Feb 29, 2016 07:49 AM IST | Source: CNBC-TV18

Budget 2016: Macro management, twin deficits, reforms priorities, says CEA

In an interview with CNBC-TV18’s Shereen Bhan, the Chief Economic Advisor Arvind Subramanian says the important thing is that despite mixed economic cues, the government needs to continue with its agenda of reforms.

The Macro Economic Survey for 2016 not only talks about realistic growth of about 7-7.5 percent in FY17, but also recognizes challenges in meeting the fiscal deficit target for the year, on back of slowing global economy and higher expenditure due to OROP and the Seventh Pay Commission.

In an interview with CNBC-TV18’s Shereen Bhan, the Chief Economic Advisor Arvind Subramanian says: “7-8 percent GDP number is embedded in our consciousness.” However, he adds that a 7-7.5 percent growth rate is more achievable when the private investment and exports are sputtering.

The important thing is that despite mixed economic cues, the government needs to continue with its agenda of reforms, he says.

“Macro management, twin balance sheet and structural reforms (are) top priorities,” Subramanian says.

Other reforms that are on the priority list for the Budget are the Bankruptcy Code, UDAY scheme for the power sector, ailing steel sector, rehabilitation on on-going projects as well as strategic divestment, Subramanian adds.

Subramanian furthers says that the Budget will also focus on the stress in farm sector and there could be action in PMGSY, MNREGA in this regard.

“Distress in farm sector is real and we have to cushion farmers on downside risk,” he says.

On the stressed asset situation in public sector banks (PSBs), Subramanian says that banks need to come clean on stressed assets, as the Reserve Banks keep emphasising. There are talks of using government equity in RBI for recapitalisation in banks, he adds.

Another worrisome issue, which was stated in the Economic Survey, was Trans-Pacific Partnership - which is a trade treaty between big nations. “Government is aware of the consequences of not joining TPP,” he says.

Export outlook is not looking very bright and the external environment is going to be difficult, Subramanian adds.

Despite the headwinds, Subramanian signs off saying: “The promise of India is still there."

Below is the verbatim transcript of Arvind Subramanian’s interview with Shereen Bhan on CNBC-TV18.

Q: The survey has gone down well, it has got a lot of positive response in fact let me quote what you Ashok Desai says on Firstpost which is part of the Network 18 family and he says that with this survey you have actually managed to get the cost of importing you from America out of the way. So, it has been worth the cost of importing you from America so positive response to the survey. However, the survey also seems to be a very clear acknowledgment of the problems facing the Indian economy and I am not just talking out the headwinds that we are seeing from the external environment.

I want to quote you back to you, you say in some for now but not indefinitely the sweet spot for India is still beckoningly there. The last conversation that you and I had when you presented your first economic survey you said this is not resurgent economy. It is recovering economy. It continues to be a recovering economy, the anxiety we spoke of then continues as far as the Indian economy is concerned?

A: Since we last spoke there have been the two major headwinds facing the Indian economy. The fact that global markets have been very weak, a much weaker than we anticipated and second the monsoon turned out to be less good then we originally expected. So, these were severe headwinds that acted on the economy the economy. More importantly, going forward these are headwinds at least on the external side may even get worst.

I do think we need to prepare for a situation where things internationally could get worth. That is the sense in which, I mean there was a part of the quote which you didn’t read which is we need to recalibrate expectations to take account of the grimmer external environment. So, there is that but of course what this means is that we recalibrate expectations, we rely a little more in the short-run on domestic demand for growth.

Also finally we have to carry on with our agenda of reform that is a very important message because we only control what we control and those things we should just push ahead.

Q: You are absolutely right on that front so let me pick up on the second part of the statement that you made that in the short-term we need to focus much more on reviving domestic demand. In the economic survey you have listed out a bunch of reforms that the government had undertaken whether it is moving to JAM trinity and so on and so forth and some of the other reforms.

You also articulated very clearly where the government hasn’t moved. I will just give you one specific example for instances, disinvestment, we are going to be woefully short of our disinvestment receipts this time around as well. Our policy on strategic disinvestment, the government when it came to power made it very clear that we are going to revive the process of strategic disinvestment. We still don’t have policy in place perhaps the Budget is going to articulate one for us so there has been a sort of slow space even as far as crucial reforms are concerned?

A: I think the survey acknowledges the kind of unfinished agenda from leftover agenda. I mean take the GST for example; it is something that we mentioned as well; yes it was a setback not to have done it in the last year. However, I am very much hoping that these are retrievable setbacks and not permanent setbacks. If that is the case I think we can be hopeful about the Indian economy.

Q: So, since we are talking about the Indian economy and I want to get the macro picture out of the way before we move to some of the other prescriptions you talk about in the survey. The projection is between 7 to 7.5 percent and you have also said that there is a downside risk to that given what we could see happen as far as the external environment is concerned and perhaps if we don’t see a pick in domestic demand.

