Thinking Heads : The Economic Survey 2017–18 +
Arvind Subramanian and Nandan Nilekani
A Candid Transcript of the Proceedings
- Economic Survey and Union Budget
- Banking
- Stigmatised Capitalism
- GST
- Privatization by Stealth
- Indian Economic Service and Outside Talent
- Demonetisation
Fun fact — Arvind Subramanian used the filler “you know” over 361 times in this 1 hour 35 minute interaction.
Arvind Subramanian —
The topic was supposed to be the economic survey, but as Nandan said, I can see some more cerebral, intellectual audience and to be honest with you, I just presented the survey at Azim Premji University. So in order to get my energy levels up I need to say something different and new.
So I’m going to try and talk about four or five different themes that come from the economic survey. I think we can have a nice Q&A on that.
The Economic Survey and the Union Budget
So let me begin by (may get me into trouble but) saying that, you know, I was asked recently in a parliamentary standing committee to to explain the contrast between the survey and the budget.
So I had to try and work up an answer was really that you know they say about politicians is that they campaign in poetry and govern in prose. So I thought the survey was the unconstrained campaigning in poetry. But then once the burdens of Office and the political constraints took over, the budget comes in. So its just two different kinds of beasts.
After about three and a half years here what are some of the big lessons I kind of take away from my understanding the economy from what we said in the survey?
Let’s begin with, you know, banking.
BANKING
Lets begin with banking. Just to make things a little spicy.
We have some very eminent board members from venerable institutions here in which we should ..
so so you know
The way I’ve always thought of the banking thing is not as a banking problem, but as a twin balance sheet challenge.
India’s twin balance-sheet problem — Off balance — The Economist
This is what we said about three-and-a-half — four years ago. We had over-indebted corporates and of course the flip side was the banking system had bad assets.
And so what we said was in order to clean up this problem we needed to do four Rs
- Recognition - Basically come clean about how much bad stuff there is the system.
- Then Resolution - to work out the corporate side.
- Recapitalisation - which is, you know, once you clean it up you’ll need more money.
- And then, of course, prevent the problem from recurring again you need Reforms - Otherwise it’s just throwing good money down the black hole only to see the problem coming back again.
I think that we actually did make a lot of progress and the government deserves credit on the first three Rs.
Recognition, I think, you know, Raghu (Raghuram Rajan) started the asset quality review process. I think we made a lot of progress on that, but I think that ..
This could be at the risk of being a bit immodest. Let me say I have something called the Subramanian law of not recognition, but non-recognition
The Subramanian law of non-recognition says that the amount of bad stuff at any point in time is 30 to 40% more than people think it is, and probably 50 to 60% more than what the regulator or anyone else thinks it is at any point in time everywhere.
It’s not because I know. I know nothing more about this than you do, but it’s just an iron law of, you know, it’s the way of people…… And I think that’s turning out to be true. It is turning out to be true that there’s more stuff.
So, but anyway to be fair we’ve made a lot of progress on that . But maybe there will be a little more cleanup.
Then we have, you know, Resolution. I think that the bankruptcy code enacted by the government was a major Reform. We actually have now a legal framework for, you know, sorting these things out.
A year later, the Insolvency and Bankruptcy Code is still evolving — Livemint
Then of course in November the government said we put in about 1.3% of the GDP — 2.1 lakh crores and then you know I was really excited that we made progress on the three Rs. And then, of course, as they say stuff happens and stuff happened.
Govt announces Rs2.11 trillion PSU bank recapitalisation plan — Livemint
So how do I see the process now. I see the process now as needing more review because I think first of all we’re going to have .. we’re going to see that there’s more bad stuff. Second, I think that, you know, the amount of money that the government committed, I think we have to review those numbers.
It’s going to be more. Partly because some of the money that was put in was actually money that the government thought the banks would raise themselves. But then the bank stocks having been battered that’s going to be very difficult. So I think that.. eh.
But of course now with all this stuff happening. The fourth R of Reform becomes very important. We’re going to have to review the process, but you know, we need to take action to ensure that this stuff doesn’t happen again. And as Rahm Emanuel famously said — never waste a crisis.
”You never let a serious crisis go to waste.” — Rahm Emanuel
You know, I always worry that, you know, you have a crisis. There is a sense of outrage, which I think is very conducive to decisive action but then Sridevi happens and then the outrage gets blunted and dented and then, you know, I worry that we may not have sufficient outrage, you know, to kind of enact these things again. That’s why expeditious action, I think, is probably called for.
Police Close Sridevi Death Investigation | Time (February 27, 2018)
Now on the… so…so…
Two points here ..
The fifth R
One of the things I neglected when i spelt out the four Rs is ..
That there was a fifth R, I think, which kind of was at the back of my mind but never explicitly articulated which is the *Regulation R*. Now, let me just say two things about reform and regulation because they are kind of mixed.
I think that I have a lot of sympathy for the view that public sector ownership complicates regulation. I call this a ménage à trois with all the attendant consequences because, you know, lines of accountability are blurred. You know, who can do what to whom is kind of ….
I don’t know if you’ve seen Jules et Jim. One of my favorite films of all time. It’s about a ménage à trois. So I think something like that is kind of playing out now, here. So I have a lot of sympathy for that view and that’s one of the reasons why I think that, you know, we need more majority private sector ownership of the banking system.
Now so you know, if you follow Twitter. I get a lot of pushback saying “this guy wants privatization; look at what’s happening in the private sector.”
And I think we have to confront that. But I would say two things in response.
- I would say that the fact that stuff is happening in the private sector too, kind of takes the edge off the argument invoked that, you know, “Oh my god!” you know the regulator couldn’t do this because it was public sector ownership. Now there were no kind of, you know, constraints here. So, you know, the failure of regulation is much broader than can be explained by public sector ownership. So, so I think we need to do much more on regulation. I think that’s one.
- The second thing that happens with this .. all the stuff coming out in the private sector is: then people say, “Look !, Oh you’re calling for more majority private sector ownership, but the private sectors is, you know, equally bad or whatever. So that takes a little bit of the sharp edge from the argument - do we need more private sector ownership.
I’m very clear on this, that ..
“Yes, stuff happens the private sector and therefore yes we need better regulation, but there is no doubt in my mind that the complications and the challenges get magnified with public sector ownership. Absolutely magnified!”
So it’s not that I love Cesar less but then I love Rome more kind of situation; that there are many more complications and I would say that at least three complications that come from majority public sector ownership. Which I think are actually new points. I wouldn’t have said these things had I not been in India the last few years. The one traditional one is the political interference point and I think we see that, you know, I think that holds true today as much as at any time in the past. But I think the new arguments. I would say are
One. I think that in some ways the public sector banks are handicapped relative to the private sector banks because it’s not a level playing field, you know.
- Public sector bank decision making has to contend with this pall — pall of uncertainty, wielded by what I call the four Cs [Decision making in Indian government is almost paralysed due to the four ‘C’s — Courts, CBI, CVC and CAG.]. You know the investigative referee institutions are quick to jump at whatever might happen in the public sector. So by definition, by construction, bold honest decision making in the public sector and by public sector managers is, has been and will continue to be impeded by this public sector ownership because of this pall of uncertainty which blunts good decision making in the public sector. That’s one I think.
- Second, a related point is that, you know, public sector ownership. Again, the lack of a level playing field. You know, I remember, for example, Raghu had invited me to come and give a talk at the convocation speech at NIPM. And you know we were chatting afterwards and Raghu said that RBI runs this institution, but you know, public centre banks can’t come and recruit here because they have different rules of recruitment, you know, writing exams etc etc. So the, you know, talent in the private gets.. To attract talent in the public sector, I think, it just becomes more difficult. Therefore, your decision making, risk management, etc. are affected by the quality of talent that you have. And I think that’s so .. So that’s another reason why I think public sector ownership is a problem.
