The government has maintained a conservative growth target of 7-7.5 percent for FY17 in light of the instability in global economies, says Arvind Panagariya, VC of NITI Aayog. However, there is no reason to be pessimistic that the 8 percent target listed out post FY17 is unachievable, he adds.
Panagariya was expressing his opinion on the Macro-Economic Survey tabled in the Parliament on Friday, in an interview to CNBC-TV18.
He says sticking to the fiscal consolidation target will be taken positively, adding he has always pitched for a rate cut and if the fiscal deficit target is achieved then the Reserve Bank will get more room to cut rates. He feels the process should begin with at least 50 basis points cut.
On the stressed assets issue plaguing the banking system, he says the resolution requires multiplicity of instruments. He supports the likely plan to allow 100 percent foreign direct investment (FDI) in asset reconstruction companies.
He sees merit in the idea of moving to a range-based system for providing fiscal deficit projections, provided the range given out is narrow enough. Below is the verbatim transcript of Arvind Panagariya’s interview with Shereen Bhan on CNBC-TV18.Q: Let me start by asking you about the projection on the growth front that the economic survey has laid out. 7 to 7.5 percent, it goes on to say that while the conditions are right for an 8 percent plus growth rate, that is only achievable over the next couple of years. It doesn’t specify the time period. Is there now increased realism about the growth outlook within the government?A: The growth projection for the last year, for 2015-2016 was between 8 percent and 8.5 percent. That was not realised, we are at about 7.6 percent going by the advanced estimate. So, I think that is what the survey seems to recognise. Q: But it has also recognised the fact that you are unlikely to get to 8 percent anytime soon. So that 8 percent dream seems to be dead at least for the foreseeable future? A: If it says that 8 percent is realisable within a couple of years it will be re-judged as we go forward as we have re-judged the growth rate itself for the year 2016-17 as well. So I don’t see any sort of any reason to be pessimistic about or at least drawing a pessimistic lesson out of it.Q: It also does articulate that there are downside risks to growth in the medium-term? A: Over the last year, one has seen a bit more instability in the global economy and that is what this survey is recognising that look there is greater uncertainty in the global economy. It does impact us naturally. Export growth had been tepid; actually it is negative about 16-17 percent, so therefore I think it is the recognition of that fact that the view taken is a bit more conservative this time than in the previous survey. Q: Let me now ask you as far as the path to fiscal consolidation is concerned and the survey says for credibility and optimality we argue for adhering to the 3.5 percent fiscal deficit target for FY17. There seems to be a divided house on whether or not 3.5 percent should be maintained or should there be a little bit of a slip to try and boost the economy at this point in time. Do you believe that the survey has articulated the position of the government and this is what it ought to be, 3.5 percent must be sacrosanct? A: First of all, not a divided house, it is a healthy debate within the government and I think that is a good thing to happen and that has happened on this very important issue. So I see that as a positive.Q: Would you like him to keep this sacrosanct? A: My argument has been that we adopted the fiscal consolidation plan last year and therefore once we have done it, we try to stick to it. At the end of the day it is the call of the Finance Minister. Q: Speaking of the call of the Finance Minister and as you pointed out there is a lot of debate and consultation within the government, the survey also says that there is a need to review the medium-term fiscal term framework. The view also seems to be that a consolidated state plus centre fiscal deficit is much more meaningful and that is what we should move to. The secretaries panel that submitted its report to the Prime Minister at the end of last year did seem to suggest that we should move away from the way that we go about projecting an absolute number on the fiscal deficit, it should be linked to revenue collection. Where do you stand on this and what kind of review would you like to see? What would this mean? A: This is again a part of thinking, process itself that we should look at, the consolidated fiscal deficit matters as well and as well as the central government so that is what the market would also worry about. So, it is an issue we need to discuss further. I don't have a clear position on it, which way we should go. However, it is something we have to discuss. Q: Do you believe that we should move away from an absolute number, move to perhaps a range as far as the fiscal deficit is concerned? That has been the recommendations for instance of the former RBI Governor who heads the expenditure management commission as well? A: It is a possibility and we should not rule things out. There is certainly a lot of merit in saying that let us define this in terms of a range as long as the range is not too wide. When you get to the range and if you define the range very widely then that range become meaningless. So, given that