Prannoy Roy, Arvind Subramanian On India's Economy After Pandemic
How and when is the economy of India, the second worst coronavirus-hit country in the world, going to bounce back? What major policy decisions should the upcoming Budget have to cushion the blow? Dr Prannoy Roy and former Chief Economic Adviser Arvind Subramanian discuss the present and post-Covid economic scenarios.
Here is the full transcript of the discussion:
NDTV: Hello, and welcome to this most crucial, in fact, it's a pivotal time for India's economy, which in many ways makes this year's Budget one of the most important Budgets in decades. And the Economic Survey, also a difficult and vital document to help us all calibrate the state of our economy. We have been through a war and worse a war against the virus enemy that nobody really understood and frankly, still don't really understand. The devastation it has caused to the economy, to people's lives and livelihood has been enormous. How and by when is India going to bounce back? What major policy decisions should this budget have? Today, we have with us, honestly one of those brilliant minds to help us answer some of these big, big questions, Arvind Subramanian, one of the finest chief economic advisors that India has ever had, and I mean that seriously, I even say that Arvind, even when you're not in the room. Arvind has been at Harvard after his stint as Chief Economic Advisor. And in this programme I will be taking you through some key data and analysis by Arvind and his colleague, Josh Fellman. And they've also been helped by an outstanding team of Vikas Dimble and Abhishek Khanna. Okay, so let's get started as there's a lot of ground to cover. And there will be, I promise you, some amazing insights in what's coming. Arvind thank you very, very much for being with us. Really looking forward to this. Thanks for sparing the time.
Dr Arvind Subramanian: Prannoy, it's always lovely to be on the show and talk to you about the Indian economy.
NDTV: Arvind just to start, before I just get into your first bit of data, this is a really, as I mentioned, pivotal time for the Indian economy, a crucial time. It's a big, big budget and an important economic survey. Right?
Dr Arvind Subramanian: Yes. You know, just to be a little bit provocative, I would say that, perhaps after the first full Budget of the government in 2015, this is arguably the most important Budget because, you know, for two reasons. One, of course, is that, you know, the economy has been devastated by as you were describing, one of the worst pandemics. And so, you know, we have to recover from what is a huge hit to the economy. But I think also in a more positive sense, it offers the government an opportunity to kind of reset course, you know, given, you know, successive stumbles, the pandemic, it gives it a chance to, you know, reset its approach to policymaking, which is what I hope we will discuss over the course of this programme.
NDTV: In fact, some of your findings, and I've read all your recent papers, which have been really, you've been working hard for once in your life. And what it tends to show is that the pandemic has been a terrible devastation, but there were problems even before and we're talking about leading up to the pandemic, there were things were not all okay, right?
Dr Arvind Subramanian: Yes. So, I think in some ways, if you, you know, look at the impact on the Indian economy, from the Budget, it was really, from the pandemic, it was really a combination of two things, right. One was, you know, the pandemic and the lockdown response that had to be taken. So that economic activity slowed down quite a bit. But that came on top of, I think, pre-existing weaknesses in the economy. This is what we spoke about. Probably the last time we were together, you know, how, for example, growth had been slowing down considerably. The financial system, you know, we had this famous twin balance sheet becoming a full balance sheet problem. And so, it's the combination of the two; exports had slowed down quite a bit. So, it's a combination of a pre-existing weakness, plus the response to the pandemic. And as you know, for 2020, the year of the pandemic, the IMF says that India will be amongst the most devastated with a decline in GDP of about 8%.
NDTV: Yes. I actually have a look at that data as the latest IMF data, we just have a look at how just to get the current pandemic, how's it affected India. And actually, if you look at the GDP in India, in this year of the pandemic, it's gone down 8%. And that's the worst amongst all developing countries. In fact, the average for developing countries is much less than that. You have a look. It's just 2.4. So, we're like three times as bad as the average for all developing countries.
But there's a little bit of good news actually on the horizon. The IMF forecasts that for next year, if we look at, will be bounced back. Will we rebound? Will India rebound? What is the IMF saying? The IMF says yes, not only will it rebound, India will be the best amongst all developing countries in 2021. That is up 11.5%.
Remember, we went down eight, now, forecast to go up 11.5 compared to developing countries, which, on average going up 6.3. So almost twice as fast as the average of all developing countries. That's a good bit of news. But, doesn't mean we'll be back to normal. If you just have a final look, before I get to Arvind, what happens if you look at overtime?
This is what, India's big rebound will still be 8% lower by the end of 2021. Now look, first, it goes down 8% in 2020, that we've seen the pandemic, next goes up 11.5, both those combined means it will be just 2.6% above 2019, the bounce back will not be enough to really take us very high. Now if there was no pandemic, you see that dotted line, that's how India's economy would have gone. And, in fact, in the end, where we'll end up in 2021, if that. Even if there 11.5% is correct, it will still be 8% short, a shortfall in GDP, without compared to without the pandemic. So even the bounce back, we're still going to lose 8 percent of that's quite a big loss. It's an intercept change, actually.
Dr Arvind Subramanian: Yes. So, I think those are very nice graphics Prannoy. For now. I just, one caution is that all these numbers are subject to a lot of uncertainty, as you know, I think what we can say for sure, is that 2021 will be a new good year for India. And that's the good news. Whether it's 11 and a half, or seven or eight or nine or whatever, who knows. But I think it's going to be...
NDTV: A 12 or 14, yes?
Dr Arvind Subramanian: Whatever. Yes, it's going to be.
NDTV: But Arvind, if it's a good year, if it's a good year, then it's an easy budget. Let's just forget the show, let's just...
Dr Arvind Subramanian: Exactly, exactly, we should go home. But, so, the good news is that it's going to be a good year, that the economy is going to bounce back. And it's going to bounce back for two or three reasons, Prannoy, right? One, of course, is that you go down because activity stopped. But with the pandemic a little bit more under control, we can release all those restrictions, so naturally, the economy will come back. That's point one. Point two of course, is that, you know, the world economy is rebounding, the IMF is forecasting, you know that trade is going to go up. So that's going to come back as well to help India, financial conditions are very, very good. You know, interest rates are very low all over the world. So, a combination of just having gone down so, so bad, the fact that the pandemic is relatively under control in India, and the fact that, you know, activity will come back, the restrictions will be lifted, the trade will improve, financial conditions are a thing, then, of course, there's some natural optimism and animal spirits. So, all of these means that 2021 will be a relatively good year. But we cannot stop the programme, unfortunately for now, because there are two big challenges that await us even if we rebound. One, there's going to be a just recovering the devastation from the pandemic itself, you know, 15 to 17 million people, fewer are employed relative to 2019. And the RBI, you know, remarkably, admirably candidate has said, you know, the NPA are going to go up from seven and a half, almost doubled to 13 and a half percent which means that the financial holding assets...
NDTV: Non-Performing Assets, NPA
Dr Arvind Subramanian: Non-Performing Assets is going to be devastated. So, we just have to recover from that. Yes, that's the first challenge.
NDTV: And then they are going to double? Bad debts are going to double. Wow.
Dr Arvind Subramanian: They're going to double. Exactly. Terrible. And then remember...
NDTV: But one thing that you did mention, one thing that you have mentioned in your papers is that India has achieved already some degree of improved economic stability and if I show some of your data, maybe you could explain it to us in a little more depth. If you just look at how India has done, improved its economic stability. It's quite interesting. There's all Arvind's data. You see, look at government debts. Under NDA 1, it was up to you know, 75% or under UPA 1, it came down a bit to about 60%. Then under UPA 2, 55%. Under the current BJP government, it's about a little bit so you can see government debt is coming down. And, okay, well, a little bit above the average for developing countries, which is 52%, but not that much above. Other ways. We've actually heard about economic stability improving.
Dr Arvind Subramanian: Sorry, we should just clarify to viewers that now we're going to talk about all these numbers until just before the pandemic hit, because that debt number is going to look very different after the pandemic. So now the economy, until the pandemic hit, because that's going to give us the second challenge, how do you restore dynamism back again?
NDTV: Exactly, exactly. All your data that you've done is just prior to the pandemic, it doesn't have the devastating impact of the pandemic in it. Yes, that's an important clarification, we move on to the other graph. Other data that you provided about how India's economic stability is improving, inflation is coming down, you can see under UPA 1 it went up. UPA 2, it was at its highest, over 10%. And now under the BJP it comes right down to around about 5%. Again, this is BJP up to the pandemic, not including the impact of the pandemic.
