but the default should not be that everyone is guilty until proven defaulter.

Dr. Roy: You know it affects foreign investors. Two things people have told me foreign investors they don’t come because of the pollution, in fact, many embassies can’t find people to come here, and the other thing they say is I don’t want to come to India because there will be lot of false cases against me. That’s a terrible reflection of what’s actually happening and why people don’t want to invest.

Arvind Subramanian: Yeah see remember for two decades now we have had this problem of what I call the 4c problem that public sector officials, honest ones, private sector people have this fear of the investigating agencies. Curts, CVC, CBI, CAG – 4 Cs. So, I think we don’t want to make that problem worse through arbitrary, through investigation.

Dr. Roy: There need to be checks as you say innocent until proven guilty. The next point you make again a very important point is quite a controversial shrink the public sector number of banks which refers to privatize more banks, more independence of banks from the government.

Arvind Subramanian: I have kind of lost faith in the sense that we could somehow create independence for the public sector bank, we have said this time and again, it’s kind of Einstein’s definition of insanity, you try and do the same thing again and again and think that things will be different. Here I think there are many things possible. One is to privatize few banks, the other thing is to allow much more entry, more banks to come in give license, you can go to a new model of DFIs which could do the long-term project lending in a way banks can’t this is more a kind of long-run thing.

Dr. Roy: It is a big worry that the public sector banks are in too much political pressure from any parties – states, governments whatever you want to say.

Arvind Subramanian: And the other side is we forgot I think from the last 5 years, 3 and a half lakh crore of tax payer money have gone into the public sector banks you know. So, this is like sucking in tax payer money.

Dr. Roy: They are finding it tough enough to privatize Air India but at least there are private airlines in India. At least there are private airlines in India. Finally, let’s have a look at the next point on fixing the financials. Provide funding to only those banks who are reforming systems and processes.

Arvind Subramanian: When government is injecting money into banks, firstly a lot has gone on. But in a sense all this money has gone in just to get the banks at prudent levels of lending, and have enough capital. Unless you get the reform of these things along with the money, it’s business as usual. We have pumped in a lot of money, we now have to differentiate. We now have to see those that do the reforms, show that their underlying risk management is better.

Dr. Roy: We now move on to another area, which everyone says is really distressed – the agricultural sector. You have spent a lot of time on this. Let’s look at what Arvind Subramanian says about fixing agriculture.

Arvind Subramanian: Number 1, main thing is direct cash to farmers. Direct. Don’t give it through fertilizer companies, power companies so that they get cheap fertilisers and power. Just give them the cash direct. There are statistics showing farmer incomes have gone down despite subsidised fertilizer and power.

Dr. Roy: Because they are not being passed on, I guess.

Arvind Subramanian: Farm incomes have come down despite production remaining the same. International prices have also come down. Fertiliser and power subsidies create so many adverse effects – overuse, soil quality, environmental quality, health quality, and they go disproportionately to large farmers. So any long run sustainable agriculture in India has to have this. The big point here is that we have to raise agricultural productivity. I think that should be overarching objective here.

Dr. Roy: The next two points we take are related and very important and don’t seem too tough to do. Create one all India market for agricultural products. That in itself will increase incomes by 20-25%.

Arvind Subramanian: The government has this ENAM platform that they have started.

Dr. Roy: The second point is to stop the constant flip-flop in agricultural trade policies. Sometimes you have high tariffs, sometimes low tariffs – goes all over the place.

Arvind Subramanian: So, this is a point that Prof Ashok Gulati makes very strongly. When prices go up, we impose controls – export controls and other controls and when prices go down, we impose tariffs. But essentially what happens is that, you don’t guarantee policy certainty to farmers. So the person who ends up getting hurt by this is the farmer because he doesn’t know what prices he is going to get.

Dr. Roy: One this that does affect is cropping pattern. The way we give MSP – Minimum Support Price – on wheat and rice effectively, and many others we don’t actually pay it, people are producing wheat and rice that we are short on onions, pulses. So cropping patterns…

Arvind Subramanian: Subsidies are very important part of that. The Delhi pollution problem, it has many many components, but one part of it is Punjab shouldn’t be growing so much rice. And they are growing rice because of the MSP, and the power and water subsidies.

Dr. Roy: Cropping patterns, disincentives and incentives are skewed up. Couple of other points – one very controversial and one not.  Incentives for water conservation, including drip irrigation you mention. Final one, we will lose 3 quarters of the woke audience, because you are an OG, right? You are an OG? Allow new GMO crops. There’s huge controversy about that. It’s more emotional than being based on facts. There’s nothing really being shown about the direct connection between GMO and cancer. Is that correct?

Arvind Subramanian: See I don’t want to get into the details of this as it is a little controversial. But I do think, if you think about the cotton revolution in Gujarat for example.

Dr. Roy: That is GMO.

Arvind Subramanian: It’s all GMO right. Look at China, for example. Brazil. We should not have a kneejerk thing against it. We should assess, have proper regulation.

Dr. Roy: Key point is, give the farmers GMO. Let the farmers grow GMO crops, their imcomes will go up 3 times.

Arvind Subramanian: in agriculture, one big point is productivity. Second point is it is not new. Why doesn’t it get done?

Dr. Roy: That’s where I will end with asking why it doesn’t get done and for average viewer, for me, the statistics are very worrying. We should get out of stock exchange, real estates. Are we heading from an economic slowdown to a collapse?

Arvind Subramanian: Part of the reason why it is not getting done is because many of these policies are determined by both states and centre. So we need GST-type cooperative federalism to implement this otherwise it will be very difficult.

Dr. Roy: The average viewer. What should they do about this worrying diagnosis?

Arvind Subramanian: I will summarise in 4-5 big points. 1. This is very serious. It has structural components and short-term components. It’s the great slowdown. We shouldn’t expect that things will automatically get better. I think we should moderate our expectation about what long-run growth will happen in India. Our world economy is not sustaining the kind of exports that happened in 2000s. We have a balance sheet challenge. Third, the standard remedies to get out of this. Reduce interest rates, increase the deficits, those tools are not available. This is not despair or giving up. We are not entitles to 8-9% growth. I don’t like despair. It’s in our hands. Over the next few months, there will be good news. The economy is getting better.