- The final new reason why public sector ownership is a problem, is this history we’ve had, you know, the last…In the boom period essentially. One of the really surprising facts about the boom period was we had the biggest private sector investment led growth boom in Indian history which was completely financed by public sector banks. You know, if you look at the share of private sector banks in all this during that period, it was actually flat. Everything was financed by the public sector. So when people say, look, public sector banks have financed infrastructure, you have to concede that. At that stage the private sector banks were not willing to come in for whatever reason, but I think the public sector banks did. But when stuff goes bad exit from public to private lending has proved to be fiendishly difficult. Because of this, I’m going to come to this bigger problem of this whole other zeitgeist of stigmatised capitalism that we have. It is now very very difficult to exit from this. And so in the future .. Therefore the lesson is, going forward, the only way not to have this exit problem is to have less of public-private lending going forward. And so that’s another reason for having more, you know, a majority private sector ownership.
Now I don’t want to be misunderstood. I’m not calling for wholesale privatisation of the banking system. I think we should have some public sector banks but fewer majority owned public sector banks and so, you know, let them compete. But we have to create the conditions for having more majority private sector ownership. So that’s where I would say that, you know, my views on on the banking system going forward.
So I think it’s a huge huge challenge. I think we had made a lot of progress, but I think things have been set back a little bit and, you know, I do worry that if we don’t address it quickly enough, the whole investment cycle - private investment cycle might be affected in a way that you know makes India under-realise it’s kind of growth potential.
That’s my piece on on banking system.
Stigmatised Capitalism
The second big Issue, I want to raise which comes from that is this, you know, stigmatised capitalism.
The point I want to make here is that, I think in this big debate between states and markets all around the world .. I think when ”Frank” Fukuyama pronounced the end of history, I think, there was this view that, you know, the way forward for the world, almost as an inevitability is, you know, democracy as the political system — More role for markets as we are running the economy and of course more globalisation as a way of bringing all this together. Of course, each of those three things have been now undermined or setback or repudiated in different ways.
In India if you think about it. When I think about the role of state and markets, I think we’re really in a gray zone here. I think really a gray zone. I don’t want to talk about the state side of it. I think the government is trying to push state capacity. I think technology is proving to be a big part of the solution for making government more effective. But I think that on the private sector market side of it, I am now convinced that India is deeply deeply ambivalent about the private sector.
So now why is that the case and what are the manifestations.
I think that part of the reason, I think, maybe the original sin of private capital in India was that it was midwifed in an era of what i would call crony-socialism. That is that, you know, if you succeeded .. some of the legendary entrepreneurs succeeded, basically by manipulating the minutiae of tariff and excise schedules. I mean, let’s be honest about that.
So so so, you know, so if you are a successful capitalist, there was always this stigma, this thing, that was it really, you know, Schumpeterian entrepreneurship, or was it actually, you know, a favorable kind of treatment by government.
Austrian economist Joseph Schumpeter’s definition of entrepreneurship placed an emphasis on innovation, such as: new products; new production methods; new markets; new forms of organization.
I think, then we had this burst; I would say the only time when capitalism had a good name, when Nandan (Nandan Nilekani) and his buddies in the IT sector said, you know, we can conquer the world with, you know, distance from government or at least not; Nobody’s distant from government. Let’s be honest here. I think that at least, you know, not getting all those explicit favours and so on, you know, great corporate governance standards; all those things that we think really create a good efficient private sector. So we have that burst of, you know, good capitalists — The only time when capital really was not sullied by the stigma of having been midwifed under these strange conditions.
But then we had, you know, after this boom, we had this spate of, you know, problems I call them the the rent rows. I said, you know, in the 2000s and, you know, just to be clever, I said you had, you know, ethereal rents, which is spectrum, terrestrial rents, which is land and subterranean rents which was coal.
So, you know, so we are all trying to rent in the system - The rent raj, and that once again discredited capitalism. And then, you know, I have to be honest here. And then, of course, even the IT sector, even Nandan and his buddies are you know, have kind of faced challenges, you know, whatever all kinds of things that i don’t want to go into.
The model, even now the IT model is now under challenge. So I think that, frankly, you know, capitalism is stigmatised. So it’s now really very difficult for India to really embrace, you know, capital, generally, in its, you know, whatever.
And of course, all around the world we’re seeing that the only way you can embrace capital now, is if you have good regulations, if you have good state capacity to regulate. And if you don’t have that and you have this background of stigmatised capitalism we’re never really going to embrace, you know, markets and capitalism in a way that can fundamentally, you know, kind of advance the economy.
So I think it’s really a.. and all this, you know,.. the exit problem that we see and you know across the board, you know, the fear that you’re going to be helping some guy for the private sector, I think is just is the kiss of death .. is the kiss of death here. And again it paralyzes decision making in India across the board. So I think I don’t know how we are going to get out of it. I think part of it has to be that state capacity, regulatory capacity has to improve which gives I think the public the confidence that actually with this government we will be better able to, you know, regulate the private sector assets. Because remember the world over and this is pretty interesting, the world over, I think, that we are seeing a move back towards a greater role for the state.
One. To regulate these high tech guys. I think that’s big on the agenda now. Everyone is talking about all this — how do we use competition policy to tame all these giants. And we also need more regulation to, you know, to kind of deal with the kind of Facebook problem, which is different from the kind of monopoly problem, the tech problem. So I think world over we’re seeing a retreat of markets and a greater reliance on the state. And also because..
Oh! the other thing is that we see greater reliance on the state internationally because of this rise in, kind of what I call Piketty inequality - you know, rapidly rising incomes, especially at the top end of the spectrum. So we need more regulation as well. So internationally, I think this is happening.
India, it’s never really embraced markets. We have this, you know, zeitgeist of stigmatised capitalism. So, you know, the future for markets and states to me is very uncertain, so that’s why I say that well it’s really this gray zone of uncertainty between the relative roles of state and markets. So that’s my second point.
GST
I think I’m going to talk about one really positive story going forward, which is of course the GST.
Now, I can give you all kinds of numbers of the GST. But to me .. and I want to make it a little bit more conceptual than just the GST. I think the GST for me has been a wonderful kind of development in many, many ways in India. I mean, I don’t want to go into the fiscal side, the tax compliance side, the formalization side. All that is happening and you know we have numbers showing that things are looking up . Things are promising. And I think as a tax base and in terms of formalization we’re going to make great strides going forward. But to me, what was really interesting about GST was the fact that, you know, in some ways the.. the, you know, how to kind of, India as a kind of political entity as a federal political entity. I think we showed that, you know, corporate federalism could really work.
Now, you know, the other reason why I think GST’s been very heartening is to compare it with what’s happening internationally. Internationally, you know, more and more political entities, say, you know, we want to reclaim power for ourselves, sovereignty for ourselves. Brexit was at one level about migration, but also it was about, you know, I’m not going to let Brussels determine the curvature of cucumbers, you know, the House of Commons has to do it instead. And so you want to reclaim sovereignty. So in that light and including what’s happening in the US… In that light, you know, for 29 + 1, you know, quasi-sovereign entities to say we give up a very important power which is the power to tax, we give it up in order to, you know, we relinquish sovereignty in order to pool sovereignty and then we will conduct business in this kind of cooperative manner.