Now, the final thing in this kind of category of economic stability being improved, that you have provided Arvind, which I found really interesting, we move on to the next one. It says that current account balance, that's imports minus exports, that's that trade plus remittances, that current account balance is better. It's improved, you can see that as a percentage of GDP is now just 1%. And that's, that's pretty good, pretty good, a little bit higher than the average for developing countries, but still not bad at all. So, these three improvements, one could build on and why have they happened?
Dr Arvind Subramanian: So one way of thinking about this Prannoy is that, you know, in India, in the past has been prone to economic instability and financial crises, from you know, what, you know, Harish Damodaran calls the four Fs; food, fuel, foreign exchange, and fiscal, right? These are the things that create, you know, food prices go up, oil prices go up, we don't have enough foreign exchange, all those create, I think, instability and crises in India. And what you've shown just now is that, apart from the, you know, the fiscal situation we'll talk about later, especially after the pandemic, these three Fs have been relatively under control. And that goes to the credit of the government that, you know, it believes in macroeconomic stability, it believes in low inflation, generally believes in prudence in terms of running the, you know, the budget, and foreign exchange reserves, there are now 600 billion or so. So we're in a very comfortable, so we are less prone to that kind of instability in the past, and as you said, that offers an opportunity to build upon.
NDTV: Okay, that is amazing. Now, you also mentioned, really another interesting factor that's happening in India increasingly, and that is a kind of what you call new welfarism. And it's kind of hardware welfarism, where several kinds of items are provided directly to the poorest. Let's have a look at some of them that you have listed. And, it's really excellent data that you have unearthed. Improved access, people have had essential services, women using bank accounts. In 10 years, it went from 20 to 35%. But from 2015 to 2019, it's gone up to 60%. That's a sharp increase in women using bank accounts. The other form of new welfarism. We look at LPG gas cylinders. You know, we've heard a lot about that, it's one of the most effective election factors and we found among the electorate, the women really appreciated this, in 10 years it went from 25 to 40%. But in the last four years has gone up to 60. Electricity, about the same trend, 60 to 75, 75 to 95. But it was already at a very high level, but it's up to 95%. And finally, if we look at toilets, which you listed, yes, they've also gone up 45 to 60. That's up 15% in 10 years and up another 15% in just the last 4-5 years. So, what do you make of this new welfarism? It looks like a very good thing. But yes...
Dr Arvind Subramanian: So, I think, in my view, I think this is probably one of the most significant achievements of the government. You know why it's very interesting is because it is a very distinctive approach to the question of redistribution, and you know, inclusive growth, you know, how governments generally do that, either they provide you know, health and education like public goods, or the UPA builds social safety nets like, no, MNREGA, you know, PDS, right to education, right to food, etc, etc. So that was the UPA approach to this. The BJP and Mr Modi's government have a very different approach to this, which is essentially to say, we are going to provide tangible goods and services like all the things that you mentioned, to improve the lives of the poor. Now, of course, it's somewhat overhyped. India's not 100% open defecation free, for example. But nevertheless, I think significant improvements have been made. I think what is really distinctive about this is that it combines a, what I call vision, with a calculation, you know, there's genuine conviction that this is good for the poor. But there's also a political calculation here, which says that if people can see these tangible improvements in their lives, you know, in a way that you don't see with growth, you know, you tell the average voter growth has gone up, what does it mean to him? But if you say, look, you got gas chulha; you got toilet, you got this. And you said this was all because of a certain benefactor sitting in Delhi, what is called the attribution to who's providing it. My colleague, Professor Nilanjan Sarkar and Yamani Aiyar have harped on this attribution. So, you materially improve the lives of the poor. You say it's due to government, and that that's what enhances also your political success, electoral vote.
NDTV: Two comments on that. This is also being now replicated in many state governments. Andhra Pradesh has done an amazing job. West Bengal is doing by this direct what you call welfarism. But there are a couple of problems I have noticed in these, the central government, for example, as you said, slightly hyped, the banking, women's banking has gone up. But when we've been on the campaign trail and talked to women, we say, do you have a bank account? They say, "Yes, we do. But you know, every time I want to collect my Rs. 1000 pension, the teller says, 'give me 500, only then will I give you 500'." So that last year, last mile, last six feet, corruption exists, then with the LPG gas, they love it. But now refills are becoming a huge problem. You know, it was good initially. But now, everywhere you go, they show an empty, they sort of rattle a LPG can and in fact, even many toilets are there, but they're being used for storage, because there's no water. So, it's a great move. And let me tell you that everybody does exactly what you said. I appreciate it. But I think more better implementation still needs to be done.
Dr Arvind Subramanian: So, I think that, you know, having said the government deserves a lot of credit, I think I would emphasize the two things are one, it's slightly overhyped. I think the achievements are good, but not as great as being claimed. And the second, yes, you know, the data is only measuring access to these things. It's not measuring actual use, you know, refills, and so on. And, and surely, I think there are, as you said, implementation deficiencies. But I think this is something that because the government has conviction about these things, there's also a good chance that they will see the benefits of, you know, continuing to implement there. So I think that that's because, you know, one of the things I think it's interesting what you said about the bank accounts for now, because you know, what the data on bank accounts is, it's not just women having bank accounts, but actually using it themselves. So, kind of the agency that women are getting with, with all the problems that you said, you know, last mile, I think there's still so I think it's this new welfarism that I think the government has, you know, really sets out its, you know, its vision, and is probably one of its most successful achievements.
NDTV: Yes, and I must say it is an excellent thing. And it is a direct result of democracy and of elections. And it's a, it's a tribute to us. But having said all that, having seen a more stable economy, seeing this welfarism, some of the figures you bring out on the ground reality about, say, just a child, children's health. And you could just give us a little more in-depth perspective on that. What about children's health in India? How is it improving? Is getting worse? It is not a very good picture, you just look at some of the data on that, by Arvind Subramaniam, Indian children are suffering still. Look at anaemia. Between, in the 10 years 2005 to 2015, it was coming down from 65% of children to still 55%. But now in the last four years, anaemia has gone up terribly. That's awful. Moving on to another bit of data from Arvind was stunting. It's a very, very important issue around the world. And it was coming down from 40% to 30% of children are stunted. Now, it's flat, it's not going down any more. It should be down to zero, at least or near zero. Diarrhoea, it had, the trend was downwards. And now started going back up to where it was, you know, 14 years ago. That is really, really, really disappointing. And finally, if we look at ARI, acute respiratory illness, again, it was coming down, it's going back up or flattening out again. So other than this, fascinating data that he brought forward, because of all the economic, as you say GDP and you can talk about all that. But in reality, this shows, how it is affecting one section, at least of our society, children.
Dr Arvind Subramanian: Yes, sure. Yes. I think that, you know, this data shows, I think, broadly Prannoy, that see, firstly, I think we should be careful and fair and say, you know, the new welfarism that you showed, is all because the government has taken the lead and the government is taking, you know, a lot of putting in a lot of political capital into it. All these things that you showed, you know, the child in health, nutrition, it's a combination of what the central government does, or doesn't do, what the state government does or doesn't do. And most importantly, is the economy dynamic and booming, which is providing income, and, you know, purchasing power and consumption to families, which also then gets translated into better health and nutrition outcomes. And to me, what these numbers suggest is that, you know, that, you know, the health of the child and nutrition of the child has been set back in the last few years. And we have to find, investigate why that's the case, because this takes something like stunting, you know is coming down remarkably. And then now that trend has reversed itself. So, I think the question to ask is, apart from all the specific things on these specific measures that the government is or is not doing, what about the general? You know, is there enough dynamism, economic opportunities in the economy, that's lifting people, providing the income and purchasing power? And that's where I think this government has fallen short, and which we will, I think, look in the next set of charts that you're going to provide, I think.
NDTV: Right? Not me going to provide, you are going to provide and I'm going to take the credit for it, you always remember that. You do the work. I get the credit. Okay? Now, I just want to; really astonishing, a bit of data that you brought out about Indian exports over the years, over the decades, India has always considered, oh, we don't export much, not important, we should have been an export led growth country. And then he showed this and let's have a look at the data. India's exports have grown year by year, third fastest in the world, Vietnam, almost 16%, China 15.5, in India 13.4. And the world average is 6.9. And we are just India.
Very fast growth of exports really helped our GDP. And it's not just software exports, we look at manufacturing exports, that's the other data you brought up. And that shows you know everybody thinks, oh yeah, there's all software. No, no, manufacturing. Vietnam 19.9, China 14 and India you know, nearly there, third 12.1. That is just astounding data. And this helps the GDP a lot, hasn't it over time?
