Former Chief Economic Adviser Arvind Subramanian was a key policy adviser to the Union Government and his out-of-the-box ideas —including using RBI reserves for capitalising public sector banks, a Universal Basic Income, and deploying JAM (Jan Dhan, Aadhaar and Mobile) trinity to deliver public goods — generated debate within and outside government. In his latest book, Of Counsel: The Challenges of The Modi-Jaitley Economy, Subramanian examines the puzzle of why demonetisation — which he has called a “massive, draconian shock” — didn’t have a bigger impact on the GDP or on BJP politically.
SUNNY VERMA: You recently called demonetisation a ‘massive, draconian monetary shock’.
I learned two things about demonetisation. I offer the fairly controversial hypothesis that imposing a lot of costs on a lot of people was intrinsic to its political success. I believe that when you have charismatic leaders, it’s easier to take action against many than it is to take on narrow vested interests. It has proved difficult to take on large farmers, fertiliser industry lobbies, public sector unions but apparently it’s not difficult to impose (such a cost) on the entire informal sector.
The second question is whether it was a draconian move. In the Economic Survey, we called it a large structural shock. What you call it doesn’t matter because when you take away 86 per cent cash, it’s not small… I remember having a discussion about this with (The New York Time’s) Paul Krugman over breakfast, and also with (American economists) Ken Rogoff and Jeffrey Frankel. They were astounded that how is it that you take away 86 per cent cash and the growth rate remains around 7-7.5 per cent. Anyone would have predicted negative growth based on this.
HARISH DAMODARAN: Can you elaborate more on these costs imposed on people?
There are a series of related ideas on that. One explanation was that you (the government) wanted to show that you are against black money. My answer is, if you only wanted to show that you are against the corrupt rich, you had other instruments to target them… It had to be more than that. So when you impose a lot of costs on a lot of people… people think that if I’m suffering, so are the others. Second is the sense of shared sacrifice, that we are all in this together. If the impact had been partial, then all these doubts would have arisen about who was left out and why.
P V VAIDYANATHAN IYER: Following demonetisation, officials in the Prime Minister’s Office and the Finance Ministry expected Rs 2-3 lakh crore to not come back. Eventually, 99 per cent of the money came back. Did you have a similar expectation?
All these calculations were done post demonetisation. I think it is fair to say that some amount — Rs 2 or 3 lakh crore — was expected not to come back. If it hadn’t come back, you could have said that some serious wealth destruction happened, that affected the corrupt rich. Of course, that did not happen. But the fact that all this came back does not necessarily mean that costs were not imposed on the corrupt rich. The cost could have been imposed as they may have had to launder it or declare and pay taxes on it.
SUNNY VERMA: There was a lot of expectation that the government would deliver a high growth rate and more jobs. But now even a 7 per cent growth rate looks imposing. What do you think went wrong?
I would point to three reasons. One is that the freeing of the financial sector took a lot of time, and it’s still a work in progress. We enacted the Insolvency and Bankruptcy Code in 2016, but in 2018, we realised that the problem is far from being resolved. The financial system is still not in a position to finance investment because the clean-up of corporates and banks has only just begun.
I have looked at agricultural growth of the last 50 years. The highest period of agricultural growth was between 2003 and 2007-08, during which there was a massive global agricultural commodity boom which benefited India. In the last few years, agriculture has gone the other way. We had droughts in the first two years. In the next two, we had good production but, for a variety of reasons, farmer incomes and prices collapsed.
The third thing is exports. The flip side of low oil prices was that you had huge capital inflow, the exchange rate appreciated by 20 per cent. As the world economy went down, our manufacturing export growth and services export growth were not even remotely as buoyant as they used to be.
RITIKA CHOPRA: Were you consulted before the demonetisation announcement was made?
My book is not a kiss-and-tell memoir about who knew what and when. When demonetisation was announced, as an economist, I was trying to understand all its complexities — what the costs and benefits would be. So, there was also a lot of honest learning for me about how it might pan out.