You said that the recovery was patchy continues to be so and while I don’t want to get into the argument on the CSOs numbers and so on and so forth and there are question marks on whether this is a historically low deflators that we are working with, the kind of strength that we are seeing in the manufacturing numbers which nobody seems to understand at 9.50 percent. Does that then give you a sort of mixed picture on where things really stand as far as the economy is concerned?

A: We said in the midyear economic analysis that the economy is sending mixed signals. There is a part of the economy that is doing well, the consumer sectors is doing well. Our indirect tax receipts are buoyant, even allowing for the thing. So, those are good parts of the economy.

There are parts which are still recovering and of course the midyear also said this additional uncertainty that we face because the nominal gross domestic product (GDP) and the real GDP so, it makes for difficult economic management. That is why what we say here is that the concept of purchasing insurance against uncertainty and that is an important concept both monetary and fiscal policy should while absolutely our commitment to macro stability is steadfast, unwavering I think given the nature of the risk which are growth slowdown, even what the economy is sending these mixed signals therefore policy has to calibrate itself to provide for this insurance against the slowdown. That is why I think we say things we do on monetary and fiscal policy.

Q: So the earliest we can get back to an 8 percent - 8 percent plus kind of growth trajectory you believe is it at least two years away?

A: I want to make a very important point, I think that these numbers 7, 7.50 and 8 have got embedded in our consciousness because of the performance in the past where we got 8.50. It is critical to understand that a performance is very conditional, obviously it is conditional what we do domestically but it is conditional on what happens internationally. So, in the past 8-8.5 were achieved because our export and export markets were doing very well and the monsoon were very good.

So, this not a kind of excuse or an apology but just to say that we must be in our assessments take account of what we control and what we don’t control and make this conditional assessments and that is very important. So, to say that we will only reach 8 in two years I mean it is, as we say for an economy we are private investment and exports are really spurting I mean 7-7.50 is very good.

Q: Let me ask you about the headline that went down very well with the markets and the markets reacted positively and that was what the survey said on the fiscal deficit. You said for credibility and optimality I argue for adhering to the 3.5 percent fiscal deficit target. So, it seems like the government is going to stick to the number that was put out as far as the fiscal deficit is concerned.

A: Let me just clarify something. I think that  if you read the survey, it is very careful and very fair and balanced in making the case for aggressive consolidation and for less aggressive consolidation partly because the arguments on both sides are both very compelling. I think it is no secret  that we have had a very vigorous and heated debate within government on this. I think the government gets a lot of credit for allowing this rich debate to take place. I think the call will be made on Monday. However I think there are very good arguments on both sides. So, one of those really tough calls. There is no right or wrong in this.

Q: You would bat for sticking to 3.5 percent?

A: At this stage my view doesn't matter.

Q: What the Budget has to do is already decided, so you could tell us whether you believe it should be 3.5 percent or not?

A: Our views are in the survey, very compelling arguments n both sides.

Q: So, you won't tell me whether it is 3.5 percent as far as you are concerned or not?

A: Our job here, my colleagues and I we provide advice. I am the chief economic advisor not the chief political decider.

Q: Let me ask you then in the context of what we ought to do as far as our fiscal consolidation roadmap is concerned? You have also then talked about the need to review our medium term fiscal framework and I understand that that is part of the recommendations that the secretary panel has also made to the prime minister's office and to the Prime Minister on whether we should be stuck to an absolute number, whether we should work with a range, whether we should look at what is happening as far as the revenue collections are concerned so that it gives the government a certain degree of flexibility. What do you mean specifically when you call for a mid review?

A: I think actually it is completely unrelated to the call for a review of the medium term fiscal framework. It should be seen as completely unrelated to what we may do this year. A review is called for, for a number of very important intrinsic reasons. First we need to plan our expenditures in the medium term framework, the planning commission has kind of gone, so we need something to look at this.

Second we look at also revenues in the medium term framework which the 14th finance commission did but the assumptions and the numbers have been completely overtaken. Most importantly  I think that when we come up with a new framework, if we do and when we do we need to absorb all the lessons from around the world in terms of  what is a good framework. You touched upon a couple of them. First, we need an anchor. At the moment the anchor is a deficit target but around the world we see that there are many other possible anchors. It could be debt anchors,  some golden rule kind of anchors. Those anchors have to be combined with providing flexibility. If the economy is down you don't want fiscal policy to be pro-cyclical. So, we need a new thinking, we need an anchor, I think there is no doubt about the fact that like monetary policy we have an anchor, fiscal policy being an anchor but we need to think about what the new ways of finding anchors and how to build flexibility within these anchors.

Q: You said this is not linked to what we are  likely to see in this Budget but would you like to see the government perhaps make its intent known on what it intends to do as far as the fiscal framework is concerned in this Budget?

A: Once you accept the principle then we need to have deliberations to see what should, we need to get lot of experts opinion around and that is how we should go forward.

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