Dr Arvind Subramanian: Yes. So, I think, you know, it's good that you brought up this data, because I think it speaks very much to, you know, the discussions we're having about augmented Aperta and self-reliance. I think what this reminds us is that when our exports do well, our economy does well. And that we have done well, not just in services exports, but also in manufacturing exports. The two I think, things to keep in mind, however, is that we've done very well in terms of high skill manufacturing exports, but the unskilled manufacturing like textiles, clothing, leather, footwear, toys, all those things which create, done as well. So that's the first thing to keep in mind when we're talking about policy going forward. The second thing, I think, which is really why I think everyone should take notice of this data, is that, you know, Prannoy reminds me a little bit of the debate in the '50s and '60s, you know, there was this whole, you know, export pessimism, you know, India can't export. So therefore, let's turn inward. And in fact, one of the few people then who said no, India's exports prospects are good was in fact, Dr Manmohan Singh, he wrote a famous book on the saying that, you know, we shouldn't be pessimistic. So now, in fact, it's likely in a twist of fate, even though we've done well on exports, we kind of turning inward, as if, you know, forgetting that, you know, the way to, you know, expanding the Indian economy is by, you know, doubling down and expanding manufacturing and low skilled manufacturing growth. So, this is kind of a reminder that we can do this, and that we should not turn inward, because of some sense that, oh, my God, you know, we can vote or the world economy is to, you know, too slow to take up.
NDTV: Yes, yes, exactly. A negative data is a bit worrying on that front, about looking inward, what you've shown is that we're kind of, in an era now, returning to a sort of protectionism, just look at the figures you've brought out. And it is worrying, you know, that at the time when one should be emphasizing openness and getting our exports up, we're seeing exports suddenly collapse, they were growing at 24%, from 16 to 24, came down to 18. And now in the last four or five years, they're growing at 3%. Of course, there are external factors also, but 3, that is way below emerging markets average.
Let's move on to more worrying data. Even if we look at factors like imports, there's been a big drop in imports. So, our entire trade from 31%, 16% to 4%, people, so imports dropping is very good, but many exporters also import certain inputs, and then use them in the export. So, one would like to see a more robust trade with the rest of the world.
And moving on to a couple of other points that you make. And that is on this return to kind of protectionism, you show that 2017-18 there's been a major hike in import duties, just look at the number of tariffs increased each year. There used to be 160-150, then they recently 140, but in 2017-18, 2460 times were tariffs increase, that is a return to protectionism. And that effect has affected the average level of tariffs in the what, what the India's imposing and when we increase tariffs, others increase tariffs to prevent our exports. Look at our import duty levels. They used to be around 13% then they suddenly shot up and now and people may not see 2% or 3% a month but it is huge in a global scenario because others put that tariffs up to stop us from exporting. Right?
Dr Arvind Subramanian: Yes. So, I think, you know, this is work I've done with Soumitro Chatterjee and you know, essentially, what is two, three things significant about this Prannoy. One is that it reverses a 20-30-year consensus that the economy we had that we would gradually open up and that was the basis of our dynamism. Now all the exports and imports that you saw, this was the basis of that. So, we've reversed, you know, kind of a three-decade old, you know, kind of consensus, as it were. The second, of course, implication of this is that if we do this, and of course, this comes with other actions that we've taken, for example, not joining certain agreements, you know, and so on. So, essentially, the, it seems to be that policymakers are somehow thinking that by turning inward, our economy can go off faster than it is now. And which flies in the face of the evidence of what happened in the '90s and 2000s. Until about the global financial crisis thereafter. So, it's this, why are we not learning from the experience? Why are we changing a policy that has, you know, it's like killing the goose that laid the golden eggs? Why are we doing that? And that's kind of the open question for policymakers. So Atmanirbhar; seems to be, you know, flying in the face of the evidence that being open is actually good for the economy. And as you said, you know, when import duties go up, if you want to export, say, clothing, for example, right? But then if all your costs of inputs go up, and then every time you know, in this modern economy with the value chain, goods keep coming in and out, in and out. So, for example, you know, if every time it comes in, your costs are going up and up, your international competitiveness is going to suffer. And those labour intensive exports, that we need to boost, will not happen.
NDTV: This is a very, very important finding, I think, and you can see the impact it is having, according to your data on a corporate sector, on just, let's have a look at the power corporate sector is suffering. And it really is worrying to see what's happening there. We look at the data there that you brought up. If you look at for example, sales, sales are really falling hugely. They were growing at 11%, 17% and 7%. Now they're growing at 3%, a year from 17% to 3%? I mean, that is just a very frightening impact of all the policies that are, you know, the self-reliance and protectionism.
Moving on, let's have a look at even the profits of the corporate sector. What are they like? They are also falling dramatically from this percentage of GDP. From 2.7% of GDP profits of 1.4. Now, people might say, oh, cut profits is a great thing. But these profits are savings, and they are reinvested. And the impact is, is really severe on the economy. So, profits dropping by half is terrible.
As a result, as I just mentioned, profits are used to invest, look at that plummeting investment in our industries, 25% down to 2%. That's the growth rate? That is really worrying. This is, this is an emergency, we need some resuscitation, or, Arvind.
Dr Arvind Subramanian: Yes, so I think very broadly, I think Prannoy, what all these indicators show, and this is true of, you know, the index of industrial production, it's true of exports, it's true of credit, you know, the credit, you know, all these things, basically, after the global financial crisis, the Indian economy has never really recovered. And in the last four or five years, you know, the deceleration, deterioration has only increased. So, that's why the big, so now we have to get into this, you know, so just stepping back, you know, macro stability, good. New welfarism made, many achievements, but the overall health of the economy, still very, very weak and slowing down. That's why we saw all those Child Health and Nutrition indicators suffer. And now we're seeing, broadly, economic activity is basically down very flat. And that's the challenge for how do we get back to, you know, investment growing, export growing, credit growing, you know, as SMEs, growing employment growing. That's, I think, the big challenge going forward, because the economy has been very weak for very long.
NDTV: Yes, very important. And it's not just, you know, big business and Corporate, it is actually the entire, you know, sector and if you look at some of the other data, including government, it is very worrying how much it's slowing down. And many of these are lag effects looking to the future. It's worrying, look at investment, industry and government in infrastructure in investment. Infrastructure was growing at 13% a year, 5% in the first five years of this, you know, 2005. But now it's 3% a year. Investment in infrastructure? Disaster. And moving on to other areas, which are really worrying. Because these are long term impacts, you're not even seeing the impact here.
Look at credit and bank loans to the economy, plummeting. 13% was pretty good. 20% excellent. Dropped in UPA 2 to 6%. And now 4%. And that doesn't include anything to do with the pandemic, one should just clarify again and again, like he did at the beginning.
And government expenditure up and down, you know, no pattern, there's no consistency. But it's good to see that has gone up from 3%. Because you need that government expenditure when private industry is not investing. So that government expenditure, hopefully, some of most of it, or some of it is going into infrastructure, not all into salaries. This is alarming, very alarming.
Dr Arvind Subramanian: So, in fact Prannoy, the credit number that you showed, and the investment number you showed, I mean, that's the heart. By the way, that credit number is not even credit to industry. If you look at credit to industry, it's actually negative growth in the last 20 years. So, remember that, you know, the twin balance sheet problem, you know, the financial system is impaired, you know, the corporate sector is impaired. And that's why you get very weak growth in credit, have very weak growth and investment. And that's been holding back the economy. But when in fact, you know, in the early 2000s, these things were booming at 15% and 20%. So how you get this back is going to be, you know, the heart of the challenge. And if anything, I think that government expenditure you showed, I mean, suggests that it's been government expenditure that to some extent, has been, you know, cushioning the economy, and preventing from being even worse than it could, that, you know, it is otherwise. So, I think that government is playing that cushioning role, which is a good thing.
NDTV: You know Arvind, one of the things that really became clear to me after reading a paper, one is our economy's in much worse shape than I thought it was. And a lot of these, like investment, you will feel slow growth for years to come. It's not just this year. But the other interesting point you keep making is like, what you call hardware versus software. Hardware? We are pretty good at, you know, giving LPG, building toilets, but in software, implementing it, not only those in not only welfare, all our sectors, implementation has been really our problem. Give us three or four points, just to sum up. To sum up, I think you mentioned first of all, let's be clear that we cannot function unless we have your first point, which is data integrity, we all must know what's happening, right?