I think has been a really, really great experience and it’s been a great experience also, you know, if you look at actually the way the GST council has worked. I mean, the quality of discussion, the quality of state capacity that’s been revealed here, the ability of states to rise above narrow interest, not always, not all the time but you know enough to make compromise possible and towards a common solution. I think it’s been a it’s been a great development. I think the lesson I draw from that is that across the policy spectrum more and more issues will have to be done in this manner.
You know, you take agriculture. I think it’s, it’s a state subject, government also intervenes and I don’t think we can't really resolve the problems of agriculture unless we have this cooperative federalism model there as well. So I think cooperative federalism as a political model.. I call this a, almost a technology for reform — It’s very easy to say what we must do.. But the how of doing it. I think cooperative federalism is a kind of a technology for reform, you know. You get people together and then, you know, carrots and incentives, sticks to incentivise states to do it. I think that’s going to become, or that should become more and more important, because otherwise I think a lot of these challenges will remain unaddressed because these are complicated problems which are going to involve the center and the states. So I think the GST does provide a kind of a model for all of us to emulate in many many other policy areas of reform as well.
So I think I’ve spoken enough, I don’t know if I’ve been cerebral enough for this audience. On this note let me stop and ask Nandan to clarify what I said.
Arvind Subramanian and Nandan Nilekani
NANDAN : Good. Arvind as you know is not just an economist, he is a literary type and all that stuff. If you see the latest covers.. There is a new cover on Outlook which is entirely dedicated to our own Ramchandra Guha and the opening article is by Arvind. So you should have a look at that.
ARVIND : I’ve to clarify one thing. So there’s a false confession I’ve made which I shouldn’t have made, you know, my good friend Ivan Menezes, and I we .. I talk about listening to Dylan.. Dylan in a haze of charas and I have to clarify that Ivan the Catholic only smoked cigarettes and Arvind Subramanian the good TamBram did neither.
Diageo’s ‘to be’ head Ivan Menezes: A peek into his St Stephen’s & IIM-A life — The Economic Times
No, I mean I was going to say I don’t even need to invoke the Clinton inhale analogy, because i didn’t smoke. It’s people like Ram who have to invoke it and say I smoked but I didn’t inhale.
Timing for Privatisation & Privatization by Stealth
NANDAN : So getting back to this banking thing, now we’re seeing the Air India Privatisation right. So we have gone from Air India being the main thing to a number 3 or number 4 in line and similarly even if BSNL was privatised today it’s very small, compared to what it was. So is that also an argument that the privatisation should happen when banking is still big as opposed to 5–10 years from now when they will be irrelevant anyway. So isn’t there a timing issue that you should do it when it’s relevant.
ARVIND : See, I think that, you know, I always used to say that the Indian approach of privatization by stealth was, to use that horrible American expression, you don’t privatise the public sector, you grow the private sector. You know, allow entry and we made great progress on that in the case of civil aviation, telecom, but it did not work in banking. We tried to give away generous licenses, etc. But, you know, as I said during the boom period it was the public sector that that led the charge and when the crisis hit in 2008, there was a flight of the deposits from the private sector to the public sector, because, you know, public sector banks, you know, they are whatever .. too public to fail, in any case, or or or something like that.
So I think that the model of shrinking and making it irrelevant worked for other sectors; has not worked….
So to think that, you know, give it some more time; it will work. I think the evidence so far is that, you know, I don’t have full faith that, that will happen going forward.
And the other thing of course is that .. you see .. the other contrast between civil aviation and banking is that, in civil aviation now I think there is political consensus. I think there is a broad consensus. I mean for a variety of reasons, including the fact that, you know, oh, you have options here that are significantly better. And so that kind of model out there, you know, convinces people and especially when you’re throwing so much public money. So people say you have an option. In the case of banking, you know, I think if all this stuff happens in the private sector. I think people are not convinced yet.
NANDAN : Yeah but I think some people and Uday Kotak is one who says that.. See, historically, the declining market share of public sector banks was 1% a year. So it took 30 years to go from 100% to 70%, but now they’re saying it will decline at 4% a year which is 400% increase in the rate of decline. Which means that in five years it’ll decline and go to below 50 percent. So, I mean, so ….
ARVIND : This 4% per year happening is predicated; it can happen if actually there’s no reform and nothing happens, right? But but I think there will be half hearted attempts at, you know, doing this because once .. See the problem now is the public sector banks have very little resources to lend. But once we get some infusions and this and you know they’re back in business.. You know, so, but then who knows. But so that’s why I think the jury’s out on whether, you know, events will shrink the public sector and grow the private sector.
NANDAN : Okay. Getting back to this whole stigmatised capitalism. I think you have some kind of bipolarity in India where there are large sections of the economy which have nothing to do with government which work on competition markets like consumer products and this and that and those that depend on government — either government as a buyer or seller or a regulator — and obviously that interface creates problems and the period between 2000 and 2014 was also a commodity super-cycle where every commodity was expensive — steel, coal. Now all those prices are coming down. So do you see that helping to reduce the stigmatised capitalism issue or ..
ARVIND : Stigmatised capitalism is a 35–40 year or maybe going back even further. So to undo that you need a lot of good stuff happening in the private sector across the board for this to happen. Because it’s not a one year, two year problem. It’s been happening continuously.
It’s enough supposing the banking sector challenges continue or, you know, the tech sector, whatever. And the more regulatory capacity is seen to be inadequate. That’s the irony. The less faith people will have in the private sector. So I think, therefore parallel effort has to be improvement in regulatory capacity.
NANDAN : You don’t think the regulators are doing enough ?
ARVIND : I think it’s a work in progress. I think some regulators. have done well. There’ve been setbacks in some. So, you know, on the whole, you know, if you look at the environmental regulator, for example again really stigmatised. TRAI — I think, you know, I think it’s made progress. Of electricity regulation, you know, especially at the state level, I mean, nobody will stand up and say, this is a model of great regulation.
Capital Markets & the Structural Shift in the Saver
NANDAN : Capital markets have done a good job.
ARVIND : See that’s.. that’s a very good point, which leads me to something that I want to say. I do think that we’ve made a lot of good progress with capital markets. I think thats true. But remember that in all these things, we are just, you know, one massive correction away from also you know … Its tenuous this whole thing.I think we’ve done a great job on the capital markets.
I worry about the capital markets. My worry is that, you know, this big, what’s happened in the last two years is that there’s been a kind of structural shift in the saver. The saver has moved from financial instruments — deposits, gold, real estate into capital markets and a lot of small savers have moved into this as well.
I worry that, you know, small savers think of capital markets as a safe investment, you know, having no volatility.
So if you have a lot of exposure of small savers in the capital market, you know, on the up it’s capitalism and on the way down with small savers ignored everything gets socialised.
And then you get the same issues again. I hope that won’t happen. I hope, you know, savers understand that this is the thing but but provided you don’t have that, Yes. i think the capital markets……
NANDAN : But the other thing is a larger secular trend which is household assets which historically have been in real estate and gold are slowly moving into financial assets. Isn’t the data showing some of that?
ARVIND : See, the moving into equity market.
NANDAN : Overall financial assets, I mean. Today India is about $4 trillion of assets which are 95% are in real-estate and gold. You don’t think that is slowly chipping away and part of that is moving.
ARVIND : No, I don’t think there’s been any big move. No, I think its being reverted again, but we’ve had this one massive structure shift in the last two years. You see the problem with that is that, you know, if you see a part of what’s happening. Also notice now looking at it from the point of view of a firm wanting to borrow money. I think we are getting some jugaad type of disintermediation from the banking sector. On the savings side, savers are moving into other instruments; on the borrowings side firms are saying, you know, we’re not getting money from the banks, we rely on capital markets. You know, that as well and you know that’s a kind of understandable event of the problems of the banking system.