SUSHANT SINGH: A recent survey by the All India Manufacturers’ Organisation lists the GST as one of the reasons for job losses and declining profits in Micro, Small and Medium Enterprises (MSMEs). Why was the GST not as simple as it was expected to be?
First, there were two policy decisions (demonetisation and the GST) done in quick succession and both impacted the informal sector. There is absolutely no doubt that had the GST been simpler, we might have avoided some of the problems. To be fair to the system, when you can’t have simplicity, then complex policy leads to ultra-complex procedures. But once the concerns about SMEs (small and medium-sized enterprises) were expressed, the GST Council took a lot of measures to simplify procedures.
LIZ MATHEW: In the recent past, we have seen Solicitor General Ranjit Kumar and NITI Aayog’s Arvind Panagariya quit citing personal reasons. Do you think it is difficult to work with the government?
I don’t know anything about their situation. I also left for personal reasons. I keep saying it’s the best job I ever had. I had a dream boss. These positions are quite delicate. Everyone has to find his or her own way of navigating through challenges.
LIZ MATHEW: We keep hearing about how the Modi government has turned around the economy. Is it really a rosy picture?
In my book, I say there were some major achievements and there were some shortcomings. The two big achievements are the GST, which needs to be improved, and the Bankruptcy Code… The RBI is also doing a lot on the resolution process, for which they deserve a lot of credit. The third big achievement is a kind of new welfarism. The government is providing essential private goods and services especially to the poor using technology. It’s not handouts and welfare, it’s not primary health and education necessarily; it is about providing toilets, cooking gas, rural housing, power, medical care. This is what I would say is quite distinctive about this government.
KRISHN KAUSHIK: One of the promises made by this government was the creation of two crore jobs. Do you think job growth has been satisfactory?
There is really no hard basis for making any claims about employment. The latest data available is from 2011. All data released post 2011 has some major methodological difficulty to be considered reliable… I have always said that the reason the employment issue keeps coming up is that, during the boom period, three sectors did very well — agriculture, construction and IT. These three job creators have not been doing well.
KRISHN KAUSHIK: The recently released back series data lowered the GDP growth rates for a major part of the UPA era. Do you trust the credibility of the data?
I am not a statistician and I haven’t looked at the data. But if you look at a variety of indicators in that period — exports, credit, capital inflow, investment, corporate profits — they were much higher. Despite all this, if we are saying that GDP growth is the same, it invites a lot of questions. It is not something one can easily accept at face value. We don’t want to be in a situation where every time data comes out, our institutions get so discredited that we start doubting every number. The only solution is that we must have experts — because it’s a very technical exercise — and only institutions with experts should adjudicate this and come out with a verdict.
Bani Kinkar Pattanayak: One of the reasons for Urjit Patel resigning as RBI chief was said to be the government’s decision to invoke Section 7 of the RBI Act, which allows it to issue directions to the RBI.
I don’t know if Section 7 was invoked or not, but I do think when you take extreme measures, it has the serious risk of compromising the independence of an institution that is so revered and respected like the Indian RBI. That being said, I think we should also be mindful — and I say this in my book — that the RBI also needs to be held accountable for a lot of things. I think it seriously underestimated the magnitude of the NBFCs’ problem, for example. We have had googlies coming out of nowhere like IL&FS, which clearly should not have happened.
Sandeep Singh: How do you see the trend of political parties announcing debt waivers? Do you see that as a challenge to the economy and the banking system?
