'Some Data Errors Occur Because Of Note Ban, GST Shocks'

Krishnamurthy Subramanian, the new Chief Economic Advisor to the government, has assumed office just when the economy is facing multiple challenges. He talks to Business Today's Rajeev Dubey, Joe C Mathew and Dipak Mondal about the state of the economy.

Krishnamurthy Subramanian, Chief Economic Advisor to the government (Photograph by Reuben Singh) Krishnamurthy Subramanian, Chief Economic Advisor to the government (Photograph by Reuben Singh)

Your predecessor said CEA is a dream job. What has been your initial experience?

It is enjoyable. Possibly because I joined when Budget deliberations had just started.

Q: A series of US-trained professionals have had a tough time in India as they were seen as not knowing the Indian economic realities. Are you an exception?

A: The important difference is that I have been in India for the last 10 years. It is important to have the best education, be at the cutting edge of both wisdom and techniques involved in research. Good awareness of the realities here is a plus.

Q: What do you see as the biggest challenges before the economy right now?

A: Let's start with what has been achieved where we can also talk about what needs to be done. We have achieved GDP growth of 7.3 per cent, the highest in any large economy today, and that too with low inflation. That is important because in 2014, inflation was 10 per cent-plus, while average inflation in the last five years has been about 4.5 per cent. If the earlier rate had continued, essential commodities would have been 30-35 per cent costlier than they are today. So, purchasing power has increased.

Related to that is the interest cost. When the rate of interest is 8 per cent and inflation is 10 per cent, the real rate of interest is negative. This means lesser purchasing power. Instead, inflation is 4 per cent and interest rate is 7 per cent, so the real rate of interest is 3 per cent. The change in the real rate from -2 to +3 means a 5 per cent difference which, calculated over a five-year period, will tell you about the increase in the real purchasing power. The third thing is GST. It has reduced taxes on products. So, a family that spends, say, Rs 3,500 a month on household items is saving about Rs 350 a month.

Q: Is this the finding of a study?

A: It is based on the average reduction in tax rates. It has happened because of structural changes. Inflation did not fall by itself. We have a monetary policy framework that targets inflation. The other important reason was introduction of the Insolvency and Bankruptcy Code or IBC. The cost of capital, of which credit risk is a key component - which itself is driven by probability of default and recovery upon default - was very high before the IBC. Now, the fear of losing your company compels you to repay. The probability of default will come down. The fall in credit spread will reduce the cost of capital.

Q: So, what do we need to do next?

A: One is agriculture. In the agricultural sector, the key issue is not production, it is market access. Our population is growing at less than 1 per cent while agriculture production is growing at 3 per cent. This will mean dampened prices. That is the issue. Also, our markets are segmented, and so local agents have disproportionate influence there. The emphasis has to be on marketing and this is where technology and e-NAM-like systems to integrate markets have to play a role.

Q: Will the income transfer scheme make an impact?

A: It is very important. Before the Budget, some narratives focused on loan waivers. Recently, my paper examined the UPA debt waiver of 2008, and we found that a large extent of the benefits went to the non-deserving borrowers. Apparently, in 2008, yield was going up, production was going up and there wasn't that much distress. So, it passes that smell test. As a result, the benefit did not go to the deserving. Second, we found that when a borrower who does not deserve a waiver gets it, the loan performance deteriorates. Third, if there is a borrower in default, and a loan has been waived off, the loan officer on the ground is concerned about giving the person (fresh) credit. As a result, the farmer is adversely affected.

Also, minimum support prices, or MSPs, affect the cropping pattern. When we increased the MSP for rice and wheat significantly in 2014, rice and wheat production boomed, but production of pulses was very low. With income transfer, the farmer can choose to grow pulses or rice or wheat or cabbage.

Q: Is Rs 6,000 a substantial amount?

A: There are people who say Rs 6,000 a year is Rs 20 a day. As of 2015/16, the average income from farming was Rs 29,000, which means Rs 10,000 per four months. We are giving Rs 2,000, about 20 per cent of their income, which is not a trivial amount. But I will not as much emphasise the return the farmer is getting as much as the risk. In agriculture, the uncertainty, the risk the farmer faces, is humongous. Rs 30,000 is the average figure. A farmer could get Rs 2,000 in four months, Rs 30,000 in the next four months and Rs 58,000 in the next four months. The average hides this variability because of which there is a 59 per cent chance of him getting less than Rs 2,000 in a four-month period. This variability comes from crop failure, scanty rainfall, pest attack or price crash due to surfeit. A lot of commentators have not looked at this aspect. This assured return reduces risk significantly. Also, when a banker sees assured cash flow, it can lend. The effect is multiplied several times.

Q: But this is an additional support. Is the government planning to bring down MSP support?

A: If you compare with other countries, all our farmer support is not really supporting farming enough. Fundamentally, the risk-return trade-off is very adverse. It is important to continue removing supports that create distortions but it is also important to remember that it is a vulnerable section that creates enormous benefits.

Q: Do you think we need a transformation in the way data is collected and analysed? There is also a question of the reliability of the data?

A: Let's take GDP data. We are trying to measures economic activity through proxies to capture this as best as possible. Two unanticipated shocks happened - demonetisation and GST. Suppose you had a barometer to measure pressure. But if something is changing drastically, the existing barometer is not going to work very well. As a result, there will be errors, one way or the other. GST and demonetisation facilitated formalisation of the economy. So, some errors or volatility that you are seeing in the data would not have been there if those shocks had not happened.

Q: Does this also explain the jobs data?

A:  On jobs, we are not focussing on two important sets of narratives. One is that a large proportion of the workforce is in the unorganised sector. So, it is more important to focus on meaningful employment than on unemployment (rate) as such. A few basis point change in the unemployment rate is not really an important economic question to focus on. Two, whenever we talk about employment data, we ask where the jobs are, which is a supply side question. But the question to ask is also that if there are jobs, do we have the skilled people for those jobs, which is a demand side question?

Skilling doesn't happen overnight. A large proportion of youth skills itself to be in race for a government job until the age of 28. And in the name of skilling all you are doing is memorise facts from competition books. Most of them don't win the lottery of a government job and after 28 they have to reskill themselves for private jobs. Therefore, it is the skilling issue that is most important. For example, there is a huge shortage of data scientists. Firms are ready to pay a large amount of money but we do not have enough people there.

Q: Exports are an engine of growth. What's you view on the exports sector?

A: Our economic growth has happened primarily from the domestic (sector), which in some sense is good given the global trends. Globalisation and trade are going through tough times. As a result, the headwinds will remain. While we should focus on enhancing domestic productivity, we cannot ignore the headwinds that are there.

@rajeevdubey; joecmathew, dipak_journo