The stronger rupee is a big villain in the exports story, said leading economist and Niti Aayog vice-chairman Rajiv Kumar. In an interview to ET, he said the country’s exports have a huge cost and productivity differential with competitors and added that the economy may have bottomed out in July. Edited excerpts:
What is your assessment of the economic situation? There is this debate on whether the economy is facing a structural slowdown or it is a temporary blip.
I think the cyclical downturn started in the last two years of the UPA (United Progressive Alliance) government. Unlike in 2004, when the UPA inherited an economy on the upswing, NDA inherited an economy that was not only slowing but also in a terrible governance mess, paralysis (as nothing was happening) and there was breakdown of accountability and so on. That downward slide I think has continued.
It was further exacerbated, until last year, by a very turbulent global economy. This is a long-term structural slide in my view which got hit also, if you like, by the several things this government has done.
And I am saying several things and not just demonetisation and the GST (goods and services tax), which are not only big-time game changers, but also changing the rules of the game as to how investments will take place — not crony capitalism, not underhand deals, not quid pro quo.
You are trying to make things more transparent, then linking everything to Aadhaar, the whole gravy chain of leakages of subsidies… these are all governance reforms and most difficult to tackle.
The 1991 reforms were simple. Now you are touching the hearts of the behavioural aspect of the Indian economy. There is a massive churn here that has meant that the economic activity has taken a hit. The informal sector and the cash-dominant sector, small and medium enterprises have taken a hit. Then there are NPAs (non-performing assets), which are an inherited legacy.
There is a large number of issues here which have got compounded and produced this five- or six-quarter slide. Therefore, it is very wrong to attribute this to demonetisation. My take is, and I hope I am right, that this has bottomed out now. The lowest we have seen in July. Some of the high-frequency indicators have not moved very much upwards — civil aviation, automobile sales. Within automobiles, commercial vehicles have become positive. People buy commercial vehicles as capital goods. This is the first beginning of investment. I am told finally real estate is beginning to pick up, especially in tier-2 and tier-4 cities.
Jobs is a big issue…
Everyone agrees that it is the real issue. One way forward would be to take the principal issue of employment head on. Can it wait till growth recovers under normal circumstances? That’s the real issue. Suppose you don’t take any measures, the growth could take about two years for full recovery or three years. Is that not too long for our young people to get extremely restive and then the economy and the society may have to pay a bigger price —isn’t that worth avoiding? The question becomes what can feasibly be done to address the issue immediately.
Can something be done in the short term without compromising the long term?
If you could devise measures that would directly benefit employment, and not by handout, plus improve infrastructure, which will improve the quality of your supply response, and clean up banks. Let’s say if you could float bank recapitalisation bonds of whatever value required and after the needed surgery of mergers and closures and this will be below the line why wouldn’t I do.
Why would I only do PPP (public private participation) or hybrid equity or things like those in infrastructure? Why wouldn’t I do more EPC (engineering, procurement and construction). May be you can get foreigners, multilaterals to lend more for this.
Similarly, on the exports side, garment exports are really flagging. We are losing out to Bangladesh. Chinese textiles exports have declined for the first time in history. To take advantage of that, why would you not bring the number of employees to avail the EPFO (Employees’ Provident Fund Organisation) benefit to 100 from 300, add something more.
So, essentially subsidise labour costs unlike in the past when we were subsidising capital cost.
But there are worries over the fiscal deficit if any large spending measures are taken…
If this spending means your fiscal deficit goes from 3.2% of GDP to 3.4%, I don’t think it should matter so much. I have always maintained it is the revenue deficit which is far more important and you have already taken a large number of steps by plugging leakages by way of direct benefit transfers. If you are doing all that, why not feel confident?
If the US can pump in $700 billion after 2008, why can’t we? Why would you not simply say today our employment needs a kick, we need to push it up. Young people will not accept anything less. So do what you can.
The rupee is seen as a villain in the exports story.
It is a big villain. You have a huge cost and productivity differential with your competitors. How would you compensate for that if not through a depreciated currency? In a country where your business sector is so heavily geared towards the domestic market, the only way to turn this around is to have an incentive structure whereby they know that exports are always going to be profitable and the minimum condition for that is to ensure that your real effective exchange rate is never above 100. If you tell importers that your import costs are going to remain high, wouldn’t that lead to more import substitution on one hand and export promotion on the other? The reasoning is that imports are inelastic and weaker rupee will cause inflation. Imports are never inelastic.
The rupee is a major issue and we will have to do something about it. This is where I personally think that much more than even interest rate, the RBI is culpable on this. How will you increase exports without doing this?
There is a huge clamour for a 100 basis point cut in interest rates. What do you feel?
There is no need. If you want to do it, do it, otherwise don’t. Much more important is the lending rate of commercial banks. The lowest rate for a AAA company is 11%, for smaller ones it is 18%-20%. They get money at 6% (repo rate). Every bank is 8-10 percentage points over their SLR (statutory liquidity ratio) limit — Rakesh Mohan had called this lazy banking. Why should the department of financial services not crack the whip?
So, is privatisation of public banks the only solution?
Yes, that is the only solution. The government should amend the law and bring its stake down to 41% or at least to 49%. There is no other way. Before that you can, as was tried in Indradhanush, really reinforce bank boards.
What about NPAs? How does the government deal with them?
The government should have drawn a line in July 2014 under all the NPAs the government had inherited. All those loans, the punch bowl, was out there in the last years of the UPA. The entire NPA mess is an inherited mess. It was then compounded by (former RBI governor) Raghuram Rajan saying “I want to do a 360-degree evaluation and analysis”.
I think in a sovereign banking system you could have been easier on the projects and NPAs. Also, a large number of these projects became bad because of non-payment or delayed payment by the government.