On June 21, Subramanian announced that he would be stepping down from the post of the Chief Economic Advisor, 11 months before the end of his term. Subramanian, who was closely involved in drafting the GST Act, cited “personal reasons” for his departure. During his nearly four-year tenure, which was extended in September 2017, he brought in ideas such as the JAM Agenda and also authored the ‘Report on the Revenue Neutral Rate and Structure of Rates for the GST’. An alumnus of IIM Ahmedabad and the University of Oxford, he has been vocal in his criticism of the RBI’s monetary policy
HARISH DAMODARAN: So why have you decided to step down as Chief Economic Adviser? Also, aren’t you leaving at a time when economic policy making offers far bigger challenges, compared to three years ago? We have rising oil prices, capital outflows, monetary policy tightening by global central banks and also trade wars…
My initial contract was for three years but the Finance Minister (Arun Jaitley) said you stay on for some more time. And now this personal imperative of having to go back (the expected arrival of his grandchild in early-September)… I have neglected a lot of my family responsibilities. I have been away from my family for four years. Our son and daughter-in-law wanted us to be close by so that we can enjoy and share the burden of grand-parenting. So it (stepping down) was the right thing to do. There are compelling personal reasons.
All economies at all points in time have challenges. I think there is no ‘now is more challenging’. When this government came to power, there was policy paralysis, macro instability and there were major reforms like the GST (Goods and Services Tax) whose implementation had been stuck for so many years… India is, in any case, a vast country and there are many talented people. So it’s not that the economy management is going to change drastically because I leave. So there never is a wrong or right time to leave. I will not be physically present but that does not mean that I will not be available or contribute. The good thing is that I have connections with lots of people in the Ministry of Finance and the Prime Minister’s Office, and if my services are really required, I’m always ready to provide that. Hopefully we will get a very good successor… Life kind of goes on and you can’t pitch this on one person.
SUNIL JAIN: When Raghuram Rajan, the former RBI governor, left, many people blamed the government. How has your experience been?
There should not be even a residue of the notion that this government can’t hold talent. I genuinely believe that I have had a great time here and that this has been a great job. So there is no question of a pattern that some people were forced out… Not at all. For me it has been a really really productive association with the government.
Secondly, I think that a lot of reaction to my leaving is highly complimentary but in a slightly ‘despite the government he did very well’ kind of a way. I think I would not have been able to contribute as much and do as much without the freedom and space I was given. All the credit for it goes to the government. I mean, after all they could have said, ‘Go away, we don’t want you speaking’. But absolutely not. The Finance Minister (Arun Jaitley) gave me so much space and freedom that I was able to say things, more so internally. The freedom with which I have been allowed to speak is extraordinary. I have not held back in terms of my private views, not at all. In public too, I think, I have been reasonably outspoken. But naturally you have to behave responsibly… Why should I want to publicly criticise the government? Then I should not be a part of the government.
Yes, sometimes you feel that may be saying something in public will bring about the change you want to see. For example, I have been outspoken about monetary policy sometimes — about the RBI keeping it too tight. I have said things about the GST — about there being too many rates and cesses. So there is no question of one more person departing because the government can’t hold on to…that’s not true in my case. The surveys that I wrote couldn’t have been written had the government not given me space to write them. The fact is that sometimes the surveys would say things that were not supportive of the government’s policies.
So Raghu’s (Raghuram Rajan) context was different, my context is completely different.
SHOBHANA SUBRAMANIAN: Apart from the price of oil, what is the biggest headwind for the country’s economy today?
I think that there is a lot of upside potential, but there are also headwinds. The most immediate macro headwind is oil, combined with the capital outflows. In terms of broader challenges, I do think that ‘stigmatised capitalism’ is coming in the way of reforms. The fact that it’s getting very difficult to bring in reforms that would bring privatisation… This is what I call the mahaul (atmosphere) of stigmatised capitalism. Public sector officials are finding it difficult to take decisions because of the fear that at some point this will be questioned or investigated. So, the bad news is that all this is going to complicate a lot of things — privatisation, subsidy reform or even meeting the entire twin balance sheet challenge.
But the good news is that with the IBC (Insolvency and Bankruptcy Code, 2016; the bankruptcy law) we have partially at least addressed the problem of stigmatised capitalism. So we are finally finding a way out of enabling exits via a judicial approach rather than a political or administrative approach.
But I also do think that, going forward, we can’t make IBC the only game in town, even though we can take steps to expedite the process of bankruptcy resolution. Overcoming stigmatised capitalism is what will be a major problem if you want to move into a more market-oriented economy. The problem is very fundamental. You can trust capital only if you trust the ability of the State to regulate private capital. The challenge is how do you get deeper trust in the State, the effectiveness of the State, the credibility of the State, the legitimacy of the State to regulate private capital.
There is one more challenge. We have come into a paradoxical situation today in agriculture where we are in trouble not only when we have not so good monsoons, but even when we have good monsoons. We are in a surplus situation, which never used to be the case. So stigmatised capitalisation and agriculture are the challenges.
HARISH DAMODARAN: Three years ago you were a votary of fiscal relaxation. Would you advocate it today?
When we had slack in our economy, when growth was decelerating, investment was decelerating, what I advocated was not fiscal relaxation but slow fiscal consolidation. Now the situation has changed completely. Oil prices are higher, the international environment is much more uncertain… Union minister Arun Jaitley wrote a blog saying exactly this. If inflation is to going to become a concern, you have to be responsible. I think there is no question of fiscal relaxation in these circumstances. Also, if inflation has gone up and the RBI has been mandated to achieve a certain inflation target, your policy has to be consistent with the changing circumstances. Capital has been going out, but mostly because of external reasons.