I would unambiguously, you know, herald this as a positive development. But, you know, if you look at the bond market too for example a year or 18 months ago, there were issues on the whole, you know. I don’t want to name names but there were issues about regulation of the corporate bond market as well. So, you know, if it happens, if we get good regulation, you know, wonderful. But, you know, only the paranoid survive it. Therefore, we have to be kind of extra vigilant and I do, you know .. Mervyn King famously said that banks are private in in birth, you know.. You know, international in birth and national in death. I worry a little bit that capitalism is great on the up but on the down, especially when small savers are involved, you know, it gets socialised and creates all the complications for politics.
The Economic Survey
NANDAN : So how many economic surveys have you done ?
ARVIND : Four
NANDAN : So the general perception is that you have taken it to a new level of both intellectual content as well as literary style. So what is it that made you sort of raise the bar of these things.
ARVIND : No, I don’t think it.. I mean, I always felt that you know the surveys should read like the op-eds that I used to write. And hopefully, you know, something like that has happened; but maybe you know three years from now, the person writing the survey should say surveys should read like what tweets look like, you know. The attention span is getting shorter and shorter, but, you know, I do think that, you know, especially after the crisis, especially after the discrediting of economists, in many ways, I think the burden on us is much greater to communicate better. We have to talk in stories and you have to make it come alive, you know. Otherwise, what’s the point. I mean, I think, you know, to give, you know, my absent friend, Ram credit. I mean, you know, he’s made history come alive and accessible to so many people and, you know, in some ways, that’s what I think all economists and all academics should strive to do. You know, if you’re always looking at, you know, the validation of, you know, some guy sitting at Princeton or Harvard and that’s the way you’re going to write the survey. You know, it’ll be unreadable and unread.
NANDAN : Okay, so how many people read this survey of yours ?
ARVIND : Okay so on this I have big data. Aadhaar authenticated big-data. So I’m happy to report that in the one month after the survey was written we had 9.5 million hits from at least 200,000 unique visitors (because I think in India, you know, a communal computer is used by more than one person) from 163 different countries. I couldn’t believe, why would someone sitting in Gabon in the Central African Republic want to know anything about the twin balance sheet challenge of India and yet they seem to want to know.
NANDAN : Maybe they are twitter farms.
ARVIND : So, I think. And just to give you a comparison - This is 9.5 million. The World Bank’s flagship publication The World Development Report, over that same period got something like 1/20th the amount of visits.
Acronyms and Tautograms
NANDAN : So the other thing is, apart from of course making your economic survey readable and literary allusions and all that you also brought in a lot of new… You have a way to come out with concepts and acronyms, which I guess you get from your big boss (Narendra Modi).
ARVIND : Can I say my acronyms are better? Or rather the JAM acronym is going to stick I think.
NANDAN : JAM was your acronym and then twin balance sheet; then UPI, you popularised the idea. So how do you come up with these nifty acronyms or whatever ?
ARVIND : I mean, that’s a.. i think that, you know, the way you think and the way you write is a product of 30–40 years of reading and writing and researching. So, you know, so there’s no one.. The only thing I’d say is that, you know, I am, you know, I’m a maverick, I’m a maniac when it comes to work and especially the last three-and-a-half years. You know, I never really stop thinking about the Indian Economy.
My staff. We get emails at two o’clock in the morning three o’clock in the morning, you know, nine at night.
So I’m always thinking about; because I do think in some ways, you know, and I mean this not about my team and me, but about the Indian economy, that we could write 20 more surveys and yet not exhaust the infinite, you know, challenges, variety, complexity, which this, that is this beautiful Indian economy of ours.
The Indian Economic Service and Outside Talent
NANDAN : And so you write your emails after Arsenal loses the … Big Arsenal fan. Yeah. So the other thing is, you know, what you have done is you have a stunt, because this is working in the government and you did this the first time coming from the US.
You have the Indian Economic Service, which is the bureaucracy of the economic service of which you’re the titular head, I think, and you also brought in talent from outside. How did you bring these two together, how do you how do you make it work?
More outsiders needed in governance: CEA Arvind Subramanian — Livemint
ARVIND : You know, first of all, there’s a bit of irony in Nandan asking me this question because, you know, what I think we accomplished, Nandan with your Aadhaar you kind of achieved it at mega scale so you know this better than I do. But I do think that to improve state capacity and this is coming to the example that Nandan mentioned — It has to be an interaction between, you know, the civil service, you know, the permanent civil service — the bureaucrats and their interplay with outsiders. And just to give you an example of my own team of the Indian Economic Service, you know, very bright capable young officers, but, you know, not had the exposure, you know, the training, etc. So when these outsiders came and I’ve had, luckily over the last three-and-a-half years, lots of bright PhD students or graduates from everywhere. It’s that interaction between the outside and the inside. The outsiders learn how to work within a set of constraints, but in turn they bring, you know, techniques ideas, what the frontier is all about in terms of analysis and research. It’s that interplay I think and I think, you know, to the extent that I deserve any credit at all which I don’t is to try and facilitate that kind of interaction, you know, and I think this is a lesson, therefore, for it, you know, it’s a given that we need more external talent — that’s a given but how do you bring that in, in a way that you know, these guys don’t just parachute in and are kind of babes in the woods, not knowing what to do. That integration, I think is the big challenge.
Arvind Subramanian, economic adviser to Narendra Modi — Financial Times
NANDAN : So one more thing, you know, you’re generally seen as a more activist CEA than most CEAs. In the sense, a lot of them do the stuff but you roam around navigate and get things done. So is that different, I mean do you…. Are you a thinker-doer, not just a thinker ?
ARVIND : I think, I think that Nandan again you’ve done this much better than anyone.. that one of the things, and this is I mean.. this is not something that you do artificially. You know it has to come naturally, you know. If I think that, you know, its the undersecretary who has the, you know, the ability or the knowledge, you know, I will go to him and get that. And so I have had the, you know, enormous privilege of interacting with so many people in government, you know down the hierarchy and across sectors. You know.
For example, recently, the fact that we’ve got access to all this data, you know, as you know better..
NANDAN : Data. Oh! my God!
ARVIND : Not Aadhaar data, but that too.
You have to work with all the youngsters and the junior people in the system, you know, and generate the level of trust and confidence that they would be willing to do things if had we gone the top down way, we wouldn’t have got the access. So funny how government works. As you know people at the bottom have a lot more power and clout. Certainly not just.. of course the ability to block we know, but also the ability to be positive.……
But you do it, not because you think this is how its going to be. It’s not a instrumental thing. It has to come naturally. You know, I mean, people have to think that you really, you know.. So my room in the office is always it’s like a seminar or research room with people from everywhere. And you know, I love the fact that, you know, my friends in the revenue department, they say to each other “Yaar bore lag rahi hai. CEA ke kamre chalke gupshup karate hain.”
NANDAN : You’re creating a St. Stephen’s adda ? No charas I hope ?
Okay since you’ve done four years. What are the top three ideas that you’ve been able to convince the system and what are the top three blocks.
ARVIND : I think that. Remember that first we have to define flop and success. Right. I’m not trying to hedge because I will tell you where we’ve been spectacularly unsuccessful. I think the flop and success - It’s also a question of timeframe, you know.
I would say that infact the first budget. You know, because having diagnosed the twin balance sheet challenge we said public investment has to be ramped up and that was, you know, highly, highly successful.
