A lasting solution to deal with the structural problems in India’s agriculture would require policies to bring the market closer to farmers and enable better price discovery for their produce, Chief Economic Adviser Krishnamurthy Subramanian has told Moneycontrol.
“The main issue in farming is on the marketing side, and not as much of the production side,” Subramanian said.
In an exclusive interview, Subramanian, who was appointed as the CEA in December, said that the debate over India’s unemployment rate needs to factor in the differences in methodologies used in the current and previous surveys.
“It is important to understand that the conversation of unemployment rate, when you compare the previous survey to the current survey, the sampling methodologies are very different. The sampling for PLFS (periodic labour force survey) is based on households with education levels of individuals, and in contrast the employment and unemployment survey was based on expenditure. The sampling is very different. Even if the fundamentals remain the same, when you do different forms of sampling, you may get different results,” he said.
Subramanian also said that a single rate goods and services tax (GST) could be looked as an ideal to move towards, but one should bear in the mind that taxing sin and basic consumption goods at the same rate may be hard to argue in a country such as India.
“That's why I would keep the one rate structure as ideal but we need to be practical as well. As long as we are moving towards streamlining, we are making a headway,” he said.
Q. If we go by the latest quarter GDP data and go about with what the finance ministry has put out recently, we seem to be in the middle of a slowdown. India’s GDP growth has slipped below 7 percent (it was 6.6 percent in October-December). The implicit calculations from the Central Statistics Office (CSO) data suggest that GDP growth will likely fall to 6.4 percent in January-March? Isn’t that sign of worry?
A.What is important to remember is that the fixed capital formation had slowed down and if you think about it, growth comes through investment. The effect of investment on growth happens with a lag of time. There was a slowdown in investment because of the dual balance sheets problem and the structural change happening because of the bankruptcy code. Because of those reasons, the fixed capital formation had slowed down and the effect of that is showing up in the economy.
Also, there is always some uncertainty before a national electoral cycle as people remain in a wait-and-watch mode. Our overall fundamentals are strong as we have implemented a lot of structural reforms, which will have an impact with a lag on economic growth. So, I am not particularly worried. The electoral cycle etc are cyclical.
Q. Assuming there is some uncertainty also after government formation, do you think this indecision about investments is likely to persist?
A.I think that would be hard to say at this point. Anyway, there are a few more days by which you will have the results. If it were a six month horizon, there would have been value in giving that answer.
Q.Which, according to you, are the major unknown variables that can derail the Indian economy’s revival?
A. Rather than focusing on unknown variables, it is better to focus on the known variables. As I have said, one of the key determinants is investment. And for growth to be equitably distributed, a low inflation environment is important because inflation is a pernicious tax on the poor. Because we have had a benign inflation level, purchasing power has been created at the bottom of the pyramid and for the middle class, which is why growth has been domestic consumption driven.
Also, we have implemented some of these structural reforms, especially the IBC (Insolvency and Bankruptcy Code), which has been a key reform despite some of the recent delays. Nowhere in the world do you hit perfection immediately, but it is something that will have an impact on the quality of investment. Among the other known variables, I would focus on oil prices that affects our imports, and, therefore, our trade deficit. That is something I would keep an eye on.
Another important aspect that I would be much focused on is the cost of capital. A large part of the cost of capital is the credit spread. Credit spread is itself a function of the expected probability of default that a bank assesses. When you go to a bank, they assess what’s the likelihood of default. The cost of capital, especially for smaller firms, should go down.
Q. Do you think cost of capital at this point is on the higher side?
A. I think everybody agrees that the real cost of capital needs to come down, partly because inflation is also low now.
Q. Indian agriculture is a now caught in a peculiar flux. Output is rising, but pricing are in a deflationary trend, implying farmers, despite record output, have seen incomes fall or remain flat. How do we decisively address this structural problem?
A. Whenever the price of a commodity goes down the buyer benefits and the seller will lose out. It is tautological that if you have inflation going down, food inflation in particular, it will benefit a consumer but not so much the seller. You can't have a cake and eat it too. But let’s get to the issue you are alluding to: agrarian distress. The basic problem is that our production has been growing at 3.5%-odd while our population is growing at less than 1%. As a result, you have a lot of surplus. Therefore, we have prices that are low.
What we really need to get working on is to bring farmers closer to the markets and vice versa. As of now, if you look at the ratio of farm gate prices to the retail or wholesale prices, the farmer does not get enough. That said, the markets are fragmented and fragmentation itself also creates issues. For instance, if a farmer knows he’s selling potatoes at Rs 10 per kg and he can sell that at Rs 15 per kg at the nearby mandi, then he can bargain for Rs 12-13 per kg.
Q. So, is it more of a problem of inefficient inter-mediation?
A. Essentially, markets are not integrated enough. We have to use technology to bring markets closer. The main issue in farming is on the marketing side, and not as much of the production side. Because of our recurrent famines in the past, in our psychology, we need to be food surplus. Now, we have a lot of surplus, which is now having an impact.
Q. So, can we expect some kind of solution in your maiden Economic Survey to deal with agrarian distress?
A. Some of these ideas are churning in our minds. Not just this, but other ideas as well. I think it will be premature for me to comment on this.
Q. What are the lessons from demonetisation and what are the gains? Critics have panned it as one of the worst decisions taken by this government.
A. After demonetisation, close to 4 lakh companies had been identified as shell firms. I always talk about this triangle of Bramha , Vishnu and Mahesh, which are: money laundering, tax evasions and wilful defaults. The Bramhan or source of that is related party transactions, especially via shell companies. If you actually have to clampdown, the shell companies are the source of this money laundering, tax evasions and wilful defaults. The companies identified as shell companies are not a small number at all. This cleanup has happened because of demonetisation. The drive towards clean income is something which actually is important. For us to move out of a situation where cronyism prevailed, clamping down on all these firms is actually important. Another important aspect is that in any project, benefits accrue over time. Cash flows in a project accrue over time and that is the case here as well.
