The Indian Express (Delhi Edition)
‘Restrictions on H1B visas is bad news; we can’t target 8-10% growth if globalisation is reversed’
Arvind Subramanian said write-down of a portion of bad debts of firms will help address the twin balance sheet problem of banks carrying high NPAS and over indebted firms. Speaking to SUNNY VERMA & P VAIDYANATHAN IYER, he said growth is not possible witho
INTERVIEW WITH CHIEF ECONOMIC ADVISER
Jobs seem to be a big concern for the Centre that is completing almost 3 years now. Is slowdown in private funds affecting job creation?
Jobs depend upon all kinds of factors. Whether you can get exports up, investments up, consumption up, everything contributes to growth. But clearly we also have to get private investment up. I think private investment is essential in keeping growth high on a sustained basis. There are limits on how much governments can invest, they have to balance fiscal rectitude with this. So I think in the medium term investments and exports have to be the basis for growth. I think that, therefore, exports to some extent are starting to pick up, it’s not fantastic, but starting to pick up. The world economy improves as the IMF is forecasting but private investment (is weak) due to the twin balance sheet challenge that we have pointed out in (the survey).
This twin balance sheet problem has stayed for long. Centre has said it is a legacy issue. For three years Prime Minister’s agenda was to revive private investment and to reduce NPAS but what is holding back the government from addressing this issue?
I think world over this is a very difficult problem, right. First, in a sense it’s less about banks than it is about companies, that’s why it’s tricky, it’s not a banking problem alone. It’s very a much a corporate sector problem. Second, most of the debt, stressed debt, is with the large companies. Third, there is always a temptation to see this as a morality play, that the guy has got away with it, let’s go after that, when in fact you have to see that mistakes were also made, so you have to deal with that. Because it’s a problem with big companies, because current levels of debt are unviable, I mean this necessarily involves a writing down of debt. World over writing down debt to the private sector is difficult. In India, it’s doubly difficult because you have what you call the four C problem — Court, CVC, CBI, CAG — I don’t mean to be pejorative, but this is the fact of life. Whatever little we have done so far say, the RBI under Raghu (former Governor Raghuram Rajan) announced measures like 5/25, SDR (Strategic debt restructuring), ARC, S4A, all these. But essentially, they have been decentralised, basically you leave it to the banks. I think the banks and bank managers, they are being asked to take decisions about writing off the debt to big firms. This is not an easy thing. This has to be centralised, the level has to be raised, it has to have political cover, and that’s the heart of the problem. It’s not easy.
How much write down is required to make a visible dent on NPAS?
If you read the chapter, we have a lot of calculations. It varies from sector to sector. Power, steel, telecom — well telecom does not have NPAS as yet — steel, power, textiles and clothing, SMES also. In the power sector, for example, we have some calculations based on work that others have done, you may have to write (down) 20, 30, 40 per cent of the debt. Similarly, in the steel sector. But luckily for steel sector it is not across the board, it’s few companies. But this is about companies now, resolving their bad debts, it’s much more difficult than putting money into the banks. That’s easy.
You said that it’s an economic issue, and no more a morality issue. Is it also a political problem because politicians do not want to take a call?
That is part of the... it is at its heart very difficult because middle level bank managers and bureaucrats are (resolving this) even politicians probably find it difficult to write down, so it’s a really intractable, thorny problem but we know that the status quo is not working. So someone else higher up has to take difficult decisions.
The government has been grappling with this issue for a long time.
To be fair, they set up the oversight committee under Vinod Rai (Chairman of the Banks Board Bureau). So it’s not that you don’t take (measures) but it’s just, it requires a lot of political (will).
But clearly private sector ARCS don’t have the balance sheet strength to deal with this problem?