You know, the report that I wrote on the GST. Look at the success of the GST on the political side - it goes to finance minister for having just forced the political consensus, just masterful, full credit to them. And on the implementation side — the revenue secretory Hasmukh Adhya and the entire team — CBEC, revenue, state governments on the implementation side. So, you know, they get all the credit.
But I think that the report that I wrote came at a time, which I think helped force the political consensus because if you remember at that time people said, Oh!, because remember — the prevailing wisdom, then was the revenue-neutral rate had to be 25% and had, you know, my report also said something like that, you know, people would have said that’s not worth having. So I think that, you know, making a case for low taxes, uniform taxes, i think that helped gain traction for …. I think, you know, JAM, cooperative federalism.
UBI — Universal Basic Income
Now coming to the flops/ successes, I would say UBI for example - Universal Basic Income - is something that in the short term is.. you know, nothing has happened, and therefore its a failure. But I think there’s been so much discussion around that already. I would say that we’re actually getting quasi-universal basic income schemes actually being implemented. For example Telangana today is implementing, what is, what one could call universal basic income for farmers. So I think that it will also be something that.., but I think there are, you know, lots of failures as well. I think that you know the fertilizer subsidy is, I think, is an area where we need to do much more of all that.
I think on agriculture too we need to think about how, you know, because my own view on agriculture is that we have two agricultures in India. We have a.. You know cereal agriculture, which is actually over supported and non-cereal agriculture, which is not supported enough. I think you know while we need to help non-cereal agriculture. I think we also need to retreat from the over cosseting cereal agriculture and, you know, I’m not sure that’s happened enough.
NANDAN : Great. Okay I think we have quizzed him enough and now I’ll throw it open for questions, you can raise your hand and I’ll…
Q&A
1. Finance Commission — Terms of Reference.
NANDAN : Okay well I think since we have our esteemed MP here Mr Rajiv Gowda. Why don’t you ask a question.
RAJIV GOWDA : GST — you talked about it as the golden moment — Cooperative federalism model working out. But has that moment passed today, when we start talking about the terms of reference for the finance commission and the inclusion of the population criterion, you start to see around South India tremendous opposition to what this implies for financial transfers to the well behaving states. Right. So what do you see as the prospect and what do you think of this whole argument that there’s too much, sort of, cross subsidy between the well working and behaving states and the poorer highly producing states ?
Four southern govts say terms of reference of 15th Finance Commission unfair — Firstpost
ARVIND : This is as toxic a question as there is.. Possibly in the coming conjuncture. Look. Let me say that..
In fact, I’m, you know, doing some research precisely on these questions and I want to think about it much more deeply. I do think that all political unions require a broad consensus on what kind of fiscal unions we need. If you think about Europe, for example, I mean the heart of the Greek problem is exactly that, you know, what kind of fiscal and banking union you want to have and so India too. I think that so far perhaps because we haven’t thought about this enough. Perhaps because of whatever circumstances, we’ve managed a kind of you know workable fiscal union so far. Now, we have to wait and see how things pan out and you know I’m looking at the numbers closely.
But I hope that, you know; See, let me put it this way : I think that one shouldn’t look at this, the fiscal union stuff in isolation of all that’s happening more broadly as well, so what is cause, what is manifestation is not clear at the stage. But we have to look at this.
Remember in all political unions and in all fiscal unions there is some amount of redistribution. That just goes without saying. I think that the key thing and this way I think maybe the debate will be going forward - The key thing is that..
- One. Is there a sense that those are within reasonable limits? One.
- Second. I think. also. Does it come with some mechanisms for.. to incentivize ..good performance?
I think.. That, i think, is going to shape the debate going forward. I think people are perfectly happy to be, you know, contributing to whatever
cross subsidization, provided there’s a sense that there’s also some, you know, effort and performance and I think maybe that’s where I think we will be a, you know.. That’s the balance that we will have to strike going forward.
NANDAN : I think these sort of answers - I may have to explain what he is saying.
ARVIND : As Adam Greenspan famously said — if you understood what I said I haven’t spoken.
If I seem unduly clear to you, you must have misunderstood what I said — Adam Greenspan, speaking to a Senate Committee in 1987, as quoted in the Guardian Weekly, November 4, 2005.
2. NITI Ayog.
QUESTIONER : I met you twice in Washington about 7–8 years ago. I generally get the feeling that those rousing ovations that you used to get in Washington may not quite be happening here. or am I wrong ? One.
ARVIND : You should’ve been in Azim Premji University this afternoon
QUESTIONER : Two, Is the NITI Ayog of any use to you in your work or not ?
ARVIND : Do they.. eh..You know, i think that..You know, each one. See I.. You know.. We have a lot of interaction with NITI Ayog. I think we always are trying to work together, but our mandates are different, you know, they do something, we do something. And so we do interact very collegially. We do interact, you know. You know, I have great relations with a lot of people there, and we do a lot of stuff together as well. So I think that.. so there is no kind of institutional turf battle or anything like that.
3. GST — Uniformity in rates.
NARAYANKAR : There is a Congress stand, you know, and a lot of vociferous demand for capping of GST at 18% . Prime Minister Modi has called it stupid, reacting to P Chidambaram.
ARVIND : Approximately, when was this
NARAYANKAR : Yesterday..
ARVIND : Oh! yesterday. I see. In the report that I wrote on the structure of the GST, what I said was, you have kind of a standard rate of around 17- 18- 19 % and then you have one rate for demerit goods and one rate for essentials. And my own view is that yes, we need more simplicity in India and we need to move towards one kind of, at some stage, you know, uniformity in rates. But the fact is that we cannot do that, divorced from from from political realities and the political reality is the following: that if you don’t have instruments for redistribution, you know, better instruments, you really have to use some of these also.. Maybe not for explicit redistribution but having to take into account that — so the fact that we have a lower rate is a reality that we will have to live with for a long time because we don’t want to tax essentials which are basically consumed by the poor. Similarly, you know, no political system can accept you know BMW Cars or cigarettes being taxed at the at 18% rate.
NANDAN : Booze
ARVIND : Booze. They are anyway out of the system altogether. So I think that, you know, as long a we can, within those political realities, as long as we can try and keep that relatively clean and simple. I think we’ve made progress. For example, and this is not just theory. For example, you know, we had this 28% rate which many people felt was high but over time we pared it down quite signigficantly. So the 28% rate is now I mean a shell of what it used to be. So, so I think, going forward, I think more such things will happen. So , you know, it’s easy to say, you know, make it one rate but there’s a lot in reality, but as long as we can blend them in a manner that is satisfactory for all parties i think we’re making.. and we have made great progress on that.
4. Demonitisation
ASHWINI JAIN : I am a retired banker.
ARVIND : Are you happy you’re not an active banker?
ASHWINI JAIN : Where did demonetization come from and what was the thinking behind it and do you think it has done what it was supposed to do?
ARVIND : When I’m asked questions on demonitization these days I say three things. Let me say those three things and then if you’re still unsatisfied, I can say more things.
So the first thing I say is that, you know, if you were a millennial, you know,
they turn to me and said “this is so yesterday”. So, you know, let’s forget about it. Or I might say, like, what’s his name, Zhou Enlai said about the French Revolution — It’s too early to tell. Or as Governor Reddy said, you know, I will say something about Demonetization then check myself into the hospital, you know..
I would have resigned if overruled on demonetisation: Reddy | Business Standard News
But more seriously.. I think that, you know — Demonetization was done because there were, you know, potential benefits and costs. I think that we’ve seen some of the short term effects of demonitization - you know whatever cash shortages, impact on agriculture. But I think there were also potential benefits with the demonetization - the formalization, the reduction in cash and all those things, the impetus that it’s given to digitalisation. So those are subtly long term benefits. There is some of the challenges, I think.. we have to kind of wait and see what these things can be. So we have to keep doing these provisional cost benefit analysis continuinally, overtime.
