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Fixing the Indian state is beyond Brahma, Vishnu, Shiva and all the gods put together: Arvind Subramanian

Subramanian took questions on demonetisation—whether he was aware of the decision and if it had hit the informal sector — and on the need to increase the formalisation of the economy.

By: Express News Service | New Delhi |
Updated: March 3, 2017 10:13:15 am
 demonetisation, demonetisation impact, demonetisation effects, Indian economy, economic survey, indian economy, GDP, CAG, CVC, Express Adda, Indian Express, India news Chief Economic Adviser Arvind Subramanian (centre) with The Indian Express Deputy Editor (Rural Affairs and Agriculture) Harish Damodaran (left) and National Affairs Editor P Vaidyanathan Iyer

This edition of the Express Adda, held at One Golden Mile, New Delhi, hosted Chief Economic Adviser Arvind Subramanian. In a discussion moderated by National Affairs Editor P Vaidyanathan Iyer and Deputy Editor (Rural Affairs and Agriculture) Harish Damodaran, Subramanian took questions on demonetisation—whether he was aware of the decision and if it had hit the informal sector — and on the need to increase the formalisation of the economy.

Excerpts from the chat:

Harish Damodaran: Let’s talk about demonetisation first. To start off, were you in the loop at all? This is a question that will be asked by many people.

I think, in some ways, it’s history and, as time goes by, it becomes less interesting to know who was or was not in the loop. It was a decision taken by a select group of people and we’ve all had to follow up on it and analyse it. But this is the response that I would give when I was asked this question and I’m going to repeat it. I think it was a Buddhist saying that “speak only when you can improve upon the silence”. To paraphrase it in terms of demonetisation, “speak only if you can improve the clamour and cacophony”. When we wrote the Economic Survey chapter on demonetisation, it gave us time to work through the entire complexity of the issue. My understanding of this on Day One was different from my understanding when we finally wrote the demonetisation chapter. I’m glad I was silent for such a long time because of what I might have said and regretted later.

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Damodaran: So, the government didn’t seek the advice of the chief economic adviser?

Let me say that this is a government which is extremely receptive to the ideas of the chief economic adviser. Whether it is adhered to in 100 per cent of cases or 99 per cent of cases is an open question.

arvind759 Arvind Subramanian with wife Parul Subramanian, energy healer and hospice expert, and Kabir Saxena of Tushita Meditation Centre

Damodaran: In the Economic Survey chapter on demonetisation, your prognosis of growth following it is not very sanguine or bullish. Isn’t it different from the government’s as well as the RBI’s views?

In this post-truth world that we live in, one response is how do you cope with this post-truth. Surely, another response must be that we resist this post-truth. It was really important for at least the team that we come out with a completely fair and balanced assessment. That’s what we tried to do but I also felt that if we didn’t do this, we’d be letting down the public at large. I think the government too deserves a lot of credit for allowing this to be published. In fact, today the pre-eminent financial journalist in the world, Martin Wolf, has written an article on demonetisation where he basically draws upon the survey. I think even the finance minister read it and found it a very balanced assessment. At least, in hindsight, we made the right choices in what we said and how we described it.

P Vaidyanathan Iyer: Martin Wolf also points out that if a democratically elected leader can dare to do something like demonetisation and deprive people of a large percentage of their currency, he would dare to do anything. If this could have been announced, people could have faced less hardship.

There are two or three things you are talking about. One is, did we need to maintain secrecy in the first place? Certainly, if you go back and read the Wangchu committee report, which wrote about this in1971. I think around the world they feel that, if you really want to strike at this, some amount of secrecy is needed. The second thing you spoke about was, is it necessary to make clear how much money has come back into the banking system and how much is going to be returned. My sense is there is now an extreme caution about ensuring that the numbers we finally put out are accurate. I can understand some of the caution but, now that the need for secrecy has faded, I think the more transparency we have, the better it will be.

subramanian759 Arvind Subramanian with a memento presented by The Indian Express

Iyer: In your Economic Survey, you also mentioned the impact of demonetisation on the informal and unorganised sector. Do you see small or medium entrepreneurs going out of business?

There has been hardship — there is no question. People in the informal sector have been hurt, livelihoods have been affected and incomes have come down. That is because this was largely related to the lack of cash and liquidity. It, therefore, follows that, once that cash and liquidity come back into the system, there should be no long-term effects from that.

