‘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 This is one of the reasons why monetary policy was kept easy and the fiscal stimulus not withdrawn till 2011-12.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.