Last two decades were China’s, the next two should be India’s: Arvind Panagariya
“Economic transformation means transferring a large part of farm workers to industry and services.”
What are the opportunities and challenges for the Indian economy in the next 10 years?
The opportunities are absolutely enormous. China was the rising economy over the last two decades and India ought to be that in the next decade, hopefully for next two decades. So opportunities are enormous and the challenge I still see is that of economic transformation which to me means being able to transfer a very large part of the agricultural workforce into industry and services and also transfer a good proportion of the population or the workforce currently in very very small enterprises into larger enterprises. If we can do that, the rest will follow automatically because what we call development, urbanisation everything is closely connected to that particular step that we need to take.
Last quarter GVA was at 5.8%. There is a consumption slowdown, there is sluggishness in private investment now. Do you think that the issues we are seeing currently are cyclical or perhaps they are pointing to a structural issue?
I certainly see it is a short-term phenomenon and when you say 5.8%, that is really one quarter. When we are talking of 10 years or even longer, I would not go by what is happening in a specific quarter. If I take the last five years, our growth rate has been on an average 7.7%. It has been pretty impressive and that is a growth momentum we need to maintain which we can, but the real challenge is changing the structure of the economy and which is what I meant by transformation and this will require creating jobs for the masses in industry and services, jobs that are productive jobs, jobs that pay good wages.
Therein lies the real challenge and I would not be so worried about some short-term declines in the growth rates. They may simply reflect a lot of structural transformation that is already underway. Remember that GST, cleaning of the NPAs and subsequently we also face some challenges in the NBFC financial woes as well. A lot of structural change is happening and some of the decline in the growth rate may very well reflect that. I am not worried about that. I think structural change is important but we need good jobs, well paid jobs for the masses in industry and services and those can come only if we do a number of necessary reforms.
Let us now delve into those necessary reforms that you refer to and the transformational steps that you have spoken about as well. You and me are speaking at the beginning of a five-year term, where there has been massive mandates. There is no question of political will or political ability. What do you think should be the broad roadmap from policymakers and government to make these changes happen?
I have to talk about short term and long-term reforms. But since we are talking here more about the 10 years or longer, let me go to the long term reforms that we really need. One is actually both short term and long term. There is one area in which the present government has taken steps back. That is the area of openness to trade. It is extremely important and unless we capture the global markets, there is simply no way to create these good jobs that has been the history of all successful countries from Hong Kong, Singapore, South Korea, Taiwan to China. We did not succeed during past 15 years or so, without achieving a major export success. Our exports in 2002 were around $50 billion. This is merchandise exports and excluding services and within nine years by 2011, we were exporting $300 billion, a six-fold increase.
It is a phenomenal increase that is the momentum that needs to return to exports and that also requires the central bank and therefore namely the Reserve Bank of India to maintain the exchange rate at the comparative level. We have let this real exchange rate appreciate a good bit in recent years and study shows very convincingly that that has had a pretty serious detrimental impact on the export performance. So, that is one. The global market is $17 trillion our share in it is only 1.7%. Compared to China, which has about 12%, we need to raise our share to at least 4% in the next decade.
Since we are speaking just before the first Union Budget of this government’s second term, do you think it is imperative that this roadmap is set in the budget and we do not go back this gradualism or incrementalism that we have seen over the last five years in consecutive budgets and in policy making?
The road map can be set in the budget or outside the budgets. To me, that really is not important. The most important thing really is to have a plan in the first year and then systematically implement that. What I have in fact suggested is a separate model with Professor Venkatesh Kumar that what the government ought to do is begin six or seven separate missions. These missions are not typically project or programme based but in each area of reforms, you will find a mission, attach a very senior bureaucrat with the charge to implement that. The bureaucrat has to be the area expert. Give them a solid team of young professionals from outside for three-four years and their mandate for each mission should be designed and implement over the five-year period, given the set of reforms with proper deadlines and a trade outline.
They should have direct access to the Prime Minister who should take updates on everything and likewise those heading the mission should be able to go and speak to the Prime Minister one on one, so there is no fear on their part of which ministry is coming in the range. If bureaucrats are not going fast enough, the Prime Minister ought to be informed. That is the sort of model I would suggest to follow if one really wants to implement the policy reforms.
One of the biggest debates among economists is about the sanctity of Indian data. Former Chief Economic Advisor Arvind Subramanian has claimed that the India growth rate may have been exaggerated and we need to relook at the methodology. What is your take on this issue?
I have no idea but my guess is that even Mr Subramanian really does not believe what he is saying that the growth rate for the years from 2011 to 2016 or 2017 was 4.5%. I do not think that he could possibly believe that, nobody did.
What do you mean when you say you think Arvind Subramanian does not believe in what he is saying? Do you think his methodology is flawed?
I will not speculate but I trust that he is a smart man and nobody who knows the Indian economy would seriously think that growth rate during those years has been 4.5%.
The agricultural sector currently employs a large number of Indians but its contribution to the GDP is relatively less. Do you think it is a long standing problem that successive governments have put off because it is politically sensitive and can we really afford to keep putting this off for the next 10 years?
There is obviously a problem of very very low income which has to be shared by a very large population. Agriculture contributes 15% on the GDP while 44% of the workforce is employed in agriculture. That means the output per worker in agriculture is less than one-fourth of the output in industry in services and at our current level of development output per worker in industry and services is not very high either.
So how far can you go? It goes back to the problem. I have repeatedly stated that our problem really is too many workers in agriculture being able to produce too little output. Now you could think in terms of raising productivity of agriculture but the problem in agriculture always is that more output, lower prices. You do not get enough revenues and as a result, it is a trap. Unless, you take a large part of the workforce out of agriculture, I cannot emphasise enough of how important that is for the future prosperity of the country.
Prime Minister Modi has said that it is possible to take India to be a $5-trillion economy in the next five years, but there is a challenge. Some estimates talk about $7 trillion and even $10 trillion by 2030. Do you have a number or any comment on these estimates?
If I remember correctly, in 2018-2019, it about $2.6-2.7 trillion. If we are talking nominal dollars, not today’s dollars. The current dollars in 2014 so there is that issue. Remember that when you say $5 trillion, you are not specifying whether it is in today’s dollars or in 2014 dollars. Certainly in 2024 dollars that is a feasible proposition. In nominal terms, we have grown over 10% per year. I have not done the numbers but to compound from $2.6 trillion at 10% , by 2024 its thrice what it is now and that it is not an infeasible proposition.