‘In India, the primary reason for weak growth is weak supply’: Saumitra Chaudhary
A key member of the Planning Commission and the Prime Minister’s Economic Advisory Council, Saumitra Chaudhary has been at the forefront of the government’s reform agenda. In his nearly three-decade-long career he has held important positions in several government committees and organisations. Hardnews spoke to him about the economy and its failings. Excerpts:
Sadiq Naqvi and Akash Bisht Delhi
Why has the growth slowed down?
In 2008, we negotiated the crisis quite well with comparatively less outlay of risk and we got out of it quite quickly. We thought we had recovered well, but looking at the data that is now available we know that growth actually rebounded even more strongly than we had imagined. And to some extent this was the source of the confusion because in 2009-10 and 2010-11, the expectation was that the growth would be quite subdued. This is one of the reasons why monetary policy was kept easy and the fiscal stimulus not withdrawn till 2011-12. Keeping the monetary and physical adjustment a bit delayed had an impact on the fiscal policy as well as inflation because monetary easing is not interlinked with the state of the economy. It can cause a situation where inflation is encouraged and that is partly what happened. The 20/20 hindsight is very comfortable and you don’t have that hindsight then but I think this is a point one needs to make.
Subsequently, there has been a slump in growth in 2011-12 and 2012-13. There are external factors as well. They were there in 2009-10 and 2010-11 when we grew by 8.6 per cent and 9.3 per cent, respectively. So what were the issues? Of course, in 2011, there was a crisis of kinds in the European Union, but I think one of the major factors is that a lot of projects have got delayed because clearance is not being issued. After the crisis people started returning to invest in infrastructure and then found that the projects were getting delayed due to clearances. Imagine an investor who has invested a couple of thousand crores in a project and then he doesn’t know when it will be completed because some clearances that had been obtained have been cancelled or are not forthcoming or some new complication has arisen which he did not anticipate. So, would anyone want to invest in a new project? This discouraged fresh investment and is the reason why growth slowed down.
The second aspect is inflation. People ask why we have inflation because the general view is that, when you have low growth, you have low inflation. However, it depends from which side the constraint is coming. If the constraint which is causing low growth is from the demand side and there is no adequate demand, you will get low inflation as in the European Union and the US. Since they have no adequate demand, they have low inflation. But if one has a problem of growth coming from inadequate supply then the inflation may be strong as in India.
For example, the supply of vegetables is not there, not because of low production but because the supply chains are not properly built. So, there is a lot of difference between what the farmer is getting and what the consumer is getting. Plus there is a lot of wastage. In certain areas, production is not there. There is not enough production of power because there is not enough production of coal or iron ore. These factors lead to scarcity which leads to inflation. There are many factories which are not running to capacity because of lack of power or it is very expensive. Therefore, these supply side constraints are severely impacting not only the level of output but also inflation. This is what has been happening in the last few years.
Obviously, the supply conditions have to be changed. Now, if that is the case, then why have a monetary policy at all? Monetary policy has succeeded in destroying some amount of demand but here you have some situations where demand is growing but supply is inadequate so there is excess demand. It is difficult but you have to destroy some of the excess demand and keep prices under control. This is what the Reserve Bank of India (RBI) has done. However, it is not a long-term solution because, in the case of other countries, supply works naturally. There are fewer impediments to creating capacity and bringing supplies to the market. In our country, for a variety of reasons, there are lots of difficulties in setting up a factory, mining coal and producing iron ore. It is a very challenging business to do business in India.
Do you think government policy is responsible for these constraints?
I think the government has tried to ease up but it has to do more. If you look at the kind of activity going on in this country, the pace at which the infrastructure projects are being laid down is probably much faster than before. But it is still not good enough. It has to be done more comprehensively to keep pace with the demand.
You spoke about supply chain issues. Do you think FDI in retail would help?
It will be an important step, but there is a slew of things that needs to be done. For example, the Agriculture Produce Marketing Committee (APMC) Act needs to be adjusted. It says farmers have to compulsorily sell their produce in the mandis to licensed traders. We have suggested, don’t make it compulsory, let the farmer have the option of selling to somebody else or finding some other solution. This way, you are granting monopoly to a few people and granting monopoly has a problem. Cold storages are coming up but they are coming up slowly. There are cold storages for fruits but for vegetables they are yet to come up. These problems can be resolved but it takes a while.
There is a view that current account deficit and fiscal account deficit cannot be countered in an election year.
There is no logic to it. It is just cynicism. It has neither an analytical basis nor an empirical observation.
What reasons would you attribute to the collapse of the manufacturing sector?