fact, if sufficiently narrow range is defined, that should be okay. However, just my tentative answer to you but we need to discuss what the implications are, how the market is going to view that, how the rating agencies are going to view that. So, all those sectors need to be considered. Q: One of the other things that the survey talks about is the recognition, recap, resolution and reform needed for the comprehensive resolution of the twin balance sheet challenge of public sector banks as well as some corporate houses. Now this has again been an issue of debate and discussion. We understand that the bank recap plan is likely to be hiked in the Budget from current allocation of Rs 25,000 crore to perhaps between Rs 30,000 crore and Rs 35,000 crore. The survey also seems to be pitching for that. What would your point of view be on recognition, recap and resolution that the survey has talked about? A: Survey talks about multiplicity of instruments. These are four instruments that the survey is talking about including also that where at the companies or the projects can be revived, revive those, where they cannot be revived, we ought to actually then cash in on the assets. So, it talks about multiplicity for instruments. I have always believed in that. This is a very serious and very large problem which you cannot really solve with a single instrument. Q: You cannot solve it with a single instrument, but there also seems to be a divided house on whether the approach of the Reserve Bank to try and address this issue at this point in time. The intent is right, but whether the approach is necessarily appropriate, will it lead to more pain for the banks or does it need to be addressed in the surgical manner with which the Reserve Bank is going at it today? Your thoughts. A: I think we need to move on these various fronts and Reserve Bank has moved on one front. We have to also push on the other fronts. So, this goes back to my argument about the multiplicity of instruments. We have to keep pushing, this is a gigantic problem. And it is one that to some degree is holding the economy back because if the bank and credit is like the life blood of the economy. And if credit is not flowing properly as it is not because of the very poor health of so many other banks, then that is a problem. So, you have got to tackle it. Q: Is a bad bank the preferred route? Is that the consideration at the highest levels of government? A: There is certainly, either bad bank or some sort of asset reconstruction companies (ARC).Q: I believe now at the 100 percent foreign direct investment (FDI) could be through the automatic route that could be done by way of the Budget. Do you think that would be a meaningful step? 100 percent into ARC?A: I think that is a good step. We should certainly allow that. But, going back to your question on ARCs versus having a bad bank or not, these are also options which we do have to consider as possibilities. These are complicated. Both the ARC and bad bank options are not so straightforward. And neither of those two also solves the other problem how you solve the moral hazard for the bank, for this problem to re-emerge after it has been solved.So, that also has to be tackled and the economic survey talks about that as well.Q: You have been spearheading a lot of these conversations and you are involved with the discussions at the Prime Minister's office and of course, with other ministries as well. What is the thinking on this front? You are absolutely right, it is complicated, there is the issue of moral hazard, it is not one size fits all approach that one can adopt on these matters, but what seems to be the preferred thinking at this point of time - bad bank, ARC, NIIF or a combination of all three?A: I am afraid you will have to wait for this till Monday.Q: So, we are going to see something on this front on Monday?A: I am waiting like you. I will be waiting on Monday also to find out what the Finance Ministry in the end decides and the Prime Minister of course.Q: So, we are expecting an announcement on this front. Since you were talking about credit and credit growth, this also leads me to then ask you if 3.5 percent is met, which seems to be the case, at this point in time, a rate cut by the Reserve Bank?A: I have always pitched for it.Q: So, you expect that to happen?A: Expect or not expect, that is a tough call, but do I wish for it? Yes.Q: Bolster the case, because the governor has said it is up to the government to stick to the path of fiscal consolidation and if the government sticks to the path of fiscal consolidation, the ball is right back in his court, so bolsters the case for a rate cut?A: Of course it does. That there is no doubt._PAGEBREAK_Q: How much?A: I still think there is considerable room for a rate cut. Let me not say how much, but as a minimal, I would go with 50 basis points at least to start with. But, perhaps, not the end of the matter there.Q: So, you are saying 50 basis points to start with and it would not end there at least as far as this calendar year or financial year?A: I think the economy really needs a little bit more, because once the fiscal has delivered, as you are suggesting on 3.5 percent, if the government really on the fiscal side, stays course, that is a major commitment by the government. And that commitment then can actually give the Reserve Bank of India some space to think through.Q: Let me ask