Chief Economic Adviser Arvind Subramanian spoke with reporters after the Economic Survey 2017-18 was tabled in Parliament on Monday:
In your first Economic Survey 2014-15, you had argued that India has reached a sweet spot and can be launched on to a double-digit growth trajectory in the medium term. In the current Survey, you highlighted that the goods and services tax (GST) has stabilised, demonetisation pain is behind us and several other reforms have taken place. Despite these reforms, what explains the fall from expected double-digit growth to 6.50 per cent for the current year as per the Central Statistics Office (CSO) estimates and 6.75 per cent as per Survey projections?
I am glad you took me back to the first Economic Survey where we spoke about the sweet spot. Look, I think relative to that assessment, few things have happened, right, as they say that stuff happens. One of them is of course that certainly, at that point, perhaps I had underestimated the overhang and the drag that twin balance sheet was exerting. I think in that sense, the twin balance sheet was exerting a bigger drag than certainly I had expected it to at that point in time. Now, that’s changing and, therefore, if that comes back, I think, we can expect to go back towards the medium term. Of course, in between that many things has happened. In fact, remember the way we phrase the analysis here is why did we decouple both from the rest of the world and from our own long-term, medium-term growth trajectory. And, I gave you four reasons for that: demonetisation, GST, high interest rates, oil prices — those factors brought it down to 6.75 per cent. Two factors are behind us, interest rates are now also slightly lower than where they were. That’s why we expect that we can go back to our medium-term potential which is somewhere, we have always said that it is between 8 (per cent) and 10 per cent. I think over the next few years, we can get back to that but again (there are risks). Now certainly oil prices are higher, so, the world evolves, it is very dynamic.
The Survey cited risks in the stock market. Do you think corrections need to be there in the taxation policy which is encouraging flows in the stock market?
You know that those are questions that we cannot provide answers to, you’ll have to wait for the Budget for answers to questions like that. I think the broader point is that we have seen around the world that when asset prices go up very much, they always tend to come back and so we have to be watchful…when we always analyse asset prices like this, I think there are two dilemmas here — you can either make the mistake of saying, oh, this time it’s different and stock market prices are justified, that’s one mistake you can make. Or you can say, the cry of wolf trap, interest rates are going to start rising, but people have been saying that internationally so often and they have been proven wrong that you have to stay clear of both these traps as it were.
Are you saying there is a bubble in the stock market?
Let me just say that the higher the prices go, our vigilance should increase correspondingly.
What level of crude oil price is the government comfortable with? In light of the rising prices, will the government cut excise duty on fuels?
What is the comfort level of the government, obviously, the lower the better. (But) let me give you sort of a little bit of a mea culpa and say that to some extent, I myself, have misread the oil prices. We had thought that oil will not go above $55, at most $60 (per barrel). I think we have been proven wrong and I think we should admit that. I think there are two things that have contributed to that. One of course is that we thought shale oil will come back at about $50-55, so far it has not come back to the same extent that we wanted to. We have discovered that the shale producers now want (a certain amount of) profit margins than just expanding activity, so the response has been less responsive and less quick. Second, which is completely unforeseeable thing is what is happening in Saudi Arabia. I think that the Aramco listing is making oil prices much higher than where they should be, and I don’t want to get into all the geo-politics around that, that’s what contributed to that. Now, how should we respond to that, the RBI (Reserve Bank of India) obviously takes it into account, in its inflation projections and monetary policy. But in terms of what follow up action should be taken in terms of excise duty coming down etc, that’s a political question. But the government is committed to its policy of deregulation and I think that will continue.