India will see a better economic growth this year than last but to what extent would be the right question to ask, says Bibek Debroy. He expects a percentage point increment to GDP growth, but feels that is not enough.
Debroy is fast emerging as one of the key economists on whom the new government relies on for policy advice. A professor at the Centre for Policy Research since 2007; Dr Debroy is an alumnus of Presidency College Calcutta, Delhi School of Economics and Trinity College, Cambridge.
Debroy was the economist the new government turned to when it wanted to revitalise the national transporter. He heads a high-level committee to restructure Indian railways, which has just submitted its interim report. Debroy has also been appointed as Member of the NITI Aayog, (The National Institution for Transforming India), which is the replacement of Planning Commission, and will act as a think-tank to the government of India. He is man one needs to watch to know what the government will do on key issues.
In an interview to CNBC-TV18, Debroy said he sees growth on the back of unclogging of projects, but feels strong signs of recovery in investments and agricultural growth are still missing.
Below is the transcript of Bibek Debroy's interview with Latha Venkatesh on CNBC-TV18.
Q: Before we get to the various issues related to the railways and the NITI Aayog, your word on the economy itself. Will growth this year be at all better than last year? If yes, by how much? I am asking you because the ongoing corporate result season is not very inspiring.
A: The answer is yes but I think the right question to ask is by what extent has the growth recovery happened because partly implicit in your question is a value judgement about what is significant. I am not going to use specific gross domestic product (GDP) numbers because that depends on whether using the old series or the new series but I think the increment to GDP growth will be of the order of 1 percent over last year. Is that enough? Of course not.
Q: One percentage point better than last year is better than what the Reserve Bank of India (RBI) or most other economists are forecasting, where do you see this growth, does it start in mining, in electricity, in manufacturing, services at least agriculture seems to be a wash out?
A: Agriculture looks bad but one of the problems with the sectoral composition is because the new series has become an apple versus oranges comparison. So it is a bit difficult to pin it down in terms of our standard understanding of the sectors.
Let me respond to it a little bit differently not agriculture certainly by the way -- we still do not have any strong robust evidence of investments having recovered. Essentially what has happened is a lot of projects particularly road construction as the most obvious ones -- lot of projects, which were stuck in the pipeline they have got unclogged. So the growth is primarily happening because of the unclogging. Hopefully the new investments will begin to happen but I will say that one has to wait for the data.
Q: As I said that the ongoing corporate result season is still looking very bleak, so according to you which might be the quarter when we will see the inflection in growth in the first half or do we have to wait until after the rains in the second half?
A: I think it can happen early. Part of my problem as it is everyone else’s problem is that we still don’t have a handle on this new GDP series. It is not robust enough. So we don’t have a fix on that. Having said that, with this new GDP series, it would sound very strange with the old GDP series but I would say with this new GDP series, there are some elements of manufacturing and some elements of services.
Q: India Inc frequently blames the low growth on high interest rates. Where do you stand on this issue, are interest rates the biggest or even a big hurdle to growth?
A: Firstly, I should say that all central banks are conservative. They are much more conservative than you and I are and that is their nature. Secondly, I think interest rates need to be cut, I also think that the interest rate which is a price or a cost is not as important as is commonly made out to be. It is a bit of a red herring. Meaning, it does not seem to be the case that people are willing to invest and cost is becoming a problem. There are problems with people not willing to invest, there are problems with people who are willing to invest, not getting access to the foreigner credit market.
Q: Speaking of inflation, one emerging red flag is the price of crude, they have inched up and now they have risen almost 25 percent from their 2015 lows, would you worry that this can endanger our fiscal calculations or whether they may even endanger the growth of inflation?
A: There are different ways to respond to the crude figure. Firstly, the crude figure was some kind of correction was almost certain, the prices were simply too low to last. One historical angle of a crude price hike has been the impact it has on the balance of payments. That is no longer that important anymore, India is what it used to be several decades ago. So it is not the balance of payments angle, the angle is to what extent do you allow that domestic transmission to happen in terms of hikes in prices of petroleum products, particularly liquefied petroleum gas (LPG) and kerosene, and secondly as you rightly said the impact it has on the deficit. So I would say that the signs are that there is going to be some pressure on both these counts.
