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Modi government's biggest achievements is fiscal discipline, macro-stability, says Sanjeev Sanyal

Modi government's biggest achievements is fiscal discipline, macro-stability, says Sanjeev Sanyal

Modi government's biggest achievements is fiscal discipline, macro-stability, says Sanjeev Sanyal
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By Latha Venkatesh  Jun 8, 2018 5:01 PM IST (Updated)

Biggest achievements of Narendra Modi government is maintaining fiscal discipline and macro-stability, said Sanjeev Sanyal, Principal Economic Adviser, Ministry of Finance.

Biggest achievements of Narendra Modi government is maintaining fiscal discipline and macro-stability, said Sanjeev Sanyal, Principal Economic Adviser, Ministry of Finance.

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Speaking to CNBC-TV18, Sanyal said slew of difficult measures, like Goods and Service Tax (GST), Insolvency and Bankruptcy Code (IBC), demonetisation and Real Estate Regulatory Authority (RERA) impacted country's growth to some extent.
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Sanyal said we want to rethink about the entire model of agriculture, where now production is clearly outpacing consumption.
Edited excerpts:
We had those recent statements from the government saying that financial conditions are tightening and they are worried about the fisc. Let us take the first one first, financial conditions yes year-to-date bond yields have risen by about 140 basis points, is it already hurting growth you think or can hurt?
We have more expensive capital. It has some impact. Although having said that, growth momentum has been extraordinarily good so far. We expect, at least the International Monetary Fund (IMF) expects, this year’s growth to be around 7.4% but the first quarter of this calendar year, we had 7.7%, so we are doing very well and it's feeding through all kinds of things.
Last year, we introduced the slew of difficult measures, Goods and Service Tax (GST), a cleaning up of the banks using Insolvency and Bankruptcy Code (IBC), demonetisation, several others, Real Estate Regulatory Authority (RERA) etc. and of course, they were difficult long-term reforms which did impact growth to some extent, but we are now on the other side of it and we are beginning to now enjoy the benefit of it.
Of course, more expensive capital does add some sand in the wheels, but there are feedback loops which slows down. So to that extent, it obviously means capital and price of capital fall. So, this is a difficult tight rope that every policymaker in the world has to manage but as things stand, we are in a good place.
The other thing that those statements said is that the fisc is challenging. On one hand, you have GST numbers which have definitely improved, Rs 94,000 crore for the latest month compared to an average of Rs 89,000 crore in the previous year. But on the other hand, farmers are asking for more support, do you think this one is maybe inevitable that the fiscal targets will have to be breached simply because the calculations we got from NITI Aayog were that it could be between Rs 25,000 crore or something in terms of a support?
Obviously, we are very serious about maintaining a fiscal discipline and we have many reforms including in oil prices, where we have been quite conservative at various levels. So it is not that we do not take this fiscal discipline issue seriously. We totally take it seriously and yes, where there is space, we will spend, we are making enormous investments in the infrastructure space. However, there is an issue with agriculture that by the way, there is a near-term issue about MSBs and so on but there is also much wider issue that we need to think about the agriculture sector as a whole in a long-term sense. So that conversation we need to get going.
I can see your point that globally the US has 3% of its population in farm, in agriculture and we have 50% so I can see that problem. But before I come to that, I just want to know, do you think that because Minimum Support Price (MSP), farm is such a big issue – you are seeing these 10 days movement of farmers?
The Prime Minister Narendra Modi made certain commitments, we will meet those commitments, but we will do it responsibly and there is a large section of our population, which does farming even today, something like 45% or thereabouts of our work force, still works in agriculture. It maybe only 14% of gross domestic product (GDP), but it still accounts almost half our workforce. So it's a sector that we need to put special emphasis at multiple levels but as I said, we recognize, we will have to make various trade-offs and we will do it responsibly but there is a larger question which I keep coming back about, rethinking agriculture as a whole that has to be done at some point in time and maybe the time is now.
You will tackle fiscal targets responsibly. The Reserve Bank of India (RBI) always worries that there is farm loan waivers from the states, the centre has been very responsible so far, where did theNational Democratic Alliance (NDA) started 4.5, now at 3.5 but those were years when crude was kind to us. Now crude itself is an input into inflation, if fiscal deficit also is more than 3.5, that is another input into inflation. So can the government give that kind of a sucker to the RBI that they will not be the cause of inflation?
So, one of the big achievements of this government is maintaining fiscal discipline and macro-stability. So, we have put in a huge amount of effort into it. We introduced the monetary policy committee, we anchored inflation in a very strict way and we have now for several years enjoyed, perhaps, the most benign inflation India has ever at least in my lifetime has enjoyed. So, it is not something we take lightly. So of course we will maintain control over inflation.
In this context, we have to also take into account the fact that in many cases, agriculture prices have this pressure downwards on one hand and on the other hand, we have another problem, which we have little control over. We are a price taker on oil and we import a lot of our oil. So we have to - when oil prices go back – make the trade-offs where we can. So, we have created a mechanism which by and large passes through to some extent.
