'Tax cuts won't...': Ex-CEA Arvind Subramanian says economic slowdown isn’t temporary, it's structural

Former Chief Economic Advisor (CEA) Arvind Subramanian has issued a stark warning on India's economic trajectory, saying that the slowdown is not temporary but structural and has been lingering for a long time. "Whether the economy is slowing down, the answer to this is absolutely yes. I think the question is whether the slowdown is cyclical, may be temporary or is it structural? Because that's the key diagnosis that one needs in order to think of what we need to do going forward, and the answer to that is in my view unambiguously it's not a short-term, temporary slowdown, it's a structural slowdown," Subramanian said in an interview with Karan Thapar for The Wire.

According to him, India's economy has been weak for a very long time, but this has been partially obscured by the post-pandemic recovery and headline growth figures that may not reflect underlying weaknesses. "We've had growth at whatever 7-8% and yet consumption has been at 3%, investment has been weak, exports have been weak, so how come if all the constituents of GDP are so weak, how come GDP itself is so high? But that's something we should just keep at the back of our mind. But more importantly, we should talk about the long-term slow down in weakness of the Indian economy," he said.

Subramanian dismissed the idea that fiscal interventions like tax cuts can stimulate demand, arguing that the real issue is weak employment, investment, and income growth. "Let me put it a bit starkly. I think consumption is down because growth and incomes are down, not the other way around, and so we need a policy to address long-term growth and job creation. That's the diagnosis and from that follows the prescription. Therefore, another corollary of that is — we should not be looking to the budget for quick fixes like - oh tax cuts because consumption is weak. Because that's not the problem. Consumption is weak because people have no income. Employment creation has been weak. So we need to find long-term measures that improve the economy, boost growth, provide more jobs, then consumption will come back," he explained.

Subramanian also challenged the common view that weak domestic demand is the main reason behind sluggish private investment, pointing to broader policy concerns and a declining share of foreign direct investment (FDI). He said people focus excessively on domestic consumption and demand. "But the obvious question is there's infinite foreign demand by way of exports — why aren't we doing well on exports? And so part of the reason I think investment has been weak is because of the broader policy environment that makes investors, domestic and foreign, less willing to invest," he said.

He stressed that policy uncertainty and economic risks are deterring both domestic and foreign investors, which has led to declining private investment and slowing job creation. "The reassurance to investors that they will not face excessive risks in the economy — that I think is the core of why foreign direct investment has been declining and private investment has been weak," he added.

Subramanian's diagnosis contrasts sharply with the International Monetary Fund (IMF), whose Deputy Managing Director Gita Gopinath recently called the slowdown "temporary." "We see it as a temporary thing. There have been some delays in implementing some of the public infrastructure projects, but we see that picking up. We do continue to see strength in rural consumption," she said while speaking to Business Today Executive Director Rahul Kanwal on January 21.

Despite India's GDP growth slowing to 5.4% in the July-September quarter, Gopinath projected that India would still achieve 6.5% growth for the fiscal year and expects recovery.