‘China, US slowdowns are bigger concerns for global economy than the trade policy dispute’
Speaking at the Exim Bank Commencement Day Lecture, panel of experts, comprising Abhijit Banerjee, professor, economics, Massachusetts Institute of Technology; David Rasquinha, managing director, Exim Bank; and Debasish Mallick, deputy managing director, Exim Bank shared their views on India’s agrarian crisis, global growth concerns and the way forward. Discussion took place on 9 January. Edited excerpts:
What surprised you is that India is growing at 7% in spite of all those five problems, which you explained. Do you think we can manage that for some time, or before we hit the Brazilian wall? Banerjee: I think so. I don’t know why, but we are kind of in an uncharted space. We have given all the problems that people are happy to point out, but this problem has been with us for a long time, and we have been growing.
Let me say one thing that may calibrate this a bit. If you look at China’s and our percapita income, it was growing as twice as fast. China grows slower than us now, but in 2004 to 2008, when it was roughly like us, it was growing at 12-14% a year. So, I don’t know—we are not maximizing necessarily where we could be. Do you see growth meeting any hurdle this year, or does it look like we will chug along? Rasquinha: At least where the external sector is concerned, which is Exim Bank’s primary focus, you are up against a number of headwinds in the world. From a demand point of view, if you look before the global crisis, your elasticity was way more than one for every one percentage growth in world economic growth, your trade was growing almost by three.
It is exactly the opposite now, or just about there. So given that you are already facing headwinds from across the world, how do you grow your export sector, when there is a decrease in aggregate demand in the world around you.
Secondly, our own economy is growing faster. If you go back, maybe to the start of the decade, the international orientation—exports and imports as a percentage of gross domestic product (GDP) was about 47-48%.
It is down to barely 30% now. So, your domestic economy is growing much faster than the global economy is growing. Naturally, your exports are not keeping pace. What is your best guess for the economy? Does it look like we will do better than last year in terms of growth, or even as good as last year, which is still 7.3%? Mallick: The last figures show we have grown at 7.2%, but in the last two quarters, third quarter and the estimates for Q4 shows a slowdown, which is at 6.8%. I really don’t know whether this slowdown is a long-term trend or the first half growth is a long-term trend, but looking at what is happening on our desks, we are yet to see a huge pick up in investment as yet. That is primarily because the capacity utilization across most major industries have not yet happened to any significant level where it warrants further investment. So, whatever little investment we have been having of late, is mostly coming through the public sector or attempts being made in the public sector and maybe some replacement demand. But real Greenfield or real expansion at a major stage has not yet happened. This with inequality and poverty rising may still pose quite some challenge. Just to complete the growth argument. How would you look at 2019? There seems to be a handshake on trade between the US and China. Does that mean that 2019, the global economy will not be as bad? The World Bank has just forecasted that it may be a shade slower in 2019... Banerjee: To be honest, I think in terms of the bigger worries, is China slowdown and a US slowdown, than the trade policy dispute. Neither of these economies are massive traders. They don’t trade as a fraction of GDP, they trade less than us. So, this will create some unhappiness, but for the domestic the real force of change is China slowing down for reasons for which we don’t have that much to do.
The US was slowing down before Trump and it will also continue to slow down a little bit. That I think is a bigger concern for the global economies. These are some of the biggest drivers of the global economy. I want to bring up the general question of inflation targeting itself, and I am not very sure whether the hike in interest rates, which was used to bring down inflation, actually hurt farmers. Is it related? Is inflation targeting creating the problem?
Banerjee: I am not sure, I cannot say for sure but I think the bigger impact is simply the price policies.
We don’t have free trade in agriculture. We ban exports, willynilly exports are banned whenever we feel like prices are going up. We want prices to be lower, we ban exports and we actually imported dal in 2016 when we had a surplus of dal.
Were any of these polices taken because of an inflation targeting regime or absolute carelessness and lack of planning? Banerjee: It is a good question. But I don’t know the answer. My guess is that the idea of keeping agriculture food prices down was key in these decisions. Whether this was thought through and is going to give us 4% inflation or not I don’t know. I think keep- ing price stability in for the consumer has been the primary goal of the policy we have towards agriculture. Inflation targeting is one of the institutions that we have put in place in the last two-three years with a monetary policy committee (MPC), which has somewhat kept at arm’s length from the powers that be. What is your sense? Should we abandon the experiment so early?
Rasquinha: If you want to have an experiment, you have to give it a fair chance to prove itself. If you go by the pure guidelines, given the monetary policy committee, it was to hold inflation at 4% with a band of 2% either way. Well, they have succeeded. They are very much within the band. The issue now is that as an outcome of the policy, did it happen as happenstance, or was it in spite of the policy. You still don’t have the evidence. It is too early. But based on what they have achieved, they have done everything that you have asked them to do. It would be pretty unfair then to disband it at this point in time, without giving them a longer rope. Have we studied enough the connection between demonetization and the collapse of farm prices? Are we pinning the blame for the disaster in farms on the wrong institution?