Q: Let me come to the more pressing issue now of farm distress. According to you what are the triggers for this recent agrarian crisis and the spate of suicides?
A: You are right that the NITI Aayog website isn't up. It will soon be up and we have an internal workforce on agriculture and what needs to be done to reform Indian agriculture. However, the deliberations of that are not up. Agriculture is a Pandora’s box of all kinds of problems depends on how you look at it because there is a long list pending for several years of pending reforms.
Some of those have to do with expenditure, public expenditure as well as private expenditure by which I mean investments. One of the things that has happened is the investments are not happening both public and private. The second part of it is linked to controls over production control and distribution. We are taking about not only the output side, the Agricultural Produce Market Committee (APMC) and the Essential Commodities Act (ECA) but also the input sides and the composition of public expenditure. We are talking about diversification of agriculture. So there is a whole bag of problems and solutions.
Q: I agree farm distress is a many sided problem but according to you what are the hierarchy of the solutions, the top three solutions as it were?
A: In the hierarchy of solutions firstly one must realise that there is no real hierarchy of solutions for the very simple reason that agriculture in India is extremely heterogeneous. So, it is very dangerous to have an universal kind of template. What works for Punjab does not necessarily work for Kerala. What works for irrigated areas does not work for un-irrigated dry land areas. What works for large land holdings does not work for small land holdings.
Having said that the essential issue is one of ensuring extension services, recognising that many of the land holdings are subsistence level, recognising that Indian agriculture has still not been opened up to the winds of change and liberalisation in all of its different dimensions.
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Q: Again I don't know if NITI Aayog has been asked but if you were asked what will be your key recommendation to the government? Is minimum support price (MSP) increase a key issue, is it a APMC reforms what should be the key steps?
A: Firstly as I said that there is a task force. The recommendations of the task force have not been implemented so I am reacting right now in my personal capacity. This is not a collective voice of NITI Aayog.
Having said that, competition yes but if we expect that the APMC act changes are like a magic wand, they aren't because there are a whole lot of things that have to be done on the supply side so one should not look for simple solutions.
Yes, I do believe that the APMC should go, does the APMC going in per se ensure that all of Indian agriculture is going to be reformed, of course not.
You mentioned the MSPs but the point about MSP is that the MSPs is that the MSPs are defacto procurement prices. They are not quite MSPs. Secondly, they are completely distort price allocation because they don't extend to every commodity. Ideally, the MSP should not be there. They are there; there is a compulsion that they be there because essentially agriculture profitability has been squeezed.
Q: Farm suicide is an issue on which one can't wait for reforms. Is there something that government can do to meliorate the situation in the near term and in the medium-term?
A: You are asking two questions in one because you began with the question of suicides and I think one needs to recognise why these suicides are happening. The suicides are happening obviously because framers have borrowed and are unable to repay. Who are the farmers who have borrowed? The farmers who have borrowed and this is reflected in the suicide are typically land holders, sometimes small land holders who have borrowed because they have commercialised, they have diversified and they have invested in farm machinery.
Now the moment you are commercializing, the moment you are diversifying, you are exposing yourself to risk and uncertainty. Once you do that unless you are granting me the opportunities and the instruments to reduce that risk or uncertainty, you are causing problems for me. What I am trying to flag is so far as this limited aspect is concerned, there is a question of introducing a proper insurance scheme, which doesn't exist for agriculture today.
So far as the broader thing is concerned and flowing from what you have just said about farmers distress, one of the things we need to look at is lease markets. We talked about land ownership earlier, but land ownership may be contentious, land lease markets are not. Similarly as a farmer, why should I have to buy a tractor? Why can't I open up the leasing market for tractors and encourage it. So there are whole lot of things that the government can do because some of these are state governments which enables essentially competition in various forms to come into agriculture and there is nothing wrong in that competition.
Q: What is the role of the NITI Aayog as you see it? Thanks to the Finance Commission there are not too many centrally sponsored schemes let for the Aayog to oversee. What exactly are the key functions or role of the NITI Aayog?
A: There are central schemes but so far as NITI Aayog is concerned there is e-book and hard copy that describes in detail what NITI Aayog’s mandate is except that because we don't have our website yet you will only find it on the Prime Minister’s Office (PMO) website or the Press Information Bureau (PIB) website.
