Among the many topics that have polarised opinion in India lately is economic growth as measured by the gross domestic product (GDP).
While the Narendra Modi government paints rosy pictures based on selective data, its detractors splash mud on them using their own data points. Obviously, not all is hunky dory.
The latest economic survey released in January, however, said India may grow between 7% and 7.5% in financial year 2019, the fastest among the world’s major economies, including China.
Quartz decided to ask Bibek Debroy, the chief of prime minister Narendra Modi’s economic advisory council, how the government aims to achieve this. Debroy is of the view that 7.5% GDP growth is “eminently doable” in the next fiscal. These are the edited excerpts of the conversation.
What is your reading of India’s economy currently?
There can be only four drivers of growth. One is public expenditure. There has been a lot of public expenditure happening, particularly in transport. But because of fiscal consolidation requirements, there are limits to public expenditure. Nonetheless, quite a bit of public expenditure is happening.
Second is consumption. Again, consumption growth seems to be improving; depends on the sector but generally it seems to be improving.
Third one is private investments. Private investments also show some signs of improvement. I don’t mean a spectacular improvement. But there are some signs, including green field investments. It is not across the board because some sectors still have excess capacity.
Fourth one is net exports. The worry is really on net exports, which are not doing that well so far. Considering all of this, that 7.5% seems reasonable. Now you might ask what about agriculture, what about this, and what about that. Those are valid questions had I said 8.5%. Despite all of this, 7.5% is eminently doable.
What do you think the government could do to improve exports?
One is the demand side (where) the government cannot do much. It depends on exogenous circumstances. But the demand side is better now than it was a couple of years ago…If it was just about the demand side then our exports should have been doing better.
Second one is the supply side (where) things cannot be solved overnight. Yes, the government has been doing various things—ease of doing business, transportation infrastructure, multi-modal logistics etc. But these don’t yield payoffs immediately.
Do you think the odds are so stacked against the exporters, they aren’t even producing enough?
How important the exchange rate is depends a bit on productivity. Even if there is an appreciation in exchange rate, you can counter that by productivity increases. In which context, your question is right that productivity could have been better, but that’s been an old story. On the exchange rate, again there can be a debate on the sensitivity of India’s exports to the exchange rate. Depends a little bit on whether we are talking about goods, or we are talking about services. But by and large, India’s exports are still not high up in the value chain, so they are still price sensitive.
From the point of view of stimulating exports, you would want the rupee to depreciate. But it is not depreciating because of capital inflows. What can the government do? Any intervention by the central bank has a cost. Whether I buy or I sell dollars, there is an issue.
There are three or four wheels of the economy which need lubrication. How would you like the government to prioritise—will it be agriculture, manufacturing, or exports?
I will not prioritise like that…Much of what the government is trying to do can be interpreted as (to create) that better business environment, not from the point of view of exports, but for growth.
The issue of course is, in a country like India, a lot of things are state government subjects. There is a limit beyond which the union government cannot push. So one part of is it is that.
The second part is public expenditure. That’s why your question of prioritisation is important. If it’s not money, then there is no question of prioritisation. It’s a fiscal thing. Because of the 14th finance commission, 42% is going to the states. If you add the centrally-sponsored schemes, that’s another 20% odd. So 62-63% is going to the states. There is a pay commission. There is a revenue compensation given to states because of GST. You are left with a small amount of money. Plus you have a fiscal deficit reduction compulsion, otherwise you will criticise the government.
The priority has to be what is there in the seventh schedule of the constitution for the union government to do, which is railways, national highways, airports. This is what the union government is supposed to do. The rest of it, 50% of the capital expenditure happens through the states. On top of that, every government has a requirement of ensuring that some sections are subsidised. This is essentially what is happening. One example of the subsidy is the health thing.
Do you think reforms are now on pause?
If I look at everything that has happened in this budget, it is a continuation of what this government has been doing since 2014. I don’t see this as an election-year budget.
Do you think the banking crisis will leave an indelible mark on India’s image and ratings?
A lot of it is a knee-jerk reaction. I don’t think this will affect India’s ratings.