We will be back to the growth rate we deserve in near future, says CEA Subramanian
There are some short term blips but in the long run, the fundamentals remain strong.
A slew of GDP downgrades have come in for the economy from World Bank to IMF, OECD to ADB. Everybody has been talking about how there are a whole lot of vulnerabilities for the Indian economy going forward, In that context, does the 7% growth estimate for this year in your economic survey seem a little too optimistic?
There has been some slowdown in the economy compared to the time when we had made the assessment. We do recognise that and the revised projections reflect some of the aspects on the short run. In the long run, the fundamentals remain sound. There are some short-term aspects, as we had also pointed out in the economic survey, and which is important one to understand that the economy really depends on the virtuous cycle starting from investment going to productivity, then to exports and jobs and thereby to consumption, which in turn affects investment.
We had also pointed out that the investment rate had fallen from a high of 40% to about 28%. It has bottomed out and started going up. We also recognised that the effects of many of these things are felt with a lag. That’s why the government has been very sensitive and has cut the corporate tax rate so that investments could be could be spurred. We must recognise that the impact of the step on investment will be felt with some lag.
It is also important to understand that the fall in the investment rates themselves were because of the concerns on the balance sheet sides and it took six to eight years for some of that aspect to build up. So, the winding down also takes time. Added to that, some of the concerns on the NBFC liquidity have a short-term aspect. These have combined to lower the projections a bit.
The steps that have been announced, especially the guarantee to tide over the liquidity issues of the NBFCs and which the honourable FM also discussed with the banks; the Rs 40,000 crore that the MSMEs actually expect in receivables and which will help with the working capital credit, are steps that will help in easing some of these liquidity aspects.
We want to highlight that while the IMF lowered its projections for this year, they continued to say that from the next year it will be 7% which actually goes back to the point that I am saying that there are some short term sentimental reasons but in the long run, the fundamentals remain strong.
You are saying that there will be a short-term blip. Does that mean that we will grow a little less than your own projections?
That may be possible and though I would wind back to what I was saying in terms of the virtuous cycle and the investment rate, the aspects that we saw on the NBFC side have been something that have added to the issues though we had factored in the lowering of the investment rate.
Most global agencies have slashed India’s GDP forecast by as much as 80 to 90 bps. Is that a fair assumption from your end? When you say a short-term blip, what exactly is it going to be?
I would say there has been some downward revision. But I would continue to emphasise that in the long run, the fundamentals remain unchanged and therefore we will be back to the growth rate that we deserve to be at in the near future.
Every time we say the worst is behind us, a PNB or a PMC issue crops up. When can we say that all the crises would be put behind us? When can we say now we can start from a clean slate?
KV Subramanian: I think we have to be careful in understanding the distinctions in the question that you have framed. The urban cooperative banks have a different set of issues.
The Nirav Modi episode at Punjab National Bank (PNB) for instance has aspects that are actually related overall to the banking operations, but when we have been talking about NPAs primarily, it is on the lending practices and there has been an improvement in the process of lending. The fact that banks are being allowed to take commercial decisions by themselves, is as one would expect. In fact, we have seen in the data that banks have become more careful and that is again something which is expected.
The NPA crisis that we have gone through has made us aware of some of the aspects that we need to be thinking more deeply about and which we are doing.
Since you are saying that you are thinking more deeply about what is brewing in the banking sector, I would want to know more about it.
I would not say brewing. I would say these are aspects that we need to think about and aspects that we may need to tweak for a fix.
But which direction should we move in because IMF has also pointed out the need for reforms. So, what is it exactly because the government has adequately capitalised the PSU banks. Plus we are pushing the mergers of PSU banks. What more reforms are being done?
This is something which I have been advocating. The world over, banks use a lot of technology to help with their lending decisions. In my own work on this area, I have seen how their predictive modelling can be very useful. One key area, where substantial rewards can be expected is investing. Banks are using a combination of artificial intelligence, machine learning etc. not only to screen borrowers but also to monitor them regularly, because when you give a five-year loan, the assessment of the credit at the start of the loan versus may be one year or two years down the line, can change and it is a dynamic scenario.