Having said that, the NITI Aayog mandate has several different strands, so let me just pick on the one strand that you have mentioned. There are other strands also, I am just ignoring those for the moment. There is an existing basket of government schemes some of those are central sector. In the Budget they are written down as Central Assistance. There are centrally sponsored ones, there are also state level schemes and there will always be a room for public expenditure. Our job is to work with that existing basket, see whether they need to improved, see whether they need to be tweaked, see whether you need additional public expenditure program. So, one part of our existence is based on a review of the schemes but not the only one.
Q: Let me shift track now to some infrastructure issues, the railways. The big ten recommendations that you made are truly impressive but if you have to choose what could be the low hanging fruits from all these, what would they be?
A: I don’t think there is any low hanging fruit -- not low hanging fruit in the true sense of the term because the railways have come to such a pass because of decades of bad policy, bad planning, bad implementation, you cannot solve that overnight.
However, I would therefore define low hanging fruit in terms of introducing commercial accounting. Commercial accounting is low hanging fruit, it can be done very easily, the trouble of course is that the average urban passenger may not regard this as low hanging fruit but I regard this as low hanging fruit something that can be done very easily.
Q: Track congestion is a huge issue, it has reached a stage where even if we manufacture more coal or cement, track congestion doesn’t permit easy transportation of these bulk goods. How much do you think the government can increase by way of track kilometres this year?
A: It is very expensive to increase the number of track kilometres. I am not talking about things like the dedicated freight corridors, those are different otherwise the typical track cost anything between Rs 10 crore and Rs 15 crore per kilometre. Where is the money? There is a scarcity of resources, am I going to spend it on signalling, am I going to spend it on safety, am I going to build it on new tracks. So there are multiple demands for the same small basket of resources. So the simple answer is it is not that easy.
Q: In that case can you update us on the progress in the freight corridor, when may things decongest enough to make a material difference to freight movement in the country?
A: The freight corridor is slightly different because that is dedicated. The freight corridor is both, a threat and an opportunity particularly the western one and the reason I am saying it is a threat is because probably half of Indian railway’s freight business is likely to move to the freight corridor, which means that the lucrative freight business goes away from the railways. It is an opportunity because they will now freeze up capacity that the Indian railways need to be geared up to ensure that they use productively.
Q: What incremental benefits can we expect from the railways this year itself?
A: The incremental benefits that are happening are in the space of better passenger amenities and there are several of these that I can list. The reason passenger amenities are important is because they enable you to argue that now that you have got better amenities, please be prepared to pay higher fares. This is the visible part of it but the less visible part of it is the decentralisation at the level of the GMs that has happened, the recognition that you should not be introducing new trends so those kinds of things maybe less visible but I think they are extremely significant.
Q: Your committee has suggested ways through which the railways can raise money by spinning off their manufacturing and other non-core units into separate companies or SPVs which in turn can raise money on their books? Are any such moves already underway?
A: What we have submitted so far is an interim report. We have still not submitted a final report. The reason I am saying this is when we have a final report, we will have a complete detailed roadmap and time sequence as to how those reforms will happen. Our initial thoughts will be a 10-year process if not longer.
The kind of manufacturing hiving off that you are talking about would not come in the first year because there are several things that are preliminaries that have to be done. So I would say that something like that would come at the end of three years or four years. Right at the beginning would be other things.
Q: Any other recommendations of yours on which the government has moved or may move quickly?
A: One I mentioned, which was the switch to commercial accounting because we have mentioned social cost, today the honest answer is I don’t even know what the social costs are because the system is so very non-transparent. So number one would be commercial accounting and number two would be fixing the HR system by which I mean begin at the process of entry and thereby you break down the silos in the departments.
So these two HR and finance I would say are the key.
Q: One of your big recommendations was to see private trains plying, when do you think that might happen in India?
A: A lot of people have misunderstood our report. Private freight trains are already part of government policy. Private passenger trains are also already part of government policy. So we have not suggested anything new there. What we have flagged is despite that policy being there, there aren’t too many takers and there are several reasons why there aren’t too many takers not just the administered tariffs, you will not have too many takers until you have an independent regulator. In addition to what I said about HR and commercial accounting, I am very hopeful that we will soon have a truly independent regulator. Once you have that, many of the other things will begin to happen.
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