5.
*MEENAKSHI* : I would like to know whether Cambridge Analytica has been assessed properly for the welfare of the country.
*ARVIND* : I know nothing about this.
*MEENAKSHI* : Economic Data.
*ARVIND* : I’ve certainly not used Cambridge Analytica to write the survey.
6.Entrepreneurial energy in Informal Economy.
*NANDAN* : Ya, Prakash.
*PRAKASH* : My name is Prakash. I’ve been an ex-corporate executive. You talked about stigmatised capitalism. In India it exists. Having said that though, it is my feeling that there is a lot of entrepreneurial energy in India that exists at the very bottom of, the bottom of the economic pyramid. And somehow we’ve not been able to target it. Perhaps it’s partly because it’s part of the informal economy which you’re trying to nudge into the formal economy. Partly its the ….. with this whole thing that focus on mega — mega projects, mega companies, mega ideas. The real solutions to India’s
problems lie right the grassroots. Take for example jobs. We talk about jobs — we didn’t touch any jobs. The thing that’s lacks in the imagination of most people in India, it’s not going to come from corporations, not going to come from mega. It’s going to come from people at the bottom and particularly in the service industry. I’m not talking about Nandan’s IT or banking or whatever. I’m talking about restaurants, i’m talking about all your bullock-cart repairs whatever. And we don’t seem, at least in my view, to focus on that. It’s linked back to agriculture. We know it’s a big problem in India. The problem is going to be solved by moving people off the line end of the jobs , not by subsidising or supporting agriculture. I’m going to stop there. What do you think?
ARVIND : See, I want to push back on on on something that you said very strongly actually. I mean. You see part of this.. Okay. One of the ideas that I think has gained too much traction in India, I think, is this kind of Gandhian kind of small Gandhian Schumacherian, you know, small is beautiful kind of stuff.
You see, because if you look at all the evidence around the world, you create jobs when small guys become big. Not by small guys remaining small. When small guys remain small their productivity is by definition, very, very low. So I think the challenge and I think a lot of the mistakes we made historically on policy was to create an incentive structure of funds for small guys to remain small and to prevent them from becoming big. If you look at exports for example — all the big exports and the jobs in exports come from guys becoming big. And there’s a lot of academic work around them. So I would try and, you know, urge you to get away from this, you know. It’s not that the small are not important. I mean, I completely agree with you — the entrepreneural energies are fantastic, but you know the way to capital, is to say that — How can you make these guys go big and that’s why the kind of startup stuff that the government has started. All these things are are very important. But it also means a lot of policies that keep firms small, you know, need to change.
PRAKASH : Sorry. I’m not Gandhian and i’m not referring to Gandhian policy. But if you take employment. Take in Europe, take in Netherlands, the bulk of the employment is in firms employing between one and ten people.
ARVIND : In India, and a colleague of mine — Amrit Amirapu — who has done this work. In India, I think 90 % of the establishments are one people or less, but that’s a problem. That’s not something we want to celebrate. We want to actually get those guys to become big. We want more, you know, 20 30 40.
NANDAN : ... maybe one going to ten also.
ARVIND : One going to ten. Ten going to hundred. Hundred going to thousand.
*NANDAN* : Our jobs guru is here (Manish Sabharwal)
7. Resilience of Indian financial institutions in 2008.
GOPAKUMAR : I’m a market researcher.
ARVIND : Questions with zing in them, you know.
GOPAKUMAR : About a decade back when financial institutions were collapsing around the world, the indian financial institutions were holding strong. And people are commenting that the regulatory framework is not good. So what’s happened in the next ten years ?
ARVIND : No, see.. I think there it was just a kind of, you know, timing issue. I mean, we were premature in pronouncing at that.. at least in retrospect it seems that way .. that, you know, when all this over-exuberance in lending happened. I think that it was, you know, at least looking back, it should’ve become evident that, you know, some of that stuff there was, you know, over-exuberance and that really come back and, to some extent bite us. So, so it was just, I think, you know, a premature declaration of victory I think, which was subsequently shown to be true.
NANDAN : Many of the loans in India are post 08. In that sense - post 2008. So many of the loans in India are post the global financial crisis. Right?
ARVIND : When this began.. this began a little bit before. The boom started in 2003–04. And we’ve had almost, you know, eight — nine years of boom. So when exactly it happened is not clear but the Infrastructure lending happened throughout that period and, you know, and it was clear that some amount .. but I think probably also that .. this is completely retrospect .. I think that in all these things, maybe, earlier action might have, you know, reduced the scale of the problem, maybe. But certainly it’s not something that’s a .. that should have. We shouldn’t have declared victory after the 2008 crisis. Basically as simple as that.
8. Inducting outside talent into Government.
KISHORE : My name is Kishore Hybrid past corporate and then the voluntary sector. We talked about people and we talked about the examples of brilliant young minds in your economic service and UAIDAI is another example where brilliant young people were put together to make such a great success. Of two things that have been criticised maybe, but widely appreciated. What we do .. need to do in the system to getting more institutions like your’s and Nandan’s. And get these institutions to be instruments of growth for all these young minds to really deliver.
ARVIND : You know, government is just far too big for .. you know, you have to have some.. basically ..some fundamental reform of the civil service for, you know, these kinds of conditions to be created across government. I mean, there are lots of ideas out there. For example, I think there is, you know, Pratap Mehta, Devesh Kapur and others have a volume on Public Institutions in India and there’s a very nice piece by, I think, by TV Somanathan and KP Krishnan, who do talk about, you know, should it be the case that above Joint Secretary level, you know, all these job should be open for competition, and that we get more outside talent as well. So I do think that you can’t do this, you know, one off, you know, UIDAI or in office of CEA. It has to be much more systemic and therefore, you know, broader administrative and civil service reform. And frankly not just at the centrally governed but also at state government levels, at regulatory institutions as well. It has to be, kind of, across the board. You need much more systemic civil service rapport for that.
9. GST on Petrol. Secrecy around the Survey.
PRADEEP : I am a techie. I have two questions. How soon is it possible to get consensus to bring petrol under GST? My second question is about Nandan’s point of an activist CEA — how soon do you think this — there is this secrecy about how this report is being made until it is made public on February 25th when it is read out. So do you foresee that either through leaks through your interns or whether the analysts in the capital market will actually publish these kinds of reports by January 1st by saying this is what Arvind Subramanian is going to meet or not meet.
NANDAN : CEC leaks.
ARVIND : No, I mean, I think you can hurl a lot of acquisitions about me and my work. But you know, I don’t think this secrecy or the leaking thing has been a big complaint.
PRADEEP : I’m saying there is secrecy until it is presented. Why is it not open in the process of making it itself ?
ARVIND : I see.. See, I think that, you know, one. I think there is a lot of transparency to the, to the extent that .. you know .. because it’s such a wide effort, lots of people are involved in it. So in that sense it’s not that way totally secretive. But the second thing is it’s unavoidable that because people think this will be.. give a clue to the budget, you know, there has to be some amount of respecting that time schedule. So for example if the survey where to come out the day after the budget, it would be, you know, there would be a kind of difference to the process. So that’s just timing that dictates that particular thing, but I don’t think that’s, I think, a big issue at all. If anything, I think people know too much about what’s happening in the survey, rather than too little.
