Interview with Arvind Panagariya: ‘Q3 GDP estimate not surprising after accounting inflation’

In a conversation with the Indian Express, Panagariya has suggested that the GDP estimate for the third quarter of 2016-17 was not surprising considering that inflation rates post demonetisation period have held up.

Written by Anil Sasi , Pranav Mukul | Updated: March 8, 2017 9:25 am
 Niti Aayog Vice Chairman Arvind Panagariya, Arvind Panagariya, GDP figures, demonetisation, GST, GST council, Indian economy, Indian express Arvind Panagariya, Vice chairperson Niti Aayog (Express photo by Nirmal Harindran)

At a time when major economies are turning “protectionist” of their domestic markets and job seekers, India must continuously undergo internal reforms to become globally competitive, said Niti Aayog Vice Chairman Arvind Panagariya, who is also an expert on trade-related matters. In a conversation with Pranav Mukul and Anil Sasi, Panagariya has suggested that the GDP estimate for the third quarter of 2016-17 was not surprising considering that inflation rates post demonetisation period have held up. He also talked about the bad-debt problem, which has plagued the public sector banks of the country, and said that the government would hopefully move towards a possible solution soon. Excerpts:

A lot of questions have been raised on the latest GDP numbers. The impact of note ban that was expected doesn’t appear to have kicked in. Do these numbers seem believable to you?

If you see the 2016-17 Q3 GDP estimate in the light of inflation rates you will not be as surprised as many have been it. Well before the latest GDP estimates came out, I had been saying that the common belief that demand fell dramatically during Q3 was overstated. If the demand had dropped dramatically following the November 8 announcement, we should have seen a large decline in prices. Some analysts had said that the demand had dropped by 40 per cent. If such a drastic drop in demand had happened, it should have reflected itself in a sharp decline in prices meaning substantial deflation. But when inflation estimates started coming out for November, December and January, they were all in the range where we can say that the inflation rate had held up.

That suggested to me that in aggregate, demand had held up reasonably well. That this could happen despite such a large part of the currency having been stripped of its legal tender status is not altogether implausible. In India, we know how to get around shortages and that is what people did. They found ways to transact without cash. Informal credit emerged to fill the gap created by cash shortage. In rural areas especially, everybody knows everybody else. In normal times too, people give credit to each other, so when you know there is no currency around, then transactions on credit become even more acceptable.

With more data feeding in, would the subsequent number give a better picture of the GDP growth rate?

Once the Goods and Services Tax (GST) is in place, I suspect the data it will provide will be useful for assessing the level of economic activity. Precisely how this would be done requires thinking but I am confident the experts in the Central Statistics Office will figure it out.

One of the biggest problems this government has inherited is the whole NPA issue. It’s already your third year, but we don’t have a proper solution …

Unfortunately, it is one of the toughest problems to tackle. It is not that the government is unaware of the problem but problem is inherently difficult. Hardly any countries have solved it fast, including the United States, which took a good bit of time to clean up “toxic” assets in the wake of the 2008 crisis. Discussions are under way at the highest level currently and I am hopeful that we will soon begin to move towards possible solutions.

Now with large economies like the US and parts of Europe adopting certain protectionist trade measures, what is the stand that India should take. Some in the industry have said it would be better for us to focus on the domestic sector …

If by focusing on the domestic sector you mean becoming protectionist, let me remind that we have travelled on that road for decades in the past. And if we return to that same path, it would be to the detriment of our own interests. We must not abandon the strategy of outward orientation. $16 trillion worth of export market in which our share is just 1.7 per cent is not about to disappear. Even if this market shrinks a little, we can gain big by raising our share to 4 per cent to 5 per cent. Ultimately, you want to be competitive in the global marketplace. If you can capture the global marketplace, you are almost sure to be able to capture your own marketplace. But the reverse is not true. If through protection, you manage to capture your domestic market, you are not very likely to succeed in the global market.

Some of the areas where we thought China relinquishing the space in global market, India should have gained, but instead of us other countries are picking up …

This is exactly where I have been saying that we have to get our own house in order so that when China quits certain space, we should fill it. Since the 1991 reforms, we have become far more competitive than we used to be. But still have some distance to go and we must keep up with reforms. We must achieve greater flexibility in factor markets, improve infrastructure, make progress on trade facilitation and end tariff inversion, which undermines our export competitiveness.

Apart from wages, is there any competitive aspect that India provides?

It varies from product to product. Engineering goods, pharmaceuticals and software services have all been India’s strong points. We seem to be also getting more competitive in automobiles. A lot of the growth in the auto industry has taken advantage of domestic market but the industry now needs to take a big jump and start becoming export competitive. But more importantly, from jobs perspective, we need to succeed in labour-intensive products such as clothing, footwear and even electronic products. The result of decades of Small-Scale-Industries (SSI) reservation in these products has been that we do not produce them on scale. It is more than a decade since we ended the SSI reservation but our manufacturers in these products have still not achieved the scale necessary to bring costs down to global levels.

In some areas, despite having the capabilities to build scale, we haven’t done so …

We need to investigate and understand why this is so. One thing we need to do is to make it attractive for MNCs currently in China to move to India. They manufacture on scale and know the global market. We should create an ecosystem that attracts these companies to locate in India to take advantage of the vast pool of workforce and skills. On the whole we have an advantage over countries such as Bangladesh and Vietnam where these companies are currently going.

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