Dr Arvind Subramanian: I think, you know, so just stepping back Prannoy, our diagnosis of the economy, that the weakness in the economy is not because you know, of, you know, not doing a bunch of important taking important actions. It's the broader approach to policymaking, what we call the software, and using soft power to, you know, to improve the software, those soft, that software is kind of needs rebooting, and that's why the overall state of the economy, so it's not any one thing done or not done. But you know, how you see the economy division, you know, the overall consistency, and, you know, state craft. So, let's go through each of these elements of software, one by one. Data integrity, you know, I want at this stage to really commend the Reserve Bank of India, you know, this time around, they've been remarkably admirably candid about what the impact of the, you know, the crisis is going to be. You know, they, you know, they said NPAs are going to up, I think that needs to, that kind of transparency needs to occur more broadly, you know, our GDP data is under a cloud, you know, many of the data put out by the government were then withdrawn. I think, even on the fiscal accounts, know, last year, some improvements were made, but honestly, we don't have a good sense of what the real deficit is, you know, how much expenditure is off balance sheet. So, I think that first element, data integrity needs to be improved.
Second, I think what we say is, you know, policy inconsistency, you know, it's something that it's so important to run an economy, that it's not that governments will not sometimes reverse course. But I think if at every point in time you do one thing, and then clawed back, that creates a climate of uncertainty, which is not good for investment, give you two examples. Take agriculture, for example. On the one hand, there's this laudable commitment to double farmer income, but every time the price goes up, you know, we impose export controls stock limits, to reduce the price that goes to farmers. You know, that's one example. We want to increase the tax net. But in the 2019 Budget, we just raised our exemption so much that, you know, people just completely fell out of the tax net. You know, again, inconsistency on even on the IBC, the bankruptcy code, a great job in enacting the legislation, but even before the pandemic, I think, basically, it had come to a halt. So, I think the government needs to be, you know, have a vision, and, you know, stick to it and, you know, articulate and stick to it clearly, and not kind of go back and forth. That's very important element of software. The next one, of course, is, I think this whole cooperative federalism, you know, you design a policy with the state, it is a cooperative federalism. And, you know, I think at this stage Prannoy, it's worth, you know, reflecting and contrasting, you know. All this thing about the kerfuffle going on about agriculture, and, you know, States and Centre and all this going on, it's obviously, you know, what's happening is, is very traumatic in many ways, and very disturbing and challenging for India. But I think that, for me, the contrast is with what this government did in enacting the GST. Remember, the GST was an amazing example of cooperative federalism, where, you know, Mr Arun Jaitley got heads together, brought in the opposition states, brought in the opposite.
NDTV: One of the most amazingly cooperative, where all the states agreed to it, and they all got together, and you know, to get something like that through. But again, I must say, on the software side, the kind of implementation of it, it's become so complicated, it's so messy. So, I just feel Arvind and this does not include you, we have so many brilliant minds, Indian minds across the world. We could tap on them; we have some brilliant minds here. But somehow the appreciation of high-quality minds and policy-making has sort of gone out of the window a bit. And I met brilliant minds all over the world, not including you.
Dr Arvind Subramanian: Of course, we can talk about, you know, the need for talent and expertise and so on. But I think in this case, it's just the kind of approach you see, in India, let's face it, almost every important policy now, both in the design and implementation is going to involve the states. So, the Centre and the State have come together. You know, you take land, you take power, you take agriculture, the GST you take the pandemic, you have to do it together. Yes. And let me just, you know...
NDTV: One more thing? Can I add one more thing?
Dr Arvind Subramanian: Yes
NDTV: You mentioned the elections, state elections have a much higher turnout than last summer elections, about 7%, higher 10% higher, people are much more involved at the state level, and even Panchayat elections, much higher turnout and Lok Sabha. So, it's part of this reflection, part of the same thing you're talking about.
Dr Arvind Subramanian: On a personal note, I think Prannoy, you know, I remember that, you know, we talk about Parliamentary procedure, and, and, and the circumvention of Parliamentary procedure. One of the highest points in Parliamentary thing in the last five years was in fact, the GST debate. I don't know whether you remember that. I think it was such a rich, I mean, it's kind of the debate and discussion that our, you know, founding fathers would have been proud of, in terms of, you know, how you discuss important policy matters, and how you bring people together. And in fact, the final vote was a unanimous vote, if you remember, on the GST.
NDTV: You know, you also mentioned about equality laws, economic laws, in particular should be equal amongst all people and that there is a bit of a lack of trust on that, explain that.
Dr Arvind Subramanian: See, look at, in India, you know, you know, you know, the relationship between the private sector and the state has always been very fraught, I use the word stigmatize capitalism that, you know, these are very, you know, both, we've had major corruption scandals under the previous government, UPA, we had all those. And then there was a sense that, you know, sometimes the private sector and the state were getting too close to each other and too cosy and resulting in all these things. I think that even today, now, there's a sense that, you know, the laws are not being applied equally, you know, to all and that some benefit at the expense of others. You know, I don't want to go into all the details, but I think there is this perception, and you saw some manifestation of that, even in relation to it, kind of the agricultural discussions. Similarly, I think, you know, actually, yes, tax enforcement, it still is perceived as being arbitrary. You know, the government owes a lot of money to private sector suppliers. So, this whole rule of law, you know, adhering to that, and this is not something that, you know, you can switch off, you know, one lever, a one switch or in a lever there, and you get, it's about a kind of sensibility and approach to policy-making, more broadly. Good data consistency, cooperative. You know, action, cuts, consultation, rule of law, equality. That's what I think we need to really, really...
NDTV: These are foundations. Yes, foundation for a healthy, healthy economy. One last issue, analyse all this. You've been involved in Budgets before. Given the current situation, given that we were already slowing down prior to the pandemic, then came the pandemic. What would you like to see in this Budget?
Dr Arvind Subramanian: That's a great question to end on as employer. So, let me say two or three things, which I think are really what, first and foremost we are still not out of the pandemic, people are still hurting, people are still suffering. So, the social safety net that we put in place for the pandemic, MNREGA, PDS, cash transfers, they should still be available for all those who need it. So, we shouldn't, you know, take that social safety net, which is still cushioning people's lives and livelihoods. I think that's I think, important point number one. Second, I would like to see no surprises in the budget, you know, for example, more tariff increases, and so on, you know, all those, you know, surprises I hope the government will avoid. Third, I think that given the state of the financial system, I hope, the budget and, you know, policies, in general, or more broadly, will have something to really address the, you know, the problems of the financial system, you know, whether it's a bad bank or, you know, the IBC being revived in some ways. I think we should do that. I would see a little bit of reversal of policies that took so many people out of the taxpaying net, I think that has to come back.
But above all, above all, and this is what I would like to end on, if the diagnosis that we have is the problem, is the software, I would like to see evidence beginning in the Budget, that that software is being kind of addressed and remedied. First, I want the Budget to be totally transparent. And the government, you know, started on this course, last year, you know, transparency, we know everything where the expenditures are gone, of balance sheet expenditure, what is the true deficit? One, two, I think the numbers should be credible, you know, we can't have, you know, very over optimistic projections, like we've had in the last three or four years. So just to kind of credible Budget, with credible numbers, and also with some serious, credible plans of how we will bring the fiscal situation under control. And, finally, a signal that, you know, the government, whether it's agriculture or the GST will go back to a kind of cooperative approach to policy-making more generally. So, in some ways, I would say, you know, if the diagnosis is software, not hardware, you know, that evidence that software is being addressed, not just in the Budget, but on an ongoing basis beyond. That's what I would be looking for, in terms of the future. And if we can do that, we can restore dynamism back to where it used to be.
NDTV: In a nutshell, Arvind, should we be worried about the size of the Budget deficit? Many countries have said, you know, forget it for now. And should we say, look, we just got a bounce back. And we'll talk about Budget deficits later, and public debt later?
Dr Arvind Subramanian: I think the way to reconcile this is that this year, we still need government support. So, I think we need to find the means to have more expenditure, if necessary, financed by more aggressive privatization. But it should come because, remember Prannoy, you know, at the end of the pandemic debt is going to be like 85% fiscal deficit is whatever. Next year if the economy improves, some of that is going to reverse automatically, the revenues are going to come back up. But while we spend more in support of the economy in the short term, we do need to have a credible plan for, you know, bringing the debt down in the medium term in a consistent, credible fashion. So short term spending, but financed by gradual medium-term prudence on the Budget.
NDTV: Excellent, I think, really, really fascinating talking to you, Arvind, I must say, yes, as I said at the beginning, it's nothing to do with you. It's your team and all that's done all the hard work, although you have worked hard for once in your life. And we look forward to you coming back to India soon. And thank you very much for taking the time to take us through this entire thing. So clearly, really, I learned a lot.
Dr Arvind Subramanian: It's a great pleasure, always productive to be on the show.