ANANT GOENKA: The United States Treasury Department has put India on the currency manipulator watchlist…
The Treasury has three criteria for defining currency manipulation. If you breach those, you are put on a watchlist. And two of the three criteria are nonsense. One is running a bilateral trade deficit with the US, and the other is if your central bank makes purchases of foreign currency. Analytically, conceptually, these are flawed criteria. It (being put on the watchlist) is not going to make much of a difference.
PRANAV MUKUL: You have been clear on Air India’s disinvestment, which could not happen. While the industry said that the government’s terms and conditions were not conducive enough, the government blamed the macro conditions, including the currency and oil prices for it. Where do you stand on that?
I think it is a setback. I do not follow this very closely and the reasons are for the others to figure out. But I think we need to find fresh ways of carrying through the commitment that the government has always had, and the PM has always had. If you want to inspire confidence in the government you need to push through with this agenda in which assets are sold to the private sector.
SUNNY VERMA: In the past few years, there has been visible tension between the Finance Ministry and the Reserve Bank of India. You have been critical of the monetary policy on many occasions. During the PNB loan scandal the government cited lapses on the part of the RBI, while they claimed lack of power in public sector banks.
All relations between the Finance Ministry and the RBI should be harmonious, but there is going to be some inevitable tension in their actions. There are different sets of instructions and so they can never be on the same page.
Around 20-25 years ago we had a big intellectual shift when we thought we need to have more independent central banks. But if you look at the crisis, you will see that independence gets less precedence. For example, in the crisis many central banks started performing quasi-fiscal operations… I think curtailing inflation is important, but I do think that the government and central banks should work together on financial stability. There should be convergence of objectives.
I have some sympathy for the view that it gets more complicated for a regulator when there is a government omission, but I do think that public sector ownership complicates the regulator because there is three-way ownership. These problems are not only confined to the public sector, and therefore there is scope for improvement in the regulation.
SUNNY VERMA: Do you think the time has come to denationalise public sector banks?
It has to be in the form of a reform. I have explained the reasons for this in gory detail as to why I think having public sector ownership adds layers to governance. For a variety of reasons public sector ownership creates a governance challenge and people also seem to overlook the fact that nobody is saying that the entire sector system be privatised. We should allow for some more majority private sector ownership of public sector banks. We should let that happen.
HARISH DAMODARAN: What have been some of the good reforms of this government? And what are some of the not so good ones?
The GST and IBC have been gamechangers. So, has the whole JAM agenda (Jan Dhan Yojana, Aadhaar and Mobile), which has brought about a revolution in digital and financial connectivity and direct benefit transfers. One of the planks of government policy has been the public provision of essential private goods and services — bank accounts, housing, toilets, gas etc. Pushing this agenda with a lot of zeal has made a difference.
I think the government could have done more in fertiliser subsidy reform. In the GST too, I think, the 28 per cent tax slab has to go. The cesses may have to remain, but there should be just one rate on cesses… Today, we have GST rates of 0, 3 per cent (for gold), 5 per cent, 12 per cent, 18 per cent and 28 per cent. We need to rationalise but I think at the first instance the 28 per cent should go.
SUMIT JHA: How can the GST be simplified?
I am saying that in an ideal system the 28 per cent rate has to go. The cesses may have to be there because we are going to have higher rates for some products, but there shouldn’t be multiple rates even here. In my report, we had called for one 18 per cent rate and then 40 per cent rate. Cesses are a different way of implementing the 40 per cent rate.
SUNIL JAIN: When this government came in it was talking about privatisation, there was an impression that PM Modi is pro-privatisation. But the fact is that privatisation has been stalled. Rahul Gandhi accused the government of being a suit-boot ki sarkar and it seems that since then things changed.
I think stigmatised capitalism has proved to be more entrenched and more difficult. I am just struck by how deep this problem is and the the only answer is the judiciary process.
BANIKINKAR PATTANAYAK: How will the global trade war initiated by the Donald Trump administration affect India?
What we should do is to be consistent with the reasonable action that other countries are taking. We should not violate rules and go beyond what others are doing because we have to understand that our ability to shape things is limited compared to other countries. We should not deviate from that. When all of this is happening across the world, it tends to legitimise a broader shift in protectionism of the whole country. That’s the kind of danger we have to try and stay away from. Just because others are doing it, doesn’t mean doing it will be in our interest.
I worry about the broader policy ecosphere being affected. The flipside of not being that export-oriented as an economy… The fallout for us is less than it is for other countries.
On the services side we have to be watchful and it could come back and affect us. Creatively, I think we should spend more time on thinking how to revive multilateralism in the world economy, taking into account the fact that the traditional leadership provided for multilateralism by the US has waned. On the other hand, the new contender cannot provide this leadership because they are protectionist themselves. So there is a scope for medium-sized countries such as India, Canada, Mexico, Brazil, which have a huge stake in keeping the markets open.
Can we do more by mobilising a constituency that can revive multilateralism and can fill the huge vacuum? People say they are in the G-0 world, where nobody is providing any leadership. I actually think it is a G-minus world. This is something we do not do enough of because we are rightly consigned with our domestic economy. As a rising power, can we think of ways to mobilise an international coalition? We cannot do it alone, but as a part of a broader constituency can we take the leadership and fill in the gap?
The difficulty with stigmatised capitalism, which is a genuine dilemma for the government… One of the responses was going after the crooks and bringing in justice. But can you do it in a way that doesn’t become overzealous? Can we do it in a way that is well targeted?