RSS old-timer and BJP's National Spokesperson on Economic Affairs, Gopal Krishna Agarwal, discusses the state of the economy with Business Today's Anilesh S. Mahajan. He also talks about the agenda for the next government. Edited excerpts:
Q: There is a sense that the country is getting caught into the middle-income trap. GDP growth is driven by consumption of top 10 million individuals. One may call it a by-product of rural distress or growing disparity between the rich and the poor. What is the thinking in the BJP and the RSS on this?
A: In the last five years, the NDA government has tried to build an effective delivery mechanism, especially for those in the second half of the pyramid. This includes direct benefit transfer, improving access to energy/healthcare and creation of assets like affordable homes, toilets and other infrastructure. Public spending in rural areas has been enhanced and focused delivery ensured. Although the schemes for the 115 aspirational districts were announced in the last six months of the government, they will be the core of the next government's agenda. This is a push model. District collectors have been made responsible for delivery of seven schemes - Ujjwala, Ujala, Mudra, Ayushman Bharat, Awas Yojna, et al.
There is a need to accelerate growth. Poverty - both in urban and rural sectors - is a big challenge for any government. We have been successful in reducing poverty but it has to be brought down to single digits quickly. There has been some growth in the size of the aspirational middle class which not only wants growth but also opportunities for gainful employment. The bottom half of the pyramid is also looking for better living conditions. This middle class is pushing consumption demand.
Meanwhile, macroeconomic indicators are quite healthy. Inflation is under control. Fiscal and current account deficit are under check and FDI flow is healthy. So is the GDP growth rate. The challenge for the new government will be to develop healthy demand and ensure demand-oriented growth. The new government must ensure that linkages not only lead to more economic activity but also reduce inefficiencies and wastages, for example in food. More investments in this segment will improve the quality of the produce. The processing units will cut down farm-gate wastage and create more opportunities in the rural sector. We need to change our mindset from deficit to surplus agriculture economy.
Q: In the last two years, the NDA regime has faced severe criticism on job creation and lack of employment opportunities. The bottom half of the pyramid is the worst affected. What can be done to improve the situation?
A: Employment is an important catalyst for economic growth. But it's unfair to expect the government to provide jobs to all. It cannot. The most effective way is entrepreneurship and self-employment. For most effect, the MSME sector has to improve. It needs handholding for access to cheaper capital, easier compliance, and above all, the demand cycle to come back. Investments are directly proportional to demand. For this, there has to be a low interest rate-oriented economy. Lowering of interest rates and availability of liquidity will create more avenues for demand. More liquidity in hands of middle class and farmers is critical for consumption-driven demand.
Q: You talked about a lower real interest rate-oriented economy. However, in the last five years, fiscal and monetary policy makers have been at loggerheads. The RBI's Monetary Policy Committee might have its own problems, but it still lowered the repo rate, though banks were unable to transmit the benefits to borrowers. Do you think the new government might have to implement structural reforms for a smoother rate transmission?
A: Most mainstream economists, bankers and corporate houses have underlined the high real interest rate issue. Until we reduce the rate of interest, our economy and industry cannot grow. This will not happen without some structural changes. The cost component of banks comprises cost of deposits and the risk premium. Fixed interest rate saving schemes such as Post Office Deposits, PPF and EPF also determine cost of deposits for banking institutions. The NDA government tried to rationalise rates on small saving schemes. Central and state government borrowings have a bearing on deposit rates. The government controlled its debt by maintaining fiscal deficit and discipline. With rising GDP, there will be space for further borrowing without disturbing the fiscal deficit.
The second critical component of the lending rate is the risk premium determined by the level of NPAs and stressed assets on the balance sheet. The NDA regime dealt with these NPAs with determination and reforms like IBC helped clean up the banking system. The banks too underwent cleansing via prompt corrective action or PCA. Out of the 11 public sector banks put under the PCA framework, five are already out. Bank mergers will strengthen their books. This is work in progress and we expect more in the next few years. Above all, this will cut down the risk premium. We are already seeing improvement in credit off-take. There is a concentrated effort to improve the private debt market. We need development financial institutions. The RBI agrees about the gap. This will require a further set of reforms. The real interest rate has came down in the last five years. The structural reforms by the NDA regime will not only make institutions stronger but also build foundations for our economy to move towards a lower real interest rate regime.
Q: Is there a timeline or blueprint on financial sector reforms?
A: History tells us that there is always a time lag between implementation and outcome. The government implemented most of the recommendations of the Financial Sector Legislative Reforms Commission. The Financial Resolution and Deposit Insurance (FRDI) Act requires more consensuses and is a work in progress. Financial institutions require mechanisms in case they fail. We have to put in place a resolution mechanism with regards to private sector financial institutions. If there is a problem of liquidation at any private financial institution, we don't have any transparent mechanism for resolution. Similarly, we need FRDI for financial institutions. The government is trying to resolve the complex issues at IL&FS. If it fails, what is the mechanism? Should taxpayer money be used to resolve the complexity of this Rs 90,000 crore failure? These are larger issues and need to be debated at greater length.
Q: The biggest investor in the economy remains the public exchequer or PSUs. There was a serious discussion in the first half of the NDA regime to improve the efficiency of public expenditure. We saw introduction of DBT, reformed PPP models and transparent rollout of projects. But, more reforms are needed, for example, centrally sponsored schemes and implementation of UDAY. How are the party and RSS insiders looking at it?
A: The government is one of the biggest borrowers, that too in a higher interest rate regime. We are committed to improving the efficiency of public expenditure. There is a firm view that if the government borrows and gives doles, there will be inflationary pressure on the economy. Simultaneously, this unproductive expenditure will deepen the fiscal deficit. The effective expenditure will ensure better control of inflation. If the government focusses on asset creation, the borrowing doesn't have the adverse impact. The NDA regime focussed on investments through asset creation rather than doles. This had a spiral impact on demand for steel, cement, et al.
Q: The biggest concern in the last five years has been the absence of private sector investments. Public sector funds fuelled growth and demand in the economy. For the next government, is there a scope for improving and reforming the effective market mobility, especially to attract private capital back?
A: Employment opportunities will not grow without manufacturing. Talk to any investor and they will tell you that the biggest factor for investment is demand. This will be followed by real interest rates, labour reforms and land. So, there are three market factors which affect manufacturing and mobility in the economy -land, labour and capital. The NDA regime has worked out the labour code, harmonising various laws. There are issues of free mobility, complexities of compliance, along with slower speed of formalisation of labour. The challenge for the new government will be to implement labour codes - guiding principles for states - to make life of labour as well as investors easier. The biggest challenge is to implement labour reforms in the informal sector. We have already discussed issues related to capital. Land remains a complex issue. There is significant progress in digitisation of land records in states along with land lease mechanisms. This is a work in progress.