NDTV: And I must say that all what you've said will be available in segments on ndtv.com as well, for anybody who wants to watch each topic separately. And, you know, take notes, etc. But thanks once again. Thank you very, very much.
Dr Arvind Subramanian: Thank you Prannoy.
Here is the full transcript of the discussion:
NDTV: Hello, and welcome to this most crucial, in fact, it's a pivotal time for India's economy, which in many ways makes this year's Budget one of the most important Budgets in decades. And the Economic Survey, also a difficult and vital document to help us all calibrate the state of our economy. We have been through a war and worse a war against the virus enemy that nobody really understood and frankly, still don't really understand. The devastation it has caused to the economy, to people's lives and livelihood has been enormous. How and by when is India going to bounce back? What major policy decisions should this budget have? Today, we have with us, honestly one of those brilliant minds to help us answer some of these big, big questions, Arvind Subramanian, one of the finest chief economic advisors that India has ever had, and I mean that seriously, I even say that Arvind, even when you're not in the room. Arvind has been at Harvard after his stint as Chief Economic Advisor. And in this programme I will be taking you through some key data and analysis by Arvind and his colleague, Josh Fellman. And they've also been helped by an outstanding team of Vikas Dimble and Abhishek Khanna. Okay, so let's get started as there's a lot of ground to cover. And there will be, I promise you, some amazing insights in what's coming. Arvind thank you very, very much for being with us. Really looking forward to this. Thanks for sparing the time.
Dr Arvind Subramanian: Prannoy, it's always lovely to be on the show and talk to you about the Indian economy.
NDTV: Arvind just to start, before I just get into your first bit of data, this is a really, as I mentioned, pivotal time for the Indian economy, a crucial time. It's a big, big budget and an important economic survey. Right?
Dr Arvind Subramanian: Yes. You know, just to be a little bit provocative, I would say that, perhaps after the first full Budget of the government in 2015, this is arguably the most important Budget because, you know, for two reasons. One, of course, is that, you know, the economy has been devastated by as you were describing, one of the worst pandemics. And so, you know, we have to recover from what is a huge hit to the economy. But I think also in a more positive sense, it offers the government an opportunity to kind of reset course, you know, given, you know, successive stumbles, the pandemic, it gives it a chance to, you know, reset its approach to policymaking, which is what I hope we will discuss over the course of this programme.
NDTV: In fact, some of your findings, and I've read all your recent papers, which have been really, you've been working hard for once in your life. And what it tends to show is that the pandemic has been a terrible devastation, but there were problems even before and we're talking about leading up to the pandemic, there were things were not all okay, right?
Dr Arvind Subramanian: Yes. So, I think in some ways, if you, you know, look at the impact on the Indian economy, from the Budget, it was really, from the pandemic, it was really a combination of two things, right. One was, you know, the pandemic and the lockdown response that had to be taken. So that economic activity slowed down quite a bit. But that came on top of, I think, pre-existing weaknesses in the economy. This is what we spoke about. Probably the last time we were together, you know, how, for example, growth had been slowing down considerably. The financial system, you know, we had this famous twin balance sheet becoming a full balance sheet problem. And so, it's the combination of the two; exports had slowed down quite a bit. So, it's a combination of a pre-existing weakness, plus the response to the pandemic. And as you know, for 2020, the year of the pandemic, the IMF says that India will be amongst the most devastated with a decline in GDP of about 8%.
NDTV: Yes. I actually have a look at that data as the latest IMF data, we just have a look at how just to get the current pandemic, how's it affected India. And actually, if you look at the GDP in India, in this year of the pandemic, it's gone down 8%. And that's the worst amongst all developing countries. In fact, the average for developing countries is much less than that. You have a look. It's just 2.4. So, we're like three times as bad as the average for all developing countries.
But there's a little bit of good news actually on the horizon. The IMF forecasts that for next year, if we look at, will be bounced back. Will we rebound? Will India rebound? What is the IMF saying? The IMF says yes, not only will it rebound, India will be the best amongst all developing countries in 2021. That is up 11.5%.
Remember, we went down eight, now, forecast to go up 11.5 compared to developing countries, which, on average going up 6.3. So almost twice as fast as the average of all developing countries. That's a good bit of news. But, doesn't mean we'll be back to normal. If you just have a final look, before I get to Arvind, what happens if you look at overtime?
This is what, India's big rebound will still be 8% lower by the end of 2021. Now look, first, it goes down 8% in 2020, that we've seen the pandemic, next goes up 11.5, both those combined means it will be just 2.6% above 2019, the bounce back will not be enough to really take us very high. Now if there was no pandemic, you see that dotted line, that's how India's economy would have gone. And, in fact, in the end, where we'll end up in 2021, if that. Even if there 11.5% is correct, it will still be 8% short, a shortfall in GDP, without compared to without the pandemic. So even the bounce back, we're still going to lose 8 percent of that's quite a big loss. It's an intercept change, actually.
Dr Arvind Subramanian: Yes. So, I think those are very nice graphics Prannoy. For now. I just, one caution is that all these numbers are subject to a lot of uncertainty, as you know, I think what we can say for sure, is that 2021 will be a new good year for India. And that's the good news. Whether it's 11 and a half, or seven or eight or nine or whatever, who knows. But I think it's going to be...
NDTV: A 12 or 14, yes?
Dr Arvind Subramanian: Whatever. Yes, it's going to be.
NDTV: But Arvind, if it's a good year, if it's a good year, then it's an easy budget. Let's just forget the show, let's just...
Dr Arvind Subramanian: Exactly, exactly, we should go home. But, so, the good news is that it's going to be a good year, that the economy is going to bounce back. And it's going to bounce back for two or three reasons, Prannoy, right? One, of course, is that you go down because activity stopped. But with the pandemic a little bit more under control, we can release all those restrictions, so naturally, the economy will come back. That's point one. Point two of course, is that, you know, the world economy is rebounding, the IMF is forecasting, you know that trade is going to go up. So that's going to come back as well to help India, financial conditions are very, very good. You know, interest rates are very low all over the world. So, a combination of just having gone down so, so bad, the fact that the pandemic is relatively under control in India, and the fact that, you know, activity will come back, the restrictions will be lifted, the trade will improve, financial conditions are a thing, then, of course, there's some natural optimism and animal spirits. So, all of these means that 2021 will be a relatively good year. But we cannot stop the programme, unfortunately for now, because there are two big challenges that await us even if we rebound. One, there's going to be a just recovering the devastation from the pandemic itself, you know, 15 to 17 million people, fewer are employed relative to 2019. And the RBI, you know, remarkably, admirably candidate has said, you know, the NPA are going to go up from seven and a half, almost doubled to 13 and a half percent which means that the financial holding assets...
NDTV: Non-Performing Assets, NPA
Dr Arvind Subramanian: Non-Performing Assets is going to be devastated. So, we just have to recover from that. Yes, that's the first challenge.
NDTV: And then they are going to double? Bad debts are going to double. Wow.
Dr Arvind Subramanian: They're going to double. Exactly. Terrible. And then remember...
NDTV: But one thing that you did mention, one thing that you have mentioned in your papers is that India has achieved already some degree of improved economic stability and if I show some of your data, maybe you could explain it to us in a little more depth. If you just look at how India has done, improved its economic stability. It's quite interesting. There's all Arvind's data. You see, look at government debts. Under NDA 1, it was up to you know, 75% or under UPA 1, it came down a bit to about 60%. Then under UPA 2, 55%. Under the current BJP government, it's about a little bit so you can see government debt is coming down. And, okay, well, a little bit above the average for developing countries, which is 52%, but not that much above. Other ways. We've actually heard about economic stability improving.
Dr Arvind Subramanian: Sorry, we should just clarify to viewers that now we're going to talk about all these numbers until just before the pandemic hit, because that debt number is going to look very different after the pandemic. So now the economy, until the pandemic hit, because that's going to give us the second challenge, how do you restore dynamism back again?
NDTV: Exactly, exactly. All your data that you've done is just prior to the pandemic, it doesn't have the devastating impact of the pandemic in it. Yes, that's an important clarification, we move on to the other graph. Other data that you provided about how India's economic stability is improving, inflation is coming down, you can see under UPA 1 it went up. UPA 2, it was at its highest, over 10%. And now under the BJP it comes right down to around about 5%. Again, this is BJP up to the pandemic, not including the impact of the pandemic.
Now, the final thing in this kind of category of economic stability being improved, that you have provided Arvind, which I found really interesting, we move on to the next one. It says that current account balance, that's imports minus exports, that's that trade plus remittances, that current account balance is better. It's improved, you can see that as a percentage of GDP is now just 1%. And that's, that's pretty good, pretty good, a little bit higher than the average for developing countries, but still not bad at all. So, these three improvements, one could build on and why have they happened?