Q. How far are we from reaching a steady state on GST, which has been characterised by multiple rate changes, teething return filing problems and procedural irritants?
A. I am generally a little skeptical about predicting exact timelines, especially on such important pieces of reform. We are working on ensuring that we move towards an e-invoice kind of a system, thereby thereby enabling the use of input tax credit (ITC), checking ITC, and also checking the actual revenues the companies are claiming. These aspects will enable the system in capturing the true value added and taxation. That's a critical aspect we need to look at.
Q. What’s your view on one single standard rate of GST?
A. If you look at any country which has implemented GST, generally it's not an easy reform. Especially, in a country like India where so many different stakeholders are there. I am glad that the perfect was not the enemy of the good. At least we have been able to bring together GST. I think one rate is definitely something that we should move towards. When will that happen is a little hard to say. Overall, we should focus on streamlining and moving towards reducing the number of rate structures.
Q. To clarify, when you say one rate, it means one standard rate for all goods and services or are you talking of a median rate?
A. That is the concept of a GST basically where it has been implemented in other countries. In India, we may find it hard to argue that sin goods should be taxed as the same rate as basic consumption goods. That's why I would keep the one rate structure as ideal but we need to be practical as well. As long as we are moving towards streamlining, we are making a headway.
Q. What's your view on something like a universal basic income (UBI) scheme for a country like India? Your predecessor Arvind Subramanian, in one of his Economic Surveys, favoured an income support scheme for the poor. Do you think this can be a game changer in eliminating poverty in India?
A. The first word in UBI is universal. I don't think after that Survey there has been any new piece of information that has come to basically change the pros and cons that are well laid. I don't think anything has changed between then and now. Because none of these schemes are actually universal.
Q. What about a conditional income transfer scheme as opposed to an all or nothing scheme?
A. Then that's not universal. The problem actually is that the basic idea in that chapter (on UBI in the Economic Survey) was that through an UBI you avoid the problems of inclusion and exclusion. When you start talking about any form of targeting then it's any other scheme, not UBI. The big benefit was, something practically not feasible, is to avoid the inclusion and exclusion errors, and, second, was to replace all existing subsidies with UBI. The consensus for removing subsidies has to come up and that's not an easy thing.
Q. But fiscally how implementable is such a scheme?
A. If it has to be an add on then fiscally it's very, very difficult. But, I don't know why we are talking about UBI because that idea is really not on the table.
Q. Because it has become an electoral rallying point as one party has promised an income transfer scheme if it is voted to power?
A. But it's not an UBI.
Q. But it's a conditional income transfer scheme.
A. And they are very different. So, to evaluate the conditional transfer scheme using the UBI construct is, I think, is like comparing different animals.
Q. Conceptually, do you think a conditional income transfer scheme as a targetted povery alleviation programme can be tested in India?
A. As an economist, I would always urge that we test something, do the evaluation, and then go. That's always a better idea. This is something that needs more thought. Whenever you talk about any conditional scheme, the design of that, and its implementation, depends on the quality of data. Given the current status of quality of data, designing the scheme carefully and implementing it will be a tall task.
Q. Since we are talking about data, one piece of data that refuses to remain uncontroversial is the jobs data. The central long question remains how to create enough opportunities to the armies of young people who join the queue of hopefuls every year. The controversy surrounding the NSSO report on jobs that the government is believed to have prevented from getting released has sparked off criticism. Is the government trying to hide an inconvenient truth? What is the solution to our jobs problem?
A. First, it is important to understand that the conversation of unemployment rate, when you compare the previous survey to the current survey, the sampling methodologies are very different. The sampling for PLFS (periodic labour force survey) is based on households with education levels of individuals, and in contrast the employment and unemployment survey was based on expenditure. The sampling is very different. Even if the fundamentals remain the same, when you do different forms of sampling, you may get different results. The second important point to remember is that the PLFS puts 75% weight on households where one member has passed Class 10 and such a person typically would not work as a daily wage labourer. In the census data, among this population, the unemployment levels are higher than the unemployment rate for households where none passed Class 10. So, if you put a 75% weight on a higher number, and a 25% weight on a lower number, the number will go up. The conversation on unemployment rate being historically high is misinformed.
On the jobs side, the real issue is about meaningful jobs. Second, everywhere in the world, elasticity of jobs to economic growth has been coming down because of technology. It is really important to look at the sectoral employment numbers. There are sectors that are losing jobs, and sectors that are adding jobs. When we pool everything together, we miss the rich variation. The right question is meaningful jobs and sectors.
Third, whenever we talk about jobs, we focus only on the supply side and say "where are the jobs?" We also need to focus on the demand side, "Where are the skilled people for the jobs?"
Q. But does it not make the problem even more difficult to solve, given that people have inadequate skills and fewer jobs available?
A. No. It's about catering to and creating both skilled and unskilled jobs. Skilling cannot happen overnight.
Q. Do we expect some solutions in the survey on this?
A. I will stick to my earlier response: premature to say.
Q. What is that one reform that you think has not taken place and frustrates you?A.
I don't get easily frustrated. I am an incorrigible optimist and practical as well. And people in my position should never get frustrated. We are here to make big changes and frustration hinders that. I would frame it as what are the changes that we need to bring about. I would say the factor markets—capital, land and labour—because that affects competitiveness and thereby our exports. These are the things we need to concentrate on reforming.