Iyer: What do you think can be done, three years after the government has come to power, to provide jobs and, basically, address some of the issues of distress in smaller cities?

The problem in India is not creating jobs per se. It is that most people find jobs but they don’t find high-productivity and high-paying jobs. The challenge is to not view this in terms of creating jobs but in degree of formalisation. Nine to 10 per cent of the country is in the formal sector and we need to raise that number. The other question is — what should you do about this? There are two or three sets of broad policy levers that you can push. It is worth stating the obvious that you have to get private investment and growth back to 8-10 per cent.

audience759 The audience at the Adda

Damodaran: Many of the ideas you have suggested, such as a step-up in public investment and universal basic income, remain just ideas. Why doesn’t the government take it up further?

Among the three or four things that I have been really passionate about, when I first came, was the need to ramp up public investment. The government has embraced that wholeheartedly. Broadly, the views I have been advocating are reflected in this year’s budget as well. The other thing I feel really passionate about is the GST. I did want this to be a simple low-rate GST and whether I’ve been successful, we’ll have to wait and see. The job is to always create the sort of ecosphere of ideas where all these things are debated. Robert Solow has a famous line: “Ninety per cent of the job of a good economist is to flush out bad ideas like cockroaches”. Those are the things the people will never know — the bad ideas that are flushed out.

Iyer: How has it been for you over the last three years in government? Does bureaucracy fascinate you?

This is, by far, the most exciting thing I’ve done ever. I’m on a 24/7 high all the time and my wife, who is here, can testify to that. One of the big challenges to this is how you persuade people to go along with you. Navigating the bureaucracy is very much part of that. For me, watching and being part of this process is a daily learning experience.

Iyer: There have been several reports on administrative reforms. Do you think certain things can be fixed?

Fixing the Indian state is beyond Brahma, Vishnu, Shiva and all the gods put together. But, I do think a government can improve if they make use of outside talent. The marriage of the insiders with the outsiders produces results. If you don’t get outsiders, there is too much ossification and caution, too much hierarchy in the system to actually generate ideas. Equally, if you just rely on outsiders, they don’t know what’s going on and are not familiar with our ways of decision making.

Iyer: You’ve often talked about the twin balance sheet problem. But, banks been unable to address this issue on their own. You advocated a bad bank. Why is it so politically unpalatable?

If you remember, I came in November 2014 and the first document that we wrote is the mid-year media analysis, in December 2014, which is when we coined the term ‘Twin Balance Sheet’ problem. At least, some of us recognised it early on. It’s also honest to say that there was an urgency and how serious we needed to be, even we didn’t signal it at that point. We were also a little bit behind the curve. There is probably in-built incentive in the system to not reveal the true extent of problems. We also thought that if growth were to pick up, it would kind of be … a rising tide can cover all the jagged rocks, and so it would do that. A combination of all these things lulled people in to a sense that the problem is not so big. The final bit of honesty is that it is a very hard problem, which should not be underestimated because nowhere in the world is it easy to say I will forgive the debts of the private sector. Because you create moral hazards, you say what kind of system is this, crony capitalism and so on. The twin balance sheet problem is finally about that, of course. There was a lot of crony capitalism, but a lot of honest mistakes were made. Down the road, we realised that a big part of the solution has to be to write down the debts of many companies, several of which were large companies, and that is not going to be easy. Making those hard decisions to write down debt, it’s difficult for any political system to do and of course in India you have this overhang of the four Cs. Even honest bureaucrats within the public sector are kind of fearful.

Damodaran: You mean the CAG, the CVC…

I would say the Courts, CAG, CVC, CBI. I don’t mean to cast any aspersions on any of them. They’re doing their job. But there is a kind of pall of anxiety and nervousness hanging over decision making. Put that together anywhere in the world and it is difficult to write off. So, it’s a really hard thing and something we need to crack.

Iyer: In the run up to the ongoing elections, the campaign draws so much from religion-based politics. How does such politics based so much on religion impact development?

All evidence suggests that social harmony is an intrinsic precondition for economic development. We’ve been a very early democracy and a cleavaged democracy and that has obviously had an impact on our economic development. While we justly and rightly claim that we’re very proud of our political development, I think it has not been without some cost.

Photos: Neeraj Priyadarshi, Tashi Tobgyal, Praveen Khanna, Abhinav Saha

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