you about two problem areas. The survey articulates or spells out both of them. One of course is agriculture and we have spoken about the distress that has been seen in the rural economy, specifically in the agriculture sector, growth of course has been extremely tepid on account of what we have seen the successive poor monsoons. It is below the average of the last 10 years as well in the agriculture sector. Do you believe that Budget 2016 must bat for to revive the rural economy and revive the agriculture sector. Should this be the number one priority for the government?A: Absolutely. That is also the priority of the Prime Minister. We all know half of the workforce is in agriculture and almost two thirds to about 70 percent of the population depends directly or indirectly on agriculture. Therefore for any government agriculture is always a very high priority. I expect that to be so. I think the discussions on this one I can say that the Prime Minister has been very clear that we need to do the all around revival. We did the taskforce on agricultural development.Q: What would the short term measures be that you would like the government to prioritise? The medium and long term of course interlinking rivers and so on and so forth are the long term ideas. However in the short term for immediate relief what is it that the government should focus on?A: One area where we can actually move quickly is on irrigation. Currently 45 percent of the cultivated land is irrigated. It can be much more because there are lot of projects which actually got completed but the last mile connectivity the so called command area development was never done. So, that is something we can complete within a year. So, on many of these projects one can do that. There are other ways also to bring water for irrigation.Q: So higher allocation for the irrigation scheme that the government has already announced?A: There is Pradhan Mantri Krishi Sinchai Yojana I think there should be allocations for that, substantial hike over what we had in last year. However we will also need to go in much more systematically than we have done in the past. This whole approach where we would sort of complete the scheme 80-90 percent, leave out the last mile connectivity, I think that needs to really change.So, the way implementation happens needs to be fixed as well.Q: The other big problem area and we discussed this very briefly is on the export front and while the argument is being given on oil and so on and so forth the problem is deep rooted and it is across the services, exports as well at this point in time. We really haven't seen an acknowledgement on the part of the government on what it intends to do to try and revive the export sector. Do you believe that this is a problem that the government needs to attack much more aggressively?A: To some degree this is a challenge for the central bank once again because exchange rate tends to be at the heart of these things. Our exchange rates, the rupee has largely appreciated in real terms across a wide range of currencies of our trading partners, partners to whom we export. Even with respect to the United States you might think that the exchange rate has depreciated but once you correct it for inflation our higher inflation relative to the US high inflation, pretty much the real exchange rate has been flat. So, that is one area where we would hopefully see some action.Q: The survey talks about the fact that we must prepare ourselves for major currency readjustment within the Asia region and what should the Indian response then be is the question that is being asked. So, what to your mind should be the appropriate response?A: In the end as I said this is an issue for the central bank to resolve. I am just pointing to one of the problems that reflects the exports. The other one of course is export markets themselves. And to the extent that lot of our exports went to the Middle East and that is where the oil earnings have declined and the demand has crashed for many of the products that went into the middle east. So, that is also a source about which we ourselves cannot do a whole lot in the direct sort of way because we being very large importer of oil at the other end we have benefitted from that crash in the price of oil.Q: But do you believe that the government is being tarred in its response to the crisis in the export sector?A: As I said if there is a short term response it will have to come from the central bank. But the government can really only respond through measures that are fiscal in nature and they take a little while to have the impact. So, Make in India program clearly is a program that addresses the long term scenario for exports but that is not the immediate kind of response.Q: Since we are talking about Make in India and linked to that is of course the Goods and Services Tax (GST) and the survey also talks about how the GST - there is disappointment on the fact that we haven't seen that go through and the GST roll out will be imperative to get back to the 8 percent plus sort of growth rate. We don't know what the fate of the bill will be in parliament, at least in this session post recess even. But we are likely to see the government move to align itself to the GST regime. For instance the service tax rate could perhaps move higher to 16 percent to the eventual GST rate. In your view would that curb growth in the short term because