Again, think of the small private sector ARCS (asset reconstruction companies) having to deal with big companies. It’s the same problem. Also, the ARCS incentives are very tricky. I will give you one example, when a bank sells debt to an ARC, the bank actually has to recognise and make provisions only when the ARC settles the debt, so in a sense there is an incentive not to settle the debt because then you don’t have to provision these. So all these perverse incentives going on in the ARCS and plus they need to be big, they need resources. And we have backed private ARCS, we have allowed FDI in it – it’s not been working.
Various commentators said that you were not consulted by the government on the demonetisation decision? Would you like to set the record straight on this.
My response to you would be to say that why do you want to deprive me of material for my memoirs. So let’s leave it at that.
Are you pro-demonetisation?
Remember. I really do believe in that quote from Keynes (Economist John Maynard Keynes): Economist should be purposive and disinterested at the same time, aloof and incorruptible as artist and yet as down to earth as politician. So we have to have that balance in doing the analysis and that’s why you read the chapter (on demonetisation), there are costs that we spell out, there are benefits that we spell out and it’s too early for the economic calculus. History will decide because the benefits take some time to come in. The costs are playing themselves out. It’s too early to say how overall it has (worked).
A lot of debate has happened on demonetisation. Do you think the benefits outweigh the costs?
I mean if you want to be empirical about this, I still don’t have enough evidence, we will have to see. Nobody can say because the evidence has not come in.
What is your view on review of the Fiscal Responsibility and Budget Management (FRBM) Act?
In the survey, basically what we have said this time is that if you look at India’s fiscal history, we have had two problems, what I call the flow problem – which is that you spend too much during booms and you expand during downturns, and then you don’t correct it back enough, and in both instances of crises this sort of action preceded. So we need to have ways of checking spending during booms and also checking how much counter cyclical policy we need to do. So whatever we do, we should have those rules, we should respect. The second is that, we have been cutting debt quite a bit but in the last 3-4 years, debt has started rising again and so how should we (grow) because I think for a country like ours maintaining a steady fiscal consolidation, steady reduction in debt, I think that is very important. And that’s what I think we should strive for. And then we will see how the FRBM comes up.
How do you foresee the performance of exports in the post-donald Trump era?
Remember our period of rapid growth of 8-9 per cent would not have been possible without the exports growth of 25 per cent, and exports growth of 25 per cent requires global markets to grow. If they’re going to close the H1-B visas, and the next restrictions could be on outsourcing, anything can happen, there is no question, it will affect our growth by affecting our exports. And remember the kind of difference between China and Mexico and ours is that Mexico and China are much more vulnerable to restrictions on manufacturing. We are much more vulnerable to restrictions on services and the H1-B kind of attack is in a direct kind of way, so one has to worry quite a bit that any reversal of globalisation in this atmosphere could also mean restrictions on exports of services and that’s bad news. We cannot move towards 8-10 per cent (growth) if that’s the way the world markets (behave)... then we have to revise down realistically our growth target and potential.
What are immediate challenges that India faces?
Twin balance sheet problem. It’s the tough one. Many countries, this is not new to us, like Sweden has had this problem, China has had this problem once, it’s now having this for the second time. Lots of countries have had this problem. Europe is now facing the similar problem as well, in Italy the problem is the same.
What is the flip side of a public ARC?
One is that basically you make everything explicit with the public ARC. That has benefits but it also has costs, maybe you don’t want to do things in such an open fashion. The second thing is that in a public ARC, you still want private sector talent and private sector stake in this but to give them that stake you have to then promise them some reward, right. By definition, the private sector has to benefit from coming in, but then the taxpayer says that they are running away with all the benefits. These are the kind of intractable problems, there is no kind of win-win situation all around.
Do you think construction sector needs a push similar to the one for textiles and apparels.
Certainly for housing and construction. The government did take some action 3-4 months ago, that can help. Construction is something we should look at, but remember in all these things any kind of targeted intervention always has risks because by favouring a sector, in a sense, you are not favouring the other sector, so there is a careful balance to be struck. In the case of apparels, there were clear problems. And the construction sector might fit that category too.