We have been able to implement so much of technology in many areas. Our public sector banks need to be investing a lot more in technology to be able to screen borrowers because the primary focus has to be on being able to assess and monitor the larger borrowers well. This, in the context of mergers, would actually help because investments in technology require a certain economies of scale because technological investments benefit from economies of scale. This should be an opportune moment to be able to invest in cutting-edge technology, which is what banks world over are doing and which public sector banks also need to be investing in. That is something we are working on.
The banks have been giving out loans in a big way -- almost over Rs 80,000 crore is what we heard from the government. But having said that, the RBI in a report recently said that the credit growth is at a two-year low. You said the banks have been a little more careful. So, is it the banks being careful or is it the fact that there is no demand in the economy for loans?
This is a point that we have analysed very carefully. It is my own assessment that the demand for credit is still pretty okay. If you look at the breakup in terms of the growth of credit among the private sector banks and the public sector banks, the credit growth slowdown overall has not been as much in the private sector banks.
If it were a demand side issue, one would have seen an equally sharp change in both sets, but that does not seem to be the case. As it happens the world over, as they say in Hindi; doodh ka jala mattha bhi phook-phook ke peeta hai (once bitten, twice shy). And that is a commercial decision. So, some care has been taken. I think our public sector banks are calibrating into it and some slowdown has happened in credit but I would attribute it not as much to demand side factors even when looking at other data sets -- loan enquiries etc. The demand for credit is pretty okay, which basically cycles back to what I was saying earlier about the fundamentals. If for instance, fundamentals had changed drastically, then demand would have been very, very low.
Are we overdue for an asset quality review in the NBFC space?
I would mention that the credit guarantee scheme that the government and the honourable finance minister had announced in the Budget is a very good move. I would say as a financial economist and somebody who understands securitisation and these kind of guarantees very well, what it does is, suppose you actually have Rs 100 portfolio and the first 10% is basically guaranteed by the government, then the rest 90% becomes much less risky and these kind of schemes are primarily used to tide over some of the liquidity aspects.
On Monday, the honourable finance minister had actually taken an assessment of this as well and wherever necessary, clarifications have been given. Moreover, while earlier, the threshold was kept at AA, it has been expanded to investment grade, which will bring in more assets to the portfolio and thereby enable the liquidity aspects not to get converted into further solvency aspects. I would emphasise on this aspect.
Secondly, some of the current situation is also because of the working capital that MSMEs need. They are now sitting on Rs 40,000 crore of receivables and here, the scheme of discounting these bills and thereby giving working capital credit can really help.
I was also looking at some data on passenger vehicles, etc. I think we have to be very careful now to make sure that the narratives that are not based on careful data are not given as much traction as they sometimes get.
Private sector investment is still not flowing in because the corporate tax cut is going to have a lagged effect. Does that mean that the government will have to shoulder growth, given the lack of private investment or will it be guided by fiscal prudence?
The government has already outlined several steps, including the corporate tax cut itself which clearly signals the intent of the government to do whatever it takes to put growth back on the high 7% plus reaching 8%. The commitment from the government on this side is unwavering.
Does that mean growth takes precedence over fiscal prudence?
These kind of macroeconomic aspects are typically a careful balancing act and we are deliberating very carefully on it. There is emphasis on disinvestment and on asset sales. Together with the extraordinary dividend that has come through, some rationalisation of expenditure can also be done to ensure that we do what is right for the economy.
When you are saying rationalisation of expenditure, are we talking about expenditure cuts?
No, I am not. I would point out that this is about revenue expenditure, the government is absolutely clear that capital expenditure is really critical and that is something that will continue to be emphasised by the government.
Many say that we are at the end of the cycle for the monetary side of things for the economy. Does that mean fiscal push is the need of the hour?
The government has signalled the intent of doing what is necessary on the fiscal side as well as on the structural reform side, to bring growth back on its path. The government and the central bank are working together to do whatever is necessary for this.