We still have to watch this, where there is space for manoeuvring, should prices go even further up, we may have to make even some adjustments particularly at the state level but nevertheless in general, we maintain the line that, we will continue to do because as I said anchoring inflation over the long-term is a very important part of doing something else, which is the next step which is structurally lowering the cost of capital in this country. So, we have done the painful first step, we cannot let it off, because then we will not benefit from the second thing, which once we lower the cost of capital in India structurally, then we are currently growing at more than 7%, we can even do 10% plus but that we will not be able to do with these current levels of cost of capital. So we did the first painful thing, now let us not just when we are going to begin to benefit from it sort of lost the faith.
But on the other hand, we have to take along a population of farmers, who have a genuine problem. They were told all these years that look, you have to increase production, so they increased production and we gave them all kinds of incentives Now, we come to a stage, where production is clearly outpacing consumption and we now have to rethink this entire model.
Just the other worry which not just the central bank, I think the government will have even more, the current account deficit (CAD). It is not high, the last number we have but then we are yet to see the full effects of crude and hitherto whenever there was global growth and higher oil prices, our exports fired but this time, it is not firing that much, the last number was good but the current account deficit, lots of brokerages talking about $65 billion CAD?
We do watch the CAD very carefully and there are two impacts, which we both alluded to.
One, is of course oil, which goes through cycles and it has spiked up recently, so there will be a feed through that, we have to take it on our chin. There is also another thing, which is due to good reason which is we are now beginning to see capex take off. So this is a good thing and we want capex to take off, but of course, it comes with a price because, while low capex is good for the current account deficit, when it begins to spike, current account is difference between savings and investments. The savings will also grow as the economy grows but investments tend to be more spiky.
So, if all of a sudden you have a huge sharp increase in investment activity, which anyway is happening on the public sector side or infrastructure and so on, it now begins to happen from the private sector, building up capacities, which they hadn’t been doing for a while, what happens is the current account gets hit by that as well. So these are issues on which we have to watch carefully.
Of course, we are also seeing foreign inflows at multiple levels. So that is not currently an issue, we have a lot of foreign exchange reserves at record highs, so we can soften these blows but yes, we need to take cognisance of the fact that yes, if you have high oil prices and the economy is accelerating and the investments are going up, the current account will take some sort of a hit and we have to then be able to make sure 1) pricing at reasonable prices keeps coming in, 2) that foreign exchange reserves were necessarily are used to smoothen, whatever adjustment needs to be made.
Is there any laxman rekha on the rupee like you would worry if it is $70 per barrel?
No, in the end, of course this is an issue on which the RBI is the competent authority. In general, the fact is, we do not like very large movements in any direction and our foreign exchange reserves are used to smoothen than that. In the end, however, we allow the market to move and do whatever it does in the longer-term.
Coming to the more important issue in which you have contributed a lot in terms of policy thinking - the insolvency code. Now, we have seen two big benefits. One, Rs 35,200 crore coming from Bhushan Steel and a few days back Rs 5,300 crore coming from Vedanta or Electrosteel. While that process is on the other problem is the RBI having to recognize what is already stressed and there come to power assets. We have heard a lot of power ministry, finance ministry talking about this. Do you think a time has come for a stressed fund to be setup by the government? What is the government thinking on this?
Let's go back a year back. What was the problem? We had a huge amount of bad loans, in fact, little more than a year back, maybe last February-March. We had a huge pile of bad loans, we didn't know what exactly was there in the books and they were not getting recognised.
So, what we did was, we opened the books up and we began to get people to begin to recognise and in the process of that, of course many scams also came out, skeletons came falling out of the closet. Now, we have a fairly good idea of what is the landscape of these non-performing assets (NPAs) and where they reside and to a large extent, they have now been written off also, so that is step one done.
It has also done two things. One, we avoided creating a bad bank, which would perhaps become another warehouse like the Investment Fluctuation Reserve (IFR). Instead, we began to use a brand new mechanism called the IBC. When we began using the IBC, did we know exactly where it would go? No, we didn't. We identified 50 odd top companies, we put it into it and at every stage we have adjusted along the way in as practical way as possible to keep this process going and now you just mentioned we are coming to the end of that. First lot is coming to the end of the cycle and we are beginning to sell it. We auction them or whatever and we are getting money back, even those who have not gone into the formal IBC process, Rs 88,000 crore odd has come back, got resolved. So, we are now in the process, where other side of the cycle and we are now getting the benefits from it.
There are however sectors, where because of judiciary or because of commercial reasons, we may have to make slightly different arrangements. In that case, for example, real estate sector, where large numbers of home buyers may be stuck and power sector now, we have the High Court has given us certain judgment. We will now examine it and we will respond.
We do not claim to know everything. We are adjusting along the way. The point is that, we have a broad framework now which is the IBC and that framework will be tweaked, where necessary, we will create special arrangements when necessary. The point is to be practical and keep moving thing forward - that is all. In the end, it's about being clear about the framework and about the fact that we will adjust along the way where necessary and quickly and keep moving forward.
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