there is no clarity on the roll out as far as the GST is concerned?A: No, why should that curb growth. Actually it should help growth.Q: It will help the government with revenues but it is certainly not going to be good news for consumers.A: No, but it is overall a good news that at least the central government, it is a signal that the central government is moving towards the GST. It is a signal that it expects therefore the remaining problem to be resolved.Q: But we have been expecting that for years.A: No, the expectation has not been strong enough for the central government to begin its realigning with its own tax policy towards the GST. So, if it actually does start realigning its tax policy towards GST then this is a strong signal that it is going to get going. Also remember it would be wrong to suggest that there has been no progress towards getting to the GST. Considerable progress has happened.Q: It is casualty of politics.A: Yes, and now anyway the only thing that is separating the two sides is whether you put the cap in your constitution or not. So, this is not too far.Q: We are hopeful that there will be a breakthrough on that front but let me also then ask you in terms of - and of course - linked to the whole issue as far as taxes etc is concerned. At this point in time the need to try and stimulate growth especially at the hands of the consumer. So, we understand that the Budget may re-jig the personal income tax slab, may give more to the consumer by way of enhancing the rebates linked to home loans so on and so forth. Do you believe that that is the need of the hour today to try and get consumption moving, to try and get growth back?A: As long as we can do this within the fiscal targets wherever it ultimately comes to a rest in the Budget yes, but the bigger need I see is to get the capex cycle moving even faster. Some progress has been made from the road projects, from the railway projects in the last year. You have to continue that and it is really the capital expenditure which have to be boosted. There have to be priority number one, because this also boosts demand, and this also boosts investment. So, on both fronts and hopefully if we also then stay within our fiscal target that would hopefully leave a bit more for the private sector to be able to borrow from the market and therefore invest. So, this may help the private sector investment get better as well. So, I am expecting of course that in 2016-17 relative to 2015-16 we would also see private investment picking up a bit better.Q: I also want to talk to you about two schemes that I know that the NITI Aayog has also been working on, one is the universal healthcare scheme which the government we understand is likely to announce in this Budget. I am given to understand that it could be to the tune of about Rs 11000 crore, that could be the allocation which will be split between the centre and the states. Should we gear ourselves up for a healthcare scheme, a mega healthcare scheme and the inputs that the NITI Aayog has made?A: I can't predict anything.Q: A healthcare cess you believe is a right approach which is also one of the funding ideas that has been put on the table?A: It is one of the possibilities but normally if one can really do it from the general Budget that is preferred but on specific ideas you really want to nail it down then you go for a cess.Q: There are some concerns though in the market on what this is actually going to mean for the private healthcare sector and so on and so forth. I understand that hospitals that are empanelled with the government will be made a part of this scheme. Any thoughts, I am not asking you to tell us what the Budget is going to say but what are the ideas that have been presented by the NITI Aayog on this particular matter?A: The details in any case will not be worked out in the Budget, how exactly this scheme will be implemented if it is launched. That is a part of the ongoing discussion, that will continue. I would expect that the empanelment process will include both the government hospitals and the private hospitals. In today's world you have got to have them both. It is essential also for the efficiency of the public sector units or public sector hospitals in this case that they compete with the private sector hospitals.Q: If I were to ask you about the specific areas that you believe the government needs to focus on at this point in time to try and ensure that at least on the domestic front we have our engines of growth revving up, what would those 3 or 4 things be that you would like to prioritise?A: I think the survey does a pretty good job of outlining many of these things. I have just seen the chapter outline of the first volume of the survey and from it my understanding is that it really brings in lots of different labour law reform areas, in the subsidies area where he talks about rejiging subsidies so that they go to the poor and not to the rich. So, in 2008 I wrote this big book, India the Emerging Giant where I had written out many of these reform ideas and I am totally pleased many of them have found their way into the economic survey.Just one point connecting back to our last interview. Recall that I had said that by the end of this fiscal year, in the last quarter we will be touching 8 percent growth. So, growth in Q4 the advance estimates is 7.8 percent.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
