July 5, 2019 2:53:07 am
In the Economic Survey for 2018-19, Chief Economic Advisor KV Subramanian has pegged that India needs to accelerate investment in excess of 35 per cent of the GDP to achieve 8 per cent sustained growth which is essential for becoming a $5 trillion economy by 2024-25. In an interaction with reporters, Subramanian pointed out that India should look at bringing in foreign investment to kick-start the virtuous cycle that would lead to increase in productivity, creation of jobs and foster exports to create demand. He also pointed out that structural problems in the non-banking financial company (NBFC) sector needs to be fixed to solve the crisis. Edited excerpts:
One of the main points of the survey is about the virtuous cycle where you say that it is investment that will lead to jobs, etc. But where will the investment come from because there is capacity under utilisation, slowdown in private investment, so where will the first phase of investment come from?
When we were writing this chapter, we had the choice of getting into each of those details or focus on conveying the big picture message, which is what we need to do in order to get on to that 8 per cent growth path. This is a question we have the answers to but we decided to not put it in, to keep the survey focussed. Firstly, as I have mentioned earlier that some of the overhang from the previous period has unwound completely. Secondly, banks have now cleaned up their balance sheets and their credit to large firms have started going up.
Third, which is an important opportunity that we have not tapped enough, is that if you look at the global environment in terms of liquidity and surplus, and the interest rate environment that has been prevailing, it is as benign as it actually ever was. There is a lot of flush liquidity, which is looking for good avenues of investment. If you have an economy, which is going to grow at 8 per cent growth rate, this money finds it profitable to invest in such economies. The reason I bring this up is that in order to trigger this virtuous cycle, we have to rely on these foreign savings that can come in and create investment. Once the investment starts, it will enhance productivity that will create jobs, foster exports, thereby demand. This is followed by very careful evidence that we have provided from China and other east Asian economies as well. Each one of them at their particular stages of development followed the same path.
Your first survey gives a big miss to the banking reforms and to solutions for the NBFC crisis. What is the reason behind this?
As I articulated, we wanted to focus on the big picture. We will be writing another survey in six months — January 2020 before the Budget. So we had to make a choice. One thing we knew very well when we started contemplating on the survey is that this will be the survey of a new government that might potentially have five years to implement policies. The choice we made was to lay out a big picture blueprint on what is the thought process we need to change in order for us to hit that 8 per cent growth. When we speak of the NBFC crisis, we have to ensure that we do not perpetuate a situation of private profits and socialised losses. The moral hazard that comes from it is something we have to be very cognizant about. What we have to think about are structural issues, especially in the NBFC situation — the asset-liability mismatch. The asset-liability mismatch is not an accident. If you look at the ratings of the commercial papers, almost 95 per cent have a rating of L1+, which means that there isn’t enough distinction between these firms. These firms are clubbed under one category on the basis of short-term ratings. Their long-term ratings are actually substantially different and the spread they actually pay is related to the long-term rating. By clubbing them all together, the incentive is for the not so good firm to pool with the good firm. This creates an incentive for the asset-liability mismatch to be created endogenously and that has what has happened in the NBFC sector. These are the structural problems that we need to fix.
Are a large number of dwarf firms a consequence of policy rigidity or the fact that they have misused the policy incentive given to them?
When we create policies, we have to recognise that those policies are not being created for Harishchandras. Those policies are being created for real humans. Seven decades of policies have been on the line that we have created dwarfs in the system. As a child, there are support wheels to help you learn bicycling. Those support wheels were there so you do not fall. But at some point your parent would have removed those support wheels so you can cycle on your own. Good paternal instinct is about protecting the child when the child is learning something but at the same time paternal instinct is also about equipping that child to go and basically live in the real world that does not make you those cuts. We need to tell our MSMEs that when you grow you are the first beneficiaries of that because you take the profits and in the process you also contribute enormously to the economy — you create jobs, which is a national priority, you also create productivity. So that’s the key mindset change we need to make. When you look at Mexico and the US — take a firm that’s 40 years old, it creates seven times as much employment as a young firm. In India, it’s only about 40 per cent and it is because of these policies where we just fostered dwarfs in the economy. —Transcribed by Pranav Mukul
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