‘China, US slow­downs are big­ger con­cerns for global econ­omy than the trade pol­icy dis­pute’

Mint ST - - BUSINESS OF LIFE - Latha Venkatesh

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.

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(From left) Ab­hi­jit Ban­er­jee, pro­fes­sor, eco­nomics, MIT; David Rasquinha, MD, Exim Bank; De­ba­sish Mal­lick, deputy MD, Exim Bank.

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