On the petroleum point I think that .. , you know, widening the scope of the GST is very much on the agenda of the GST Council, you know. There’ve been discussions about real estate. There’ve been discussions about power. The whole petroleum thing is always hanging in the background.
NANDAN : He wants to know about booze ya.
Anand Kripalu. Managing Director & Chief Executive Officer, United Spirits
ARVIND : Booze. We can talk about booze over a cup of wine , a glass of wine later in the evening. But I think that on petroleum .. remember if petroleum were to come into the GST, you know. It would lead to a huge loss in revenue. So the finance minister has said that — No. Let’s wait for the thing to stabilize. Let’s be confident that, you know, the revenues are coming in and that will give us confidence then to take these, you know, bold steps, which will, you know, involve some loss in revenue. So. But I think .. it is going to, you know, happen. You know, hopefully sooner rather than later.
My own .. my own view is that, you know, electricity needs to come in, to help “Make in India”; land and real estate need to come in, you know, for the whole, you know, cleaning up of the system and petroleum needs to come in because, you know, we can’t have such a huge commodity outside. Because, otherwise the whole .. you know it taxes .. it creates extra taxes and undermines our competitiveness. But all this, I think, is .. I have sufficient faith in the process that these are things that will be constantly discussed.
NANDAN : Ravi (Ravichandar) in the spirit of inclusion. I know there are a lot of us in the overflow area. Can they ask questions, if technology allows.
RAVI : Technology doesn’t allow it but we could get some questions
NANDAN : We should not treat them as second class citizens. This finance commission had a problem.
ARVIND : I must say that, with Nandan chairing and in Bangalore, i think this is a .. not exactly high performance here on the tech tech side.
10. Will Pvt sector fund strategic interests. Corporate Sector in farming.
SETHUMADHAVAN : My name is Sethumadhavan, a retired civil servant.
The banking board chairman mentioned couple of days ago that the private sector banks have not been funding the infrastructure sector at all. Most of the funding has come from the public sector banks which probably have led to the NPA. So there is an apprehension that by going to the privatisation route it might affect the vital interests of the country. This is one. So the alternative probably suggested is that take away the shares of the government , the interest of the government. Put it in an independent totally regulatory body which manages the banks, but the direction is not totally lost. That sort of a via media situation is rather than suggesting the banking sector is one, one issue that I want to ..
Second thing is we all know that the farming is in difficulty. So when is the government going to allow the corporate sector to come into the farming in a major way. It is a major political sort of issue but is it likely. Or whats your feeling on that.
ARVIND : See, on the first question, you know, I think sometimes this, you know, it’s really beguiling to say that, you know, “Yeah, you can get a bit of this and a bit of this” and, you know, I think in this you can’t be half pregnant. I think, you know. It’s, you know, to say that somehow, you know, I will get the benefits of, you know, basically getting public direction of where investment should be and yet, you know, you don’t get the downside. I mean, I think that, you know, if you’re going to politically direct resources, you’re going to get the consequences of the political direction. So, see.. I think you may still say, and maybe this is what he had in mind. You may still say that, you know, all that’s happened is worth paying the price for the infrastructure boom that happened which the public sector financed. I think that’s a, you know, intellectually possibly defensible argument to make. But I think, then we have to get into the costing of that. I mean for the, you know, the benefits that we built up. I mean, now so much taxpayer money is is going down the whatever to this. Does the cost benefit analysis turnout to be positive or not. Nobody has done that but potentially you could do that. But my sense is that you can’t get this, you know, best of both worlds, you know, one is intrinsic to the other. If you want to direct resources politically, you get the cost of doing that. There’s no kind of getting away from it.
On agriculture. I think you’re absolutely right. I think that, especially on the supply chain side. I think we need much more private sector participation. But I think the government has, you know, thrown it open. I don’t think that there are big, you know, impediments to the private sector coming in. Why that hasn’t happened i think is kind of a question that all of us are still grappling with, you know. Why don’t more warehouses get built, because, you know, we’re allowing, you know, any private sector person can come and build and the government is taking a lot of steps in that direction. I suspect that we also have some residual kind of restrictions like, you know, the APMCs creating a common market. It still impediments, to barriers to the flow of goods across, which kind of impedes private sector investment. But in principle, I think the government is fully committed and in policy as well has thrown it open, especially in the supply chain to the private sector. So there are no kinds of impediments, policy impediments to that, I think.
NANDAN : So. I think this is also a half-finished reform because you had .. In the old days, you had development financial banks like IDBI, ICICI which were doing long term funding. They were supposed to be replaced by the bond market. The bond market never came. So you put the burden of lending 20-year loans to banks, which have demand deposits. It’s completely wrong. So I think it’s also half finished reforms in the financial system. But I get Bangalore has got 4 million square feet of warehouses getting built. Number one city for warehouses.
11. Myopic Political deciscions & Corruption.
QUESTIONER : Can you comment about basically the two big holes in the Indian economic bucket and I believe it is corruption and myopic political decisions.
NANDAN : That’s your view.
QUESTIONER : My view. As a concerned Indian citizen,
ARVIND : See. You know. This whole myopic-political .. I’ll come to corruption the second .. On this whole myopic political decisions stuff, right, I mean, I’m often always reminded of that, you know, great postmodern philosopher Donald Rumsfeld who said, you know, you do that with the system you have,not with the system, you wish you had. I mean, we have chosen for good or bad to have democratic politics and all that we have to do has to work itself through democratic politics. You know, if democratic politics has myopia in decision making, then, you know, why don’t we have more political parties or political entrepreneurs who create opportunity by not being myopic. I think that is the puzzle from, you know.. There will be always be myopia in democratic politics but you know these openings where you don’t. I mean, supposing, for example, someone said I have the confidence I would stay two terms. Supposing. And then you know I can stretch out my appraisal, why haven’t we seen more of that. So that’s, I think.. So the whole, you know, myopia in political decision making, you know, I think you have to view this through the lens of, you know, how do we work through democratic politics.
Corruption. Look, let me be a little bit, you know, push back a little bit on this. I think that there is, you know, if corruption is .. clearly now, obviously we have to get rid of corruption.
All those motherhood and apple-pie we can say, but I think that we also .. Political system will always demand going after corruption, which will then therefore make punitive action very attractive. You know, people want accountability and even retribution. But if you do that too much, that very thing can create, you know, whatever .. chill avenues for private sector investment and growth. So you have to be very careful. There is such a thing as, you know, going up too much, you know, or in forms that can aggravate the problem or at least create a lot of collateral damage or side benefits.
So my own view is that — Political system will demand that you go after the stock of corruption and to some extent we have to do that. But I think if you want to preserve an economy or whatever you have to address the flow of corruption and therefore what affects the flow of corruption.
You know, I mean, are tax rates too high, is there too much regulation. So I’m not saying .. I’m not advocating all these things, but if you want to go after, you know, corruption, going forward, rather than punishing people looking back, it’s a slightly different perspective that one must have.
12.Role to be played by Public and Private banks.
NANDAN : I think Ravi’s got some questions from the other world
RAVI : One question has come from upstairs which says. It says, What role does the CEA see between public and private banks, the role they need to play when there is a downturn or things go bad. Should the private be doing the same as what is expected of the public sector bank in such situations and are they doing it ?
ARVIND : I think that if you have a private bank, there’s no such thing as what role should they play. I mean, privately they look on to private incentives, you know, once you say that they have some social role to play, they are no longer private. I mean, you know, so I think it’s a bit of a, you know, again, you want to maybe have the best of all worlds and say, you know, they should also play.. I think if there is a downturn, I think Government has to respond in various ways. But to expect, you know, private sector operators to, you know, respond in ways that the government wants it to respond is, I think anathema to the spirit of what we have …
RAVI : Public sector banks did more for Jan Dhan, than the private banks ever did.
