India has made rapid progress in transforming its economy over the last couple of decades, Arvind Panagariya, the first vice-chairman of the central government think-tank Niti Aayog, said in an interview with CNBC-TV18.
A renowned economist, Panagariya served as the Niti Aayog vice-chairman from January 2015 until August 2017 before returning to Columbia University where he is a professor of economics and holds the Jagdish Bhagwati Professor of Indian Political Economy chair. He has previously worked at the Asian Development Bank, World Bank, the International Monetary Fund, and the United Nations Conference on Trade and Development (UNCTAD).
Among his literary publications include the books India: The Emerging Giant and Why Growth Matters. He was conferred the Padma Bhushan by the Indian government in 2012. A free-market economist, Panagariya is a proponent of rapid privatisation of state resources. He shared his views on the state of the Indian economy. Edited excerpts:
Compounded annual growth of 10 percent over the last 20 years, impressive you would say?
A: I think it is. There used to be a view that somehow democracies cannot grow rapidly in the way the East-Asian economies had done, but I think India has actually provided a counter example. We have been a democracy for the 70 years of our Independence and particularly you took the 20-year period, but if I take the 15-year period, only because the rapid growth in India started in 2003-2004, so if we take the 15 years following that, then our growth rate in fact in real dollars has been somewhere between 9 percent and 10 percent, the nominal growth rate has been about 11.50 percent.
So it has been a pretty solid story and we have continued to grow. So, I think if we get our house further in order, carry out more reforms as we go forward, and sustain this for another two to three decades, I think we will be very much like the South Korea, Taiwan, and China stories.
Q: Since you have done these numbers closely, in per capita income terms, what has been the growth and is that a good record?
A: In per capita terms what I can tell you is, slightly different way of putting it, this is in real rupees which is what determines the welfare of the Indian citizen. So if you start in 1950, if we had a weekly per capita income of let us say Rs 100, then in real terms when we come to about year 2000, we have tripled. So, from Rs 100 it goes to Rs 300. So we added only Rs 200 to that income on a per capita basis.
However, if we take 2000 to let us say 2013-2014, then within that 2013-2014 year period, we added more than another Rs 300. So the addition during this fast growth period, we have added actually 1.5 times of what we did in the first 50 years.
Q: Let me come to the other macros. Current account deficit for almost all of it has remained within 3 percent, in fact within 2.5 percent except for one aberration during the taper tantrum year, 2013. Do you think macros have been conducted well especially on the emerging front?
A: Most certainly. You can look at the two or three major measures of macro stability, you have got inflation which has been kept at much lower levels. Even if you go back to the 1980s and some years in 1970s, our inflation rates were much higher; 1980s easily more than 10 percent it used to be. There were some years during 1970s when inflation rate had crossed 20 percent annually for two years at least. So from that perspective, if you take the longer view, then we now have much lower rates of inflation. Particularly in the last five years it has stayed, on an average, at 4 percent. So in some ways you can say that there has been a bit of death of inflation.
Current account, very much within 2 percent of the gross domestic product (GDP). So that too has been kept at relatively low level. Contributing to those two factors has also been the general control on the fiscal deficit which at least the official budget figure certainly has continued to come down and is 3.4 percent now.
Q: Rather than me throw macros at you, before I get to what we should do henceforth, what according to you are the hits of the Indian economy in the past 20 years?
A: I will answer your question in terms of policies. Large areas of liberalization — I would say if I were to take a broad brush, then I would say that the product market reforms is what we have done very effectively and that includes end to the investment licensing completely and to the import licensing completely, trade liberalization where we went from almost autarchic kind of trade policies to the average tariff on industrial products coming down to maybe 13-14 percent now, although there is some reversal because we had gone down to about 12 percent.
We have given entry in sectors which were traditionally government monopolies, two of them in particular, telecommunications and civil aviation, and in banking we largely, even though private sector banks had existed, they were very tiny, but in the last 20 years major entry of new private sector banks, expansion of the private sector banks, the balance of assets between private and public sector banks has really shifted in the favour of private sector banks. That is another big one.
Another very big area where we succeeded was the telecommunications, that was a major reform. As late as 1999, we had three telephones per 100 population and today we are maybe 90 telephones per 100 population. So big change, it has been transformational if you look at the last 15-20 years, truly transformational.