Under the FRBM Act there is a 50 bps window...
There are special conditions for it.
But this has been an exceptional year.
The conditions that are laid out are very clear. The conditionalities in the FRBM Act is for a situation when there are two quarters of decline. This is a slowdown, nor decline. We have to be careful. It is important to highlight that there is a difference between a slowdown and a crisis or a recession. A recession is defined as one, where for two quarters, there is a decline in GDP, in other words, a negative growth rate. We have to acknowledge that there has been a slowdown in growth but we still are in the positive.
This is no recession?
It is not. It is not. The narrative needs to be balanced. I have said that we should not get onto irrational exuberance when things are going good and get into excessive pessimism either. We will grow at 6% plus and in some sense, this is a good opportunity for us to look at the aspects that we need to carefully think about and address.
The government has also set up a panel to look at augmenting the GST revenue itself. While a lot of steps will be taken to get the money going on the strategic stake side, the revenue seems to be a concern. What is your own estimate so far? Are we staring at a shortfall in revenue because the growth rate has only been at about 5-6% in direct taxes and GST?
Recognising this, the government has set up the committee to be able to look into all aspects of the GST. There is no denying the fact that GST was an important piece of reform and I have looked at such reforms in several countries, even our own experience with CENVAT and it takes time for some of those issues to be brought onto the surface and then for us to respond and fix, which is what the government is intending to do by setting up this committee.
I am pretty sure that this committee will come up and give us suggestions that we should be able to take action on.
But are we staring at a revenue shortfall for this year?
We have to wait for the numbers to come in. I am pretty sure the revenue secretary is doing those calculations.
The government has undertaken a lot of reforms, especially on the corporate tax rate cut. In that sense, they really shifted from the normal tradition of announcing tax cuts. It used to happen during the budget time and this time we saw it in the middle of the year. Can we hear something from the government? Is Diwali just around the corner on personal income tax as well?
The committee was a task force that was set up on relooking the direct tax code of which I had the privilege of being a member as well has submitted its report and the government is considering the report. So as and when the report would actually be assimilated fully the government will take the necessary step.
If corporates deserve a tax break and that too that huge, do you think middle class too deserves something and that will spur demand in a huge way?
In the economic survey we pointed out that in an economy like ours, investment is the key driver and the investment benefits the middle class as well by creating well paying jobs and enhancing exports which again creates jobs. But we have to recognise that the investment effect of that is actually felt with some lag, but it is more of a sustained effect.
On the other hand, consumption can be perked up for a short while but it will eventually peter out. I will emphasise that there is a difference between what is a key driver and what is a force multiplier.
At the macroeconomic level, and this is something where every variable seems like both the cause and effect and that is why it has to be looked at very carefully and discover the key driver so that we fire on the key cylinders, which is investment. The corporate tax rate cut has to be seen in that light. I would urge that the steps that have been taken to reduce the corporate tax rate cut and thereby spur investment, make us really competitive among our neighbours.
It will show its impact on investment. If we need to keep our long run vision to achieve the $5-trillion economy goal, we have to have the patience to say let this effect go through investment. It is really critical because that is what starts the cycle and we have taken the steps that are necessary.
The markets are expecting some movement on LTCG and STT once again. It has also been a part of the panel that you have been a part of?
We are not yet in budget time actually.
So can we say that all the hopes are dashed on that front for the capital markets?
That was just an off the cuff remark. The committee on the direct tax code has considered all these issues together and has made certain recommendations. These have been considered.
But how important will it be to restore the confidence of the capital markets?
Overall, we must recognise that sentiment is a short-term thing. The government recognises the need for doing what it takes on the economy front and certainly as you would have seen the number of deliberations and interactions that have been held, this is a government that is listening to the market. I must also point out that through the economic survey, we have set out a very clear path for what we should be going. If we stick to that, the results will come.
So the door to more reforms is not closed?
No, I would, in fact, say that the reforms actually are structural reforms. It is recognised that we need to be doing more of that. I would put it positively and say that we are committed to structural reforms in the economy.