Dr Arvind Subramanian: So one way of thinking about this Prannoy is that, you know, in India, in the past has been prone to economic instability and financial crises, from you know, what, you know, Harish Damodaran calls the four Fs; food, fuel, foreign exchange, and fiscal, right? These are the things that create, you know, food prices go up, oil prices go up, we don't have enough foreign exchange, all those create, I think, instability and crises in India. And what you've shown just now is that, apart from the, you know, the fiscal situation we'll talk about later, especially after the pandemic, these three Fs have been relatively under control. And that goes to the credit of the government that, you know, it believes in macroeconomic stability, it believes in low inflation, generally believes in prudence in terms of running the, you know, the budget, and foreign exchange reserves, there are now 600 billion or so. So we're in a very comfortable, so we are less prone to that kind of instability in the past, and as you said, that offers an opportunity to build upon.
NDTV: Okay, that is amazing. Now, you also mentioned, really another interesting factor that's happening in India increasingly, and that is a kind of what you call new welfarism. And it's kind of hardware welfarism, where several kinds of items are provided directly to the poorest. Let's have a look at some of them that you have listed. And, it's really excellent data that you have unearthed. Improved access, people have had essential services, women using bank accounts. In 10 years, it went from 20 to 35%. But from 2015 to 2019, it's gone up to 60%. That's a sharp increase in women using bank accounts. The other form of new welfarism. We look at LPG gas cylinders. You know, we've heard a lot about that, it's one of the most effective election factors and we found among the electorate, the women really appreciated this, in 10 years it went from 25 to 40%. But in the last four years has gone up to 60. Electricity, about the same trend, 60 to 75, 75 to 95. But it was already at a very high level, but it's up to 95%. And finally, if we look at toilets, which you listed, yes, they've also gone up 45 to 60. That's up 15% in 10 years and up another 15% in just the last 4-5 years. So, what do you make of this new welfarism? It looks like a very good thing. But yes...
Dr Arvind Subramanian: So, I think, in my view, I think this is probably one of the most significant achievements of the government. You know why it's very interesting is because it is a very distinctive approach to the question of redistribution, and you know, inclusive growth, you know, how governments generally do that, either they provide you know, health and education like public goods, or the UPA builds social safety nets like, no, MNREGA, you know, PDS, right to education, right to food, etc, etc. So that was the UPA approach to this. The BJP and Mr Modi's government have a very different approach to this, which is essentially to say, we are going to provide tangible goods and services like all the things that you mentioned, to improve the lives of the poor. Now, of course, it's somewhat overhyped. India's not 100% open defecation free, for example. But nevertheless, I think significant improvements have been made. I think what is really distinctive about this is that it combines a, what I call vision, with a calculation, you know, there's genuine conviction that this is good for the poor. But there's also a political calculation here, which says that if people can see these tangible improvements in their lives, you know, in a way that you don't see with growth, you know, you tell the average voter growth has gone up, what does it mean to him? But if you say, look, you got gas chulha; you got toilet, you got this. And you said this was all because of a certain benefactor sitting in Delhi, what is called the attribution to who's providing it. My colleague, Professor Nilanjan Sarkar and Yamani Aiyar have harped on this attribution. So, you materially improve the lives of the poor. You say it's due to government, and that that's what enhances also your political success, electoral vote.
NDTV: Two comments on that. This is also being now replicated in many state governments. Andhra Pradesh has done an amazing job. West Bengal is doing by this direct what you call welfarism. But there are a couple of problems I have noticed in these, the central government, for example, as you said, slightly hyped, the banking, women's banking has gone up. But when we've been on the campaign trail and talked to women, we say, do you have a bank account? They say, "Yes, we do. But you know, every time I want to collect my Rs. 1000 pension, the teller says, 'give me 500, only then will I give you 500'." So that last year, last mile, last six feet, corruption exists, then with the LPG gas, they love it. But now refills are becoming a huge problem. You know, it was good initially. But now, everywhere you go, they show an empty, they sort of rattle a LPG can and in fact, even many toilets are there, but they're being used for storage, because there's no water. So, it's a great move. And let me tell you that everybody does exactly what you said. I appreciate it. But I think more better implementation still needs to be done.
Dr Arvind Subramanian: So, I think that, you know, having said the government deserves a lot of credit, I think I would emphasize the two things are one, it's slightly overhyped. I think the achievements are good, but not as great as being claimed. And the second, yes, you know, the data is only measuring access to these things. It's not measuring actual use, you know, refills, and so on. And, and surely, I think there are, as you said, implementation deficiencies. But I think this is something that because the government has conviction about these things, there's also a good chance that they will see the benefits of, you know, continuing to implement there. So I think that that's because, you know, one of the things I think it's interesting what you said about the bank accounts for now, because you know, what the data on bank accounts is, it's not just women having bank accounts, but actually using it themselves. So, kind of the agency that women are getting with, with all the problems that you said, you know, last mile, I think there's still so I think it's this new welfarism that I think the government has, you know, really sets out its, you know, its vision, and is probably one of its most successful achievements.
NDTV: Yes, and I must say it is an excellent thing. And it is a direct result of democracy and of elections. And it's a, it's a tribute to us. But having said all that, having seen a more stable economy, seeing this welfarism, some of the figures you bring out on the ground reality about, say, just a child, children's health. And you could just give us a little more in-depth perspective on that. What about children's health in India? How is it improving? Is getting worse? It is not a very good picture, you just look at some of the data on that, by Arvind Subramaniam, Indian children are suffering still. Look at anaemia. Between, in the 10 years 2005 to 2015, it was coming down from 65% of children to still 55%. But now in the last four years, anaemia has gone up terribly. That's awful. Moving on to another bit of data from Arvind was stunting. It's a very, very important issue around the world. And it was coming down from 40% to 30% of children are stunted. Now, it's flat, it's not going down any more. It should be down to zero, at least or near zero. Diarrhoea, it had, the trend was downwards. And now started going back up to where it was, you know, 14 years ago. That is really, really, really disappointing. And finally, if we look at ARI, acute respiratory illness, again, it was coming down, it's going back up or flattening out again. So other than this, fascinating data that he brought forward, because of all the economic, as you say GDP and you can talk about all that. But in reality, this shows, how it is affecting one section, at least of our society, children.
Dr Arvind Subramanian: Yes, sure. Yes. I think that, you know, this data shows, I think, broadly Prannoy, that see, firstly, I think we should be careful and fair and say, you know, the new welfarism that you showed, is all because the government has taken the lead and the government is taking, you know, a lot of putting in a lot of political capital into it. All these things that you showed, you know, the child in health, nutrition, it's a combination of what the central government does, or doesn't do, what the state government does or doesn't do. And most importantly, is the economy dynamic and booming, which is providing income, and, you know, purchasing power and consumption to families, which also then gets translated into better health and nutrition outcomes. And to me, what these numbers suggest is that, you know, that, you know, the health of the child and nutrition of the child has been set back in the last few years. And we have to find, investigate why that's the case, because this takes something like stunting, you know is coming down remarkably. And then now that trend has reversed itself. So, I think the question to ask is, apart from all the specific things on these specific measures that the government is or is not doing, what about the general? You know, is there enough dynamism, economic opportunities in the economy, that's lifting people, providing the income and purchasing power? And that's where I think this government has fallen short, and which we will, I think, look in the next set of charts that you're going to provide, I think.
NDTV: Right? Not me going to provide, you are going to provide and I'm going to take the credit for it, you always remember that. You do the work. I get the credit. Okay? Now, I just want to; really astonishing, a bit of data that you brought out about Indian exports over the years, over the decades, India has always considered, oh, we don't export much, not important, we should have been an export led growth country. And then he showed this and let's have a look at the data. India's exports have grown year by year, third fastest in the world, Vietnam, almost 16%, China 15.5, in India 13.4. And the world average is 6.9. And we are just India.
Very fast growth of exports really helped our GDP. And it's not just software exports, we look at manufacturing exports, that's the other data you brought up. And that shows you know everybody thinks, oh yeah, there's all software. No, no, manufacturing. Vietnam 19.9, China 14 and India you know, nearly there, third 12.1. That is just astounding data. And this helps the GDP a lot, hasn't it over time?