ARVIND : See. I think that’s a very good point. But that’s not a downturn.
So, you know .. and I have a lot of sympathy for that. But then, I think what we should do is — we should make these things explicit and actually say that, you know, the public sector banks have performed this, you know, social role; they should be remunerated for it. I mean, the government should remunerate the banks or at least provide an offset. So if you’re going to perform .. and I think there’s a huge..
The fact that the public sector banks stepped up and did the Jan Dhan. I think they performed a huge service to the country. Let’s be explicit and lets reward them for it.
13. Applying the GST Council model to other issues.
SANJAY KETKAR : My name is Sanjay Ketkar. I work for a multinational IT company. My question is that you talked about cooperative federalism is a good thing for India and GST Council is a very good example of that. Now if take this concept and use it for all the major issues that we have.. my questions won’t it render our parliament less useful or useless. All the decisions will be taken outside the parliament and the parliamentarians will be left only for shouting, throwing chairs and all that.(laughter)
ARVIND : Mr. Rajiv Gowda should answer that question.
But lets facetiously.. It’s a good question. You know, the GST council people think that, you know, now the budget is not interesting anymore on the indirect tax side because GST council has decided all these things. But I think there’s a way of man… After all, remember that when the center takes decisions, along with the states and the GST Council. I mean, it is part of a broader political process. So I think the trick there is, you know, how you manage that cooperative federalism. That’s what it is. You know, if for example, you know, you have consultative processes outside whatever narrow body you create. I think it can very well.., you know, one doesn’t have to undermine the other. I think it’s possible to set up structures to ensure that it is broadly consultative and not undermining of parliamentary democracy.
14. Privatization by Stealth.
FURQUAN : This is Furquan from Deccan Herald. So recently, we saw government saying that they would be raising taking four lakh crore as debt to meet the budgetary promises. If this decision now comes at a point of time when banking sector is already reeling under a lot of stress. We don’t know what is the amount of frauds that are going on right now, as you rightly pointed out that it can be 20% more, it can be 60% more. We don’t really know what’s happening there. This borrowing by the government will directly impact the bond yields. Was it a prudent decision to go ahead at a time when banking sector is really in the middle of a crisis. And again you bid for privatization. But why is it that the government, deliberately or not deliberately is inactive in the case of private sector and strangles its public sector so that it goes for privatization. Air India did not go in privatization in an ideal position, same is going with BSNL. BSNL we are seeing inaction in terms of appointing directors. Be it tariff game or be it allocation of the spectrum or VoIPs allocation. So why is it happening that government is inactive in the case of public sector entities?
ARVIND : See on the first question, I mean, I have a slightly different view. I think one of the things that budget did was to say that despite, you know, it being a difficult election year, the government decided to actually continue with the path of fiscal consolidation. So, you know, the aim very much was that, you know, you go from 3.5 to 3.2 or whatever. So I think the government is completely aware of the fact that, you know, to have prudent fiscal policy is in, you know, is in everyone’s interest. And this commitment to prudent fiscal policy is a conviction. It’s not something we’re doing just because it’s convenient do so. So I think in that sense. And you saw recently when the borrowing program was announced, you know, yields dropped considerably, kind of reassuring markets that, you know, government is committed to fiscal stability. So I think that’s not a .. I mean let’s see what happens. But I think the government intends to, you know, pursue fiscal consolidation.
I didn’t quite understand your second question, i think. I think if the sense was that, you know, this is actually a de-facto way of privatization by stealth — if that’s what you were trying to say, I don’t think I agree with that at all. I think, you know, that the government is committed to privatizing Air India for good, clean, open, transparent reasons. There’s no kind of backdoor thing. I mean, you know what Air India is. It has sucked up a lot of money. It’s been a black hole. And we’ve seen the benefits of efficient private sector operation. So it’s being done. Similarly with the banks. I mean, we have a huge challenge and if eventually we get into some kind of private sector ownership. It can be done completely transparently.
I mean, this kind of smacks of a degree of conspiracy theory that even I find difficult to digest. (laughter)
NANDAN : I think we’re down to the last two questions. One of one from upstairs.
15. More Transparency in Government.
RAVI : What will it take for government to inevitably become more transparent over being opaque right now. What will it take to be more open.
ARVIND : Well I think that, you know, let me give you one example. I think people have forgotten this and you know i’m going to personalise it a little bit but it illustrates .. I mean, people .. just as a corrective to the perception. So I was at, you know, the Jaipur Literary Festival with Thomas Piketty and he said, You know, I’ve done this analysis for every country in the world. I can’t do it for India because you guys don’t put out the tax data and you know he challenged me and I said I’ll take up the challenge and you know the Revenue Secretary, Dr Hasmukh Adhya…. two years ago..
As of two years ago taxpayer data, which Mr. Piketty now has used it to kind of lambast India for its growing inequality. But, you know, we (the revenue department) made available that detailed tax data, which I think ..
NANDAN : Anonymised
(laughter)
ARVIND : I was going to say it’s more secure than Aadhaar. So, I think it’s easy to say, the government is not transparent. But I think a very good example of .. And by the way after a fifteen year hiatus we put out tax data and now we know it’s wonderful for everyone to know what’s happening.
NANDAN : Progressive
ARVIND : Yeah, yeah. Absolute progress.
16. Timing of the Economic Survey. Demographic Dividend.
QUESTIONER : You started off by saying that the economic survey is more poetry than prose and since the title is 2017–18, isn’t it worth putting it out a couple of months after the financial year is over so that it’s more prosaic and you’re not projecting as much, not making as many presumptions, assumptions, etc. And if I can have one little question.
ARVIND : So that is not a question.
NANDAN : Advice.
ARVIND : That advice is summarily and comprehensively rejected.
QUESTIONER : You brushed it aside but there is this phrase going around about the demographic dividend and around the world demographic millstone seems to be more appropriate. And I’m not talking only about India but that seems to be one of the drivers of what’s happening in the UK and many other countries. Would you like to comment on that?
ARVIND : See. First. I don’t think I brushed it off. It’s the first time this question has come up. See, I think that, just as .. I mean, there’s .. I think there’s a lot of research to show that the East Asians did benefit a lot from the demographic dividend. Just as you know at the flip side of it is demographic decline like in Russia or the UK. It creates challenges on the other side. So we think of, you know, a young and growing population as a real potential advantage. But I think the mistake would be to think of demography as destiny either on the way up or on the way down. I mean, its not .. Japan for example is aging but they can do lots of things to increase labor force participation of women. So it doesn’t have to be a destiny. Similarly, we have a potential dividend, but there’s no guarantee that it’s going to be a dividend. I mean, there’s a lot of hard work to be done to make to convert that potential opportunity into a thing. In the case of India that’s especially so because India .. we should stop talking about one demographic India. There are at least two demographic Indias. The India of the heartland, which is, you know, you know, young and growing. But the India of the kind of the periphery and West Bengal, which is kind of starting the aging process. So there are two different Indias and so there are two different sets of challenges. So we have to think about it much more and I do think that and I’m sure and I hope Manish will agree with me that one exciting opportunity here is to allow mobility and the more mobility we have, the more, you know, the ageing .. and this is something that China doesn’t have. China basically all the provinces can boom and decline at around the same time. But we have this tremendous variety which creates a lot of scope for taking advantage of this demographic dividend.
NANDAN : Thank you Arvind for a wonderful session. very much.