Q: Now let me come to the misses. I have in front of me key points from your 2008 book, India: The Emerging Giant, over there you have referred to telecommunications, electricity as areas where India needs to deliver. As you point out, electricity, telecommunications India has delivered. How would you look at the misses from the point of view of your India: The Emerging Giant book? Is electricity a miss?
A: At the time I wrote that book, it looked like a big reform and a real hit, but from the vantage point of today, that has ended up being a miss because some of the things that were in the Electricity Act actually did not get implemented eventually. There was a lot of momentum at that the time I was writing towards privatization of distribution. However, that did not happen. There was a lot of momentum towards giving open access for electricity grid and so forth in the distribution grid and that really has not happened either. There was a movement also to end the cross subsidy in electricity, and that did not happen. The government changed, UPA
Q: In fact, let me make that question also more general. Going from the vantage point of your 2008 book, what would you say are the misses for India as we stand on the threshold of a new decade?
A: I had expected actually when that book came out that we would get very serious labour law reforms, and indeed under Atal Bihari Vajpayee government this reform had been mooted, the labour law reform, and that had made me optimistic that down the road we will get it, but it has not happened.
On land acquisition, which is the other kind of very important market, some progress happened because we did away with the Urban Land Ceiling Act that had been put in place in 1976 by Mrs. Indira Gandhi. So, that was a big improvement, but on the whole in terms of urban land, we have not been wholly successful. Land acquisition actually we went a bit back because in the Land Acquisition Act that we brought out in 2013 has made land markets even more inflexible to the point that today even if you do the linear projects like road construction, today the cost of land in these projects has become over three fourth of the total cost. So, that makes the building up of infrastructure a lot more costly than would have been the case had the land prices been kept a bit more reasonable.
Q: From the vantage point of your 2008 book which I still think is a seminal book on Indian economy until then the book Emerging Giant, what is your take on the way in which India has evolved on savings? I mean it looks like savings having grown very well up until 2014-2015 has started to peter out, is that a worry?
A: That certainly is a worry, because actually if I look at the data it seems that our savings really peaked by 2007-2008, correct me if I am wrong. We had gone to about 35-36 percent of the GDP and after that they sort of declined. In particular, this decline has been in the household financial savings, which is what gets intermediated through the banking system and therefore it is the most productive form of savings. So we certainly need to get back to the higher rates of savings. Economists understand very little in terms of what determines these savings and what policy levers can be actually used to boost that savings. So unfortunately, here I am at a bit of a loss, general economists are at a loss also as to what can be done.
Normal pattern has been that as economies grow at least in the early stages of development, the savings rates do rise. It happened for us, if you go back to 2003-2004, the total savings as a proportion to GDP were about in the range of 23-24 percent and then they rose very rapidly, unprecedented growth in savings, we hit almost 35-36 percent. But now we are sort of back to about 30 percent, maybe little below 30 percent now and that needs to go back up. If we are going to maintain, we are going to sustain growth rates of 8 percent or more, you need savings rate to be somewhere higher than 30 percent even if they are sort of below 35 percent, we need to get to 32-33 percent range.
Q: I was looking only at a household financial savings. I take your point that overall savings as a percentage of GDP has peaked from probably 2008-09 but household savings seem to be holding up, it was government that was dissaving very seriously from 2009 to 2013. But after 2013, maybe because of the way the base year has changed or for whatever, we have actually seen even household savings either remain stable or actually give up a bit. Do you think that we will be able to encourage it, is this because income has fallen, how do you dissect this, because this seems to be a very important road block to pushing up investments in the years to come?
A: Observationally we know that consumers started borrowing themselves. So we see that the consumer debt has risen during this period and therefore the decline in the household savings is the mirror image of that borrowing by, at least, some of the households. So that is where the story is.
Now the indication seem to be that the savings are beginning to rise back up. This is something that we all comment on but don’t see it. We are all complaining that the private consumption demand has weakened considerably and it is not enough demand and so forth, but of course that is going to reflect back in the rising savings. So sometimes we don’t connect, we sort of want both rising consumption demand and we also want rising savings but that of course is not going to happen.
Q: I want to also ask you about how we have conducted trade policy. Would you say it is a failure that we have not been able to get into the global supply chains?
A: Let me backtrack a little bit and say that we did liberalise trade in a big way and that period was from 1991 to 2007. By 2007, we were pretty open economy and it was reflected in our very rapidly expanding trade to GDP ratio also, both imports and exports expanded dramatically and so forth.