Dr Arvind Subramanian: Yes. So, I think, you know, it's good that you brought up this data, because I think it speaks very much to, you know, the discussions we're having about augmented Aperta and self-reliance. I think what this reminds us is that when our exports do well, our economy does well. And that we have done well, not just in services exports, but also in manufacturing exports. The two I think, things to keep in mind, however, is that we've done very well in terms of high skill manufacturing exports, but the unskilled manufacturing like textiles, clothing, leather, footwear, toys, all those things which create, done as well. So that's the first thing to keep in mind when we're talking about policy going forward. The second thing, I think, which is really why I think everyone should take notice of this data, is that, you know, Prannoy reminds me a little bit of the debate in the '50s and '60s, you know, there was this whole, you know, export pessimism, you know, India can't export. So therefore, let's turn inward. And in fact, one of the few people then who said no, India's exports prospects are good was in fact, Dr Manmohan Singh, he wrote a famous book on the saying that, you know, we shouldn't be pessimistic. So now, in fact, it's likely in a twist of fate, even though we've done well on exports, we kind of turning inward, as if, you know, forgetting that, you know, the way to, you know, expanding the Indian economy is by, you know, doubling down and expanding manufacturing and low skilled manufacturing growth. So, this is kind of a reminder that we can do this, and that we should not turn inward, because of some sense that, oh, my God, you know, we can vote or the world economy is to, you know, too slow to take up.
NDTV: Yes, yes, exactly. A negative data is a bit worrying on that front, about looking inward, what you've shown is that we're kind of, in an era now, returning to a sort of protectionism, just look at the figures you've brought out. And it is worrying, you know, that at the time when one should be emphasizing openness and getting our exports up, we're seeing exports suddenly collapse, they were growing at 24%, from 16 to 24, came down to 18. And now in the last four or five years, they're growing at 3%. Of course, there are external factors also, but 3, that is way below emerging markets average.
Let's move on to more worrying data. Even if we look at factors like imports, there's been a big drop in imports. So, our entire trade from 31%, 16% to 4%, people, so imports dropping is very good, but many exporters also import certain inputs, and then use them in the export. So, one would like to see a more robust trade with the rest of the world.
And moving on to a couple of other points that you make. And that is on this return to kind of protectionism, you show that 2017-18 there's been a major hike in import duties, just look at the number of tariffs increased each year. There used to be 160-150, then they recently 140, but in 2017-18, 2460 times were tariffs increase, that is a return to protectionism. And that effect has affected the average level of tariffs in the what, what the India's imposing and when we increase tariffs, others increase tariffs to prevent our exports. Look at our import duty levels. They used to be around 13% then they suddenly shot up and now and people may not see 2% or 3% a month but it is huge in a global scenario because others put that tariffs up to stop us from exporting. Right?
Dr Arvind Subramanian: Yes. So, I think, you know, this is work I've done with Soumitro Chatterjee and you know, essentially, what is two, three things significant about this Prannoy. One is that it reverses a 20-30-year consensus that the economy we had that we would gradually open up and that was the basis of our dynamism. Now all the exports and imports that you saw, this was the basis of that. So, we've reversed, you know, kind of a three-decade old, you know, kind of consensus, as it were. The second, of course, implication of this is that if we do this, and of course, this comes with other actions that we've taken, for example, not joining certain agreements, you know, and so on. So, essentially, the, it seems to be that policymakers are somehow thinking that by turning inward, our economy can go off faster than it is now. And which flies in the face of the evidence of what happened in the '90s and 2000s. Until about the global financial crisis thereafter. So, it's this, why are we not learning from the experience? Why are we changing a policy that has, you know, it's like killing the goose that laid the golden eggs? Why are we doing that? And that's kind of the open question for policymakers. So Atmanirbhar; seems to be, you know, flying in the face of the evidence that being open is actually good for the economy. And as you said, you know, when import duties go up, if you want to export, say, clothing, for example, right? But then if all your costs of inputs go up, and then every time you know, in this modern economy with the value chain, goods keep coming in and out, in and out. So, for example, you know, if every time it comes in, your costs are going up and up, your international competitiveness is going to suffer. And those labour intensive exports, that we need to boost, will not happen.
NDTV: This is a very, very important finding, I think, and you can see the impact it is having, according to your data on a corporate sector, on just, let's have a look at the power corporate sector is suffering. And it really is worrying to see what's happening there. We look at the data there that you brought up. If you look at for example, sales, sales are really falling hugely. They were growing at 11%, 17% and 7%. Now they're growing at 3%, a year from 17% to 3%? I mean, that is just a very frightening impact of all the policies that are, you know, the self-reliance and protectionism.
Moving on, let's have a look at even the profits of the corporate sector. What are they like? They are also falling dramatically from this percentage of GDP. From 2.7% of GDP profits of 1.4. Now, people might say, oh, cut profits is a great thing. But these profits are savings, and they are reinvested. And the impact is, is really severe on the economy. So, profits dropping by half is terrible.
As a result, as I just mentioned, profits are used to invest, look at that plummeting investment in our industries, 25% down to 2%. That's the growth rate? That is really worrying. This is, this is an emergency, we need some resuscitation, or, Arvind.
Dr Arvind Subramanian: Yes, so I think very broadly, I think Prannoy, what all these indicators show, and this is true of, you know, the index of industrial production, it's true of exports, it's true of credit, you know, the credit, you know, all these things, basically, after the global financial crisis, the Indian economy has never really recovered. And in the last four or five years, you know, the deceleration, deterioration has only increased. So, that's why the big, so now we have to get into this, you know, so just stepping back, you know, macro stability, good. New welfarism made, many achievements, but the overall health of the economy, still very, very weak and slowing down. That's why we saw all those Child Health and Nutrition indicators suffer. And now we're seeing, broadly, economic activity is basically down very flat. And that's the challenge for how do we get back to, you know, investment growing, export growing, credit growing, you know, as SMEs, growing employment growing. That's, I think, the big challenge going forward, because the economy has been very weak for very long.
NDTV: Yes, very important. And it's not just, you know, big business and Corporate, it is actually the entire, you know, sector and if you look at some of the other data, including government, it is very worrying how much it's slowing down. And many of these are lag effects looking to the future. It's worrying, look at investment, industry and government in infrastructure in investment. Infrastructure was growing at 13% a year, 5% in the first five years of this, you know, 2005. But now it's 3% a year. Investment in infrastructure? Disaster. And moving on to other areas, which are really worrying. Because these are long term impacts, you're not even seeing the impact here.
Look at credit and bank loans to the economy, plummeting. 13% was pretty good. 20% excellent. Dropped in UPA 2 to 6%. And now 4%. And that doesn't include anything to do with the pandemic, one should just clarify again and again, like he did at the beginning.
And government expenditure up and down, you know, no pattern, there's no consistency. But it's good to see that has gone up from 3%. Because you need that government expenditure when private industry is not investing. So that government expenditure, hopefully, some of most of it, or some of it is going into infrastructure, not all into salaries. This is alarming, very alarming.
Dr Arvind Subramanian: So, in fact Prannoy, the credit number that you showed, and the investment number you showed, I mean, that's the heart. By the way, that credit number is not even credit to industry. If you look at credit to industry, it's actually negative growth in the last 20 years. So, remember that, you know, the twin balance sheet problem, you know, the financial system is impaired, you know, the corporate sector is impaired. And that's why you get very weak growth in credit, have very weak growth and investment. And that's been holding back the economy. But when in fact, you know, in the early 2000s, these things were booming at 15% and 20%. So how you get this back is going to be, you know, the heart of the challenge. And if anything, I think that government expenditure you showed, I mean, suggests that it's been government expenditure that to some extent, has been, you know, cushioning the economy, and preventing from being even worse than it could, that, you know, it is otherwise. So, I think that government is playing that cushioning role, which is a good thing.
NDTV: You know Arvind, one of the things that really became clear to me after reading a paper, one is our economy's in much worse shape than I thought it was. And a lot of these, like investment, you will feel slow growth for years to come. It's not just this year. But the other interesting point you keep making is like, what you call hardware versus software. Hardware? We are pretty good at, you know, giving LPG, building toilets, but in software, implementing it, not only those in not only welfare, all our sectors, implementation has been really our problem. Give us three or four points, just to sum up. To sum up, I think you mentioned first of all, let's be clear that we cannot function unless we have your first point, which is data integrity, we all must know what's happening, right?