Banerjee: We have looked at the farm price and you do see an immediate impact, you see it in the next quarter, you see mandi prices going down. I think that it’s clear that, that is what had happened.
You mean between demonetization and farm prices?
Banerjee: If you look at what’s right after demonetization: RBI has money centres, so places closer to money centres get more cash and they seem to have higher prices.
So I do think that there is evidence. I think there is a bunch of people who look in different ways and there is evidence that demonetization did hurt. So, when we do policies, which hurts specific groups predictably, like for example, importing when there is a large amount available, we need to compensate there. If you do not compensate then they are going to be angry and my point wasn’t at all that we should abandon the experiment, but if we are going to be in this world where we are going to impose large cost on people then we need to also find ways to compensate them. Can you hold for a little more on the connection between demonetization and the problem that we have seen in crops. What is the research done? Banerjee: I think it doesn’t tell you anything about what happened in 2018, when we also had lot of distress. This was just basically the end of 2016 and the beginning of 2017, when you saw it, you do not see it afterwards. So it goes away pretty fast.
So it cannot explain the farm distress for the next year?
Banerjee: If you see 2017 kharif season, distress cannot be explained by demonetization. I do not think its demonetization that’s driving. One year later, the cash is back and we know that the cash came back pretty fast. The mandis were back operating at normal prices. The effect is there, but it went away pretty fast. So I do not think that is what is going on. What is your diagnosis of this clearly nationwide eruption of farmer distress? Rasquinha: I think you need to look back at policy and that is a point professor Banerjee made in his address also. If you take a look at government policy regarding export or import of agricultural products, professor Banerjee just now mentioned dal, now you had to import pulses because you had agreements in place with a number of African countries and Myanmar and the government of India cannot break a commitment, which it has made to them from the foreign policy point of view, as well as from the moral angle. However, historically, we have used the fol- lowing government policy: If the price of commodity ‘X’ is shooting up in the market, there are complaints, especially from the middle class, then you put a ban on the exports. What is that going to do to the farmer? It is going to drive down his income. So, we have done this for onions, we have done this for grains, we have done it for I do not know how many other issues.
The good news is evidently the government is ceased of the matter. In December, the commerce ministry took a new agriculture export policy through the cabinet and, that says that for two items, processed food items and organic food items, these will be exempt from these kind of special restrictions, and will be allowed to be exported or imported freely irrespective of the domestic price situation. It is not the full solution because, obviously, processed food and organic is just a small part. But it is a big step towards solving the problem. If we can, then get the courage to move to the next step, it could handle this. In India agriculture is growing at about 3% per annum. Population growth has dipped to 1-0.9%. So, you would hit saturation limits, are we not recognizing that problem? Is that also a middle income problem?
Banerjee: Productivity in agriculture is extremely low. I do not think there is any place where we are hitting any constraints and we are seeing lots of exit from agriculture. Do you see people who say they are farmers?
We look at what fraction of income comes from agriculture? It is 20%. So, people have understood. You are getting a lot of reverse tendency, people are letting their land to bigger farmers. So, we need to create a regulatory structure within which people are able to give their land to whoever is the best user, which we do not have. Right now nobody really can give their land on a five year lease. A legislative constraint then?
Banerjee: Yes. Or we need something which both protects the interests of small farmers and lets the land market work better. Land does not get reallocated to the best use. I think our productivity could grow a lot if we did that and where little bits of that happens, like Gujarat under Modi, there was very fast growth in agriculture and, globally, fast growth in agriculture. So we can have 7% growth in agriculture, it is not impossible.
We have definitely used imports well for the consumer, but to the distress of the farmer. Now is it time to use trade to help the farmer, which was probably not explored at all. We have always treated ourselves as domestic economy when it comes to agriculture? Mallick: Yes that would be an interesting turn to take for our agriculture, except that, so far as international trade regulations are concerned, we should have space to fit in our policies.
A more important thing perhaps would be at certain places our sanitary conditions would actually put a restriction on our agricultural exports, and you have the example readily of mango, and all, not being allowed to penetrate certain markets.
So until and unless we do that I think it would be quite a bit of a challenge. So one side we have to improve our quality, the other side we have to improve our perception. Once these two things are done, agricultural exports can be a major thing.
We are not just meeting in a time of a competitive trade barriers; we are also meeting at a time of competitive poll promises which is almost looking like a race to the bottom at this point in time. Do you think this is heading towards a fiscal disaster?
Banerjee: No. I think it’s heading towards what we have always done which is we are going to have a cycle and we had this before; we had loan waivers.
(From left) Abhijit Banerjee, professor, economics, MIT; David Rasquinha, MD, Exim Bank; Debasish Mallick, deputy MD, Exim Bank.