Loan waivers are very inefficient and not a very good instrument to achieve agricultural objectives. Even if you can’t achieve those objectives by improving productivity, there are much better ways of providing a push — Direct Benefit Transfers (DBT), the Telangana Rythu Bandhu scheme, for instance — that don’t carry the perverse incentives of loan waivers, which penalise those who don’t borrow at all from the formal system. Second, it penalises those who borrow and repay. But I do think that when states are promising this, at least in principle, the Centre has control… (They can say) ‘You’ll face fiscal constraints, we control how much borrowing you can do, if you have to give a loan waiver, you still have to meet the fiscal deficit by legislation since you have to cut something else’. That’s a way of saying that you have to bear the political cost of that. So loan waivers are a problematic, inefficient, very perverse way of achieving agricultural objectives.
Aanchal Magazine: Earlier, the transfer of RBI’s surplus reserves was done once a year. Then the demands for interim transfers came in. Won’t this become a habit, with governments dipping into the RBI’s reserves? Where does one draw the line?
Are there surplus reserves? Unambiguously, there are. If you apply international practice on how much should be the optimal reserves — and that’s what we did in the recent EPW paper — it is clear that there are excess reserves. But what do you do about the political policy question? Because it is unusual, it (transfer of reserves) should be used very carefully. When I said it should only be used for recapitalisation of banks, that captures the spirit that you can’t do this again and again and you can do it only for things that can have important long-run consequences. Recapitalisation of banks is like an investment in the financial system. Also, I think it should be done cooperatively and not unilaterally. As I say in the book as well, look at what, all over the world, especially after the global financial crisis, distinguished central banks — European Central Bank (ECB), Fed Reserves — did. They said the global financial crisis is very unusual, we’re going to deploy the central bank balancesheet in order to address these one-off problems. My quibble with the RBI is, why did it never voluntarily say that? Why didn’t it say at some point in time that we have a strong balance sheet and we volunteer to put the RBI balance sheet to solve the financial-sector problem, of course only under certain conditions. Then there would be no question of the government raiding the RBI.
What I would like all of you to ponder upon is think of it the other way, not about the government raiding the RBI, but how perhaps the RBI could have behaved differently.
Sumit Jha: Back to the GST, was the budget estimate too ambitious? The average monthly collection is falling short by Rs 15,000 crore.
If the budget is demanding something much higher of the GST, then you would kind of infer that maybe the budget got ahead of what were the underlying conditions of the economy. So it’s a bit unfair to blame the GST revenue for targets that were set in the budget. I don’t think the GST revenue is doing that badly.
Bani Kinkar Pattanayak: Do you think the RBI board should be empowered to have a more proactive role or should the decision-making process be left to the RBI management?
My sense is that the board is meant to give overall guidance and not get involved in all kinds of details.
Ravish Tiwari: What proportion of the current balance sheet mess would you attribute to the UPA and how much to the current government?
For that, you need to look at numbers carefully, in terms of actual timing, loan by loan. I don’t think anyone has done that calculation. I would say (the problem) is predominantly legacy and a smaller proportion of it is new, but it’s impossible to say whether it’s 70-30, 80-20, 60-40. As I say in the book, the original sin for the twin balance sheet problem was the excessive lending that took place in the boom years. How much was then and how much later, it really would be impossible to say.
RAVISH TIWARI: As an economist, you have followed how countries have grown, you study and teach economic history, you know as much history as the new RBI Governor knows economics. Do you think you’re eligible to be chairman of the Indian Council of Historical Research?
Just as I said statistics should be done by experts, if I was offered the chairmanship of ICHR, a) I shouldn’t be offered the job; b) if I was offered, I shouldn’t accept it; and c) if I accept it, you should write columns saying this guy is the pits.
P Vaidyanathan Iyer: Is there a possibility of India becoming a welfare state — not just at the federal level, but smaller provincial levels? What happens to reforms then?
We should remind ourselves that we’ve always been a welfarist country. I think we’re a wonderful democracy, of course, but that means there will always be pressures to redistribute. The challenge for us is to find efficient ways of redistributing. Subsidies is a very inefficient way of doing that. There are all kinds of price controls and that creates problems. I think we should be thinking of non-distorting ways, with things like Universal Basic Income and DBT as ways of the future.