Now, then we maintained this trade regime for several years but sadly, sort of in the last three years, we have begun to kind of reverse some of it. Some of the tariffs have gone up and also in a way what we needed was a continued momentum towards liberalisation, not only the momentum was not maintained, but we actually went back in to import substitution. I being a trade economist myself and leading the charge on freeing up trade, I feel a little kind of disappointed that we have not continued on this front.
Also, the latest hopefully you would want to talk about, we had been negotiating on RCEP. The Regional Comprehensive Economic Partnership agreement with our Asian partners and it will look actually very promising that we were going to go into it but at least for now it seems we have pulled back and I am still kind of remain optimistic that this is perhaps more of a bargaining stance that India wants to cut a better deal than was available on the table just now. India is in a good sort of negotiating position because if you want to do serious RCEP, you can’t do this RCEP without India being in there, because other countries already had these bilateral free trade agreements with one another.
Q: So we first need to have these bilaterals in place before we get into RCEP is your suggestion?
A: No, actually we should simply go ahead and negotiate, renegotiate perhaps over the next year or two. But we should get into the RCEP because it is a multilateralised or at least plurilateralised deal which is uniform across these 16 countries. It is about a population of a 3 billion people and more than 20 percent of the GDP is accounted for by these countries, so it is a very large grouping and we can’t afford to be out of that because we would be facing significantly higher tariffs when we export to these other 15 countries than the 15 countries that are members would face against each other. So it is something very important, very substantial and it also good instrument for us to return to the more liberal trade policy regime.
Q: Let me now come back to where we started, the India growth story while it has been a glorious period of growth as you pointed out with your numbers, the latest GDP numbers that we have are troubling with an 8 percent nominal GDP growth for the last available quarter. What is your sense, what is the reason for this sudden precipitous drop in nominal GDP and what is the remedy?
A: The decline in the growth rate in my own thinking has originated in perhaps two major factors. One is the non-performing assets (NPA) of the banks and so the clean-up process that is going on, cleaning up of the NPAs that has thrown off the financial markets and that means that the credit is not expanding as it should have been.
This has been because of both the corporates themselves have their balancesheets a bit in disarray and the banks are also now scrutinising their loans a lot better, they know that they cannot do business the way they used to do in the past. They have to be responsible for whatever they lend. That is one part of the story.
The other is that also the anti-corruption drive of the prime minister is changing the way business is done in India. That is something that people don’t recognise but the fact is that a lot of the things that you were able to do in the past in terms of free-wheeling and dealing, you cannot do that anymore.
So there is another major change in the way we do business to which the corporates are having to adjust.
So those are, in my view, the two major factors which have contributed to the slowdown in the growth rates.
Personally, I remain optimistic. It might take a six months to a year to return a bit but after a year, if you are looking at the year 2020-2021, I would expect the India growth story will return to 7.5 percent kind of growth, which is what we have experienced during the first five years of Prime Minister Narendra Modi’s administration.
Q: Is there a worry that the global backdrop is not very clement? From the government what would you expect in terms of a policy that can help us tide over this period of slow growth?
A: I think we have to turn to bold reforms. The government has done to its credit — people don’t give government enough credit — things like insolvency and bankruptcy code (IBC), goods and services tax (GST) and most recently the knock off on the corporate profit tax rate. These are all major reforms and they are not politically easy reforms, very difficult ones.
So reforms have been done but I think we are in the second term of PM where also a couple of good, major things have been done. Most notably, the medical reform that was done, it was a very difficult reform.
However, we need to do the labour law reforms. We need to return to liberalising trade and we will also tackle the issue of land acquisition act. PM tried to do it in his first term early on but unfortunately the opposition parties simply won’t play on that but now the government does have the votes and it may be able to carry the reform on land acquisition also. So we need to do that.
Lastly, I would mention that we also need to think very hard in terms of — what I have been advocating — the coastal employment zones. Not many, if we could start with two of those and in those zones, you can then institute very flexible land and labour laws and also easier movement of goods in and out of the country. So custom clearances etc becoming much easier. So you can do that much more easily if you have a couple of zones where in a focused way you can do that. The model I have in mind is the Chinese coastal special economic zones (SEZs) in places like the Shenzhen. In Shenzhen the local governments can make their own labour laws and that is a sort of thing we need to do using the coastal employment zones.
Otherwise, the timing is very good. We can bring in a lot of the investments that used to go to China to India now but this is the time to catch the wave and get going.