Dr Arvind Subramanian: I think, you know, so just stepping back Prannoy, our diagnosis of the economy, that the weakness in the economy is not because you know, of, you know, not doing a bunch of important taking important actions. It's the broader approach to policymaking, what we call the software, and using soft power to, you know, to improve the software, those soft, that software is kind of needs rebooting, and that's why the overall state of the economy, so it's not any one thing done or not done. But you know, how you see the economy division, you know, the overall consistency, and, you know, state craft. So, let's go through each of these elements of software, one by one. Data integrity, you know, I want at this stage to really commend the Reserve Bank of India, you know, this time around, they've been remarkably admirably candid about what the impact of the, you know, the crisis is going to be. You know, they, you know, they said NPAs are going to up, I think that needs to, that kind of transparency needs to occur more broadly, you know, our GDP data is under a cloud, you know, many of the data put out by the government were then withdrawn. I think, even on the fiscal accounts, know, last year, some improvements were made, but honestly, we don't have a good sense of what the real deficit is, you know, how much expenditure is off balance sheet. So, I think that first element, data integrity needs to be improved.
Second, I think what we say is, you know, policy inconsistency, you know, it's something that it's so important to run an economy, that it's not that governments will not sometimes reverse course. But I think if at every point in time you do one thing, and then clawed back, that creates a climate of uncertainty, which is not good for investment, give you two examples. Take agriculture, for example. On the one hand, there's this laudable commitment to double farmer income, but every time the price goes up, you know, we impose export controls stock limits, to reduce the price that goes to farmers. You know, that's one example. We want to increase the tax net. But in the 2019 Budget, we just raised our exemption so much that, you know, people just completely fell out of the tax net. You know, again, inconsistency on even on the IBC, the bankruptcy code, a great job in enacting the legislation, but even before the pandemic, I think, basically, it had come to a halt. So, I think the government needs to be, you know, have a vision, and, you know, stick to it and, you know, articulate and stick to it clearly, and not kind of go back and forth. That's very important element of software. The next one, of course, is, I think this whole cooperative federalism, you know, you design a policy with the state, it is a cooperative federalism. And, you know, I think at this stage Prannoy, it's worth, you know, reflecting and contrasting, you know. All this thing about the kerfuffle going on about agriculture, and, you know, States and Centre and all this going on, it's obviously, you know, what's happening is, is very traumatic in many ways, and very disturbing and challenging for India. But I think that, for me, the contrast is with what this government did in enacting the GST. Remember, the GST was an amazing example of cooperative federalism, where, you know, Mr Arun Jaitley got heads together, brought in the opposition states, brought in the opposite.
NDTV: One of the most amazingly cooperative, where all the states agreed to it, and they all got together, and you know, to get something like that through. But again, I must say, on the software side, the kind of implementation of it, it's become so complicated, it's so messy. So, I just feel Arvind and this does not include you, we have so many brilliant minds, Indian minds across the world. We could tap on them; we have some brilliant minds here. But somehow the appreciation of high-quality minds and policy-making has sort of gone out of the window a bit. And I met brilliant minds all over the world, not including you.
Dr Arvind Subramanian: Of course, we can talk about, you know, the need for talent and expertise and so on. But I think in this case, it's just the kind of approach you see, in India, let's face it, almost every important policy now, both in the design and implementation is going to involve the states. So, the Centre and the State have come together. You know, you take land, you take power, you take agriculture, the GST you take the pandemic, you have to do it together. Yes. And let me just, you know...
NDTV: One more thing? Can I add one more thing?
Dr Arvind Subramanian: Yes
NDTV: You mentioned the elections, state elections have a much higher turnout than last summer elections, about 7%, higher 10% higher, people are much more involved at the state level, and even Panchayat elections, much higher turnout and Lok Sabha. So, it's part of this reflection, part of the same thing you're talking about.
Dr Arvind Subramanian: On a personal note, I think Prannoy, you know, I remember that, you know, we talk about Parliamentary procedure, and, and, and the circumvention of Parliamentary procedure. One of the highest points in Parliamentary thing in the last five years was in fact, the GST debate. I don't know whether you remember that. I think it was such a rich, I mean, it's kind of the debate and discussion that our, you know, founding fathers would have been proud of, in terms of, you know, how you discuss important policy matters, and how you bring people together. And in fact, the final vote was a unanimous vote, if you remember, on the GST.
NDTV: You know, you also mentioned about equality laws, economic laws, in particular should be equal amongst all people and that there is a bit of a lack of trust on that, explain that.
Dr Arvind Subramanian: See, look at, in India, you know, you know, you know, the relationship between the private sector and the state has always been very fraught, I use the word stigmatize capitalism that, you know, these are very, you know, both, we've had major corruption scandals under the previous government, UPA, we had all those. And then there was a sense that, you know, sometimes the private sector and the state were getting too close to each other and too cosy and resulting in all these things. I think that even today, now, there's a sense that, you know, the laws are not being applied equally, you know, to all and that some benefit at the expense of others. You know, I don't want to go into all the details, but I think there is this perception, and you saw some manifestation of that, even in relation to it, kind of the agricultural discussions. Similarly, I think, you know, actually, yes, tax enforcement, it still is perceived as being arbitrary. You know, the government owes a lot of money to private sector suppliers. So, this whole rule of law, you know, adhering to that, and this is not something that, you know, you can switch off, you know, one lever, a one switch or in a lever there, and you get, it's about a kind of sensibility and approach to policy-making, more broadly. Good data consistency, cooperative. You know, action, cuts, consultation, rule of law, equality. That's what I think we need to really, really...
NDTV: These are foundations. Yes, foundation for a healthy, healthy economy. One last issue, analyse all this. You've been involved in Budgets before. Given the current situation, given that we were already slowing down prior to the pandemic, then came the pandemic. What would you like to see in this Budget?
Dr Arvind Subramanian: That's a great question to end on as employer. So, let me say two or three things, which I think are really what, first and foremost we are still not out of the pandemic, people are still hurting, people are still suffering. So, the social safety net that we put in place for the pandemic, MNREGA, PDS, cash transfers, they should still be available for all those who need it. So, we shouldn't, you know, take that social safety net, which is still cushioning people's lives and livelihoods. I think that's I think, important point number one. Second, I would like to see no surprises in the budget, you know, for example, more tariff increases, and so on, you know, all those, you know, surprises I hope the government will avoid. Third, I think that given the state of the financial system, I hope, the budget and, you know, policies, in general, or more broadly, will have something to really address the, you know, the problems of the financial system, you know, whether it's a bad bank or, you know, the IBC being revived in some ways. I think we should do that. I would see a little bit of reversal of policies that took so many people out of the taxpaying net, I think that has to come back.
But above all, above all, and this is what I would like to end on, if the diagnosis that we have is the problem, is the software, I would like to see evidence beginning in the Budget, that that software is being kind of addressed and remedied. First, I want the Budget to be totally transparent. And the government, you know, started on this course, last year, you know, transparency, we know everything where the expenditures are gone, of balance sheet expenditure, what is the true deficit? One, two, I think the numbers should be credible, you know, we can't have, you know, very over optimistic projections, like we've had in the last three or four years. So just to kind of credible Budget, with credible numbers, and also with some serious, credible plans of how we will bring the fiscal situation under control. And, finally, a signal that, you know, the government, whether it's agriculture or the GST will go back to a kind of cooperative approach to policy-making more generally. So, in some ways, I would say, you know, if the diagnosis is software, not hardware, you know, that evidence that software is being addressed, not just in the Budget, but on an ongoing basis beyond. That's what I would be looking for, in terms of the future. And if we can do that, we can restore dynamism back to where it used to be.
NDTV: In a nutshell, Arvind, should we be worried about the size of the Budget deficit? Many countries have said, you know, forget it for now. And should we say, look, we just got a bounce back. And we'll talk about Budget deficits later, and public debt later?
Dr Arvind Subramanian: I think the way to reconcile this is that this year, we still need government support. So, I think we need to find the means to have more expenditure, if necessary, financed by more aggressive privatization. But it should come because, remember Prannoy, you know, at the end of the pandemic debt is going to be like 85% fiscal deficit is whatever. Next year if the economy improves, some of that is going to reverse automatically, the revenues are going to come back up. But while we spend more in support of the economy in the short term, we do need to have a credible plan for, you know, bringing the debt down in the medium term in a consistent, credible fashion. So short term spending, but financed by gradual medium-term prudence on the Budget.
NDTV: Excellent, I think, really, really fascinating talking to you, Arvind, I must say, yes, as I said at the beginning, it's nothing to do with you. It's your team and all that's done all the hard work, although you have worked hard for once in your life. And we look forward to you coming back to India soon. And thank you very much for taking the time to take us through this entire thing. So clearly, really, I learned a lot.
Dr Arvind Subramanian: It's a great pleasure, always productive to be on the show.
NDTV: And I must say that all what you've said will be available in segments on ndtv.com as well, for anybody who wants to watch each topic separately. And, you know, take notes, etc. But thanks once again. Thank you very, very much.
Dr Arvind Subramanian: Thank you Prannoy.