First, some of the manufacturing slowdown is because of the slowdown in exports. Exports have done poorly this year. Second, when new investments are not happening, the demand for capital goods is not there. Third, because the monetary policy was tightened to keep inflation in check, sales of some interest rate-sensitive items like cars and two-wheelers have come down. When sales come down, production will come down too. Fourth, if you see the index of industrial production there are problems with that data. After all, one of the main reasons why the growth rate of 2009-10 and 2010-11 had been raised is because, on receipt of the annual survey of industries data, which is much more comprehensive but comes after a two-year lag, it was found that IIP estimates were much slower than the reality and the data was adjusted. So, my feeling is that the manufacturing sector is not doing well. It is doing badly but not perhaps as badly as IIP is making it out to be.
Some economists and experts say that if the interest rate is lowered, we could counter this lower industrial growth.
I don’t think so. If it’s only a question of demand management then lower interest growth rate will create a pick-up in demand, but structurally supply is the problem.
So with interest rate policy you can moderate or accelerate the demand but that is not the primary reason for weak growth. For instance, in the European Union and North America, the primary reason for weak growth is weak demand. For us, the primary reason for weak growth is weak supply.
So this will not be an appropriate cure for the problem. We have to make our supply response much better. To make it easier for us to do business, easier to set up a plant, easier to build a road, maybe easier to demonstrate but also work should be done, work not for someone but for this.
How does one solve the problem of increasing unemployment?
Till 2008, I stopped hearing the word ‘unemployment’. Every boy or girl passed out from college, got a job and within one year changed jobs four times and by the end of one year they got a job where they were earning twice as much. Because of the slowdowns in the last two to four years, the opportunities have become less. What do you do? This is something which can only be corrected if the economy picks up pace. If it does in two or three years, the situation will look dramatically better.
What is the impact of welfare schemes and subsidies?
Welfare schemes and subsidies have a purpose. There are two things. There are certain parts of society which need a helping hand, that’s premise one. Premise two is that there is a sustainable solution and a temporary solution. Sustainable solution is that they should be able to earn more so that they can live a better life. The temporary solution is that this will take time so until it happens you cannot say, you wait for 10 years for the situation to become better. You have to provide solutions now and therefore you have to calibrate these things quite closely. If you put all the attention on the temporary solution there will be no permanent solution. If there is only a permanent solution, they will be very unhappy because nobody will have the time to wait. So, this has to be worked out.
Second, there are issues of prioritisation. One thing is very clear, if children don’t grow to their full physical potential they will not go up to their intellectual potential. So, you are going to miss out on long-term opportunities. So mothers’ health and children’s health are a priority. After that, primary and secondary schooling has priority. You look at them as social welfare programmes or as building social capital. These may be looked at as subsidies but I personally don’t see them as subsidies. Certain things like providing cheap food under the PDS system or providing cheap fertilisers or providing subsidies to petroleum products are subsidies. These subsidies should also have priority. Food subsidies clearly have a higher priority than fertilisers and a much higher priority than petroleum subsidies. You have to cut your cloth depending on what you have. If you are hard-pressed for money then you have to trim your subsidies to save the one which has more social merit.
Is cash transfer a temporary or permanent solution?
Cash transfer is only a mechanism for a transaction. Cash transfers are for things like scholarships and will always be there. Scholarships should not be given to a department, who will give it whenever they choose to. As soon as the money is debited to the government account, the beneficiary gets it. It eliminates issues like whether the scholarship arrived or the officials saying, come tomorrow. We don’t want that to happen. It is an empowerment and we are doing this for old-age pension and certain other pensions. Issues of transferring subsidies are being thought about in certain areas like fertilisers or kerosene. This cuts out leakages and rent-seeking.
Your views on MGNREGS?
This scheme is relevant to a different extent in different places. There are parts of the country where there are enough jobs and parts where there are not. It should be used extensively in places where there are no jobs. Where there are jobs, what is the point? Sometimes there is needless creation of jobs. In backward areas, particularly in tribal districts of central India where livelihood opportunities are extremely limited, the scheme is extremely valuable. Whereas in less backward districts it is of no social or economic value. This is a structure that is a kind of insurance for the very poor and should be treated as such.
B1: ‘Food subsidies clearly have a higher priority than fertilisers and a much higher priority than petroleum subsidies. You have to cut your cloth depending on what you have. If you are hard-pressed for money then you have to trim your subsidies to save the one which has more social merit’
B2: ‘Because of the slowdowns in the last two to four years, the opportunities have become less. What do you do? This is something which can only be corrected if the economy picks up pace. If it does in two or three years, the situation will look dramatically better’