Automobiles and two-wheelers are seeing muted sales not because of a low-demand situation afflicting the sector, but because there is a supply-side issue about chips, principal economic advisor to the government Sanjeev Sanyal told Outlook Business. He also said that the GDP growth projection of more than eight per cent made in the Economic Survey and 11 per cent in the budget are achievable going forward if there are no major disruptions. He argues that the government has fixed processes to help businesses and deregulated the economy in a major way, especially in the Covid-19 years. When all this is seen with the infrastructure push the government has been making in the last few years, the economy should enter an extended growth phase, as China did earlier, he says.
Here are the edited excerpts:
For FY23, the Economic Survey pegged growth at more than eight per cent, and the union budget pegged the nominal GDP growth of 11.1 per cent. How achievable are these projections?
Our assessment is more conservative than what the IMF [International Monetary Fund], World Bank, etc. think. I am very happy to be proved wrong. But, when you do budgeting, I think you need to be a little conservative. As far as our growth focus is concerned, my sense is that there will be some impact of the withdrawal of liquidity from the world and interest rates going up. We have allowed for that [in our estimates].
Also, energy prices are elevated, although ours is $70-75 range. Even that is quite high. I do not think that we will be in $90 for a prolonged period of time because there will be some impact of the withdrawal of liquidity. Nevertheless, it will fall and even though we have allowed for supply-side problems in chips and other things to resolve over the course of the year, the fact is that for much of the year it is disruptive. All of this put together, I think eight to eight-and-a-half per cent is a decent growth rate.
An important aspect of that is also our view that in the next year contact-based services will be open. We have vaccinated everybody pretty much twice. Boosters are also getting done. I think it is not unfair to expect that the next wave, should there be one, will not be particularly disruptive. Of course, I can be proved wrong. I am not a health expert. But, I think it is a reasonable view that things will open up. At some point, you have got to allow tourism, universities and all that to function. So, given that hopefully there are no disruptions going forward, by and large, our infrastructure push is working its way through and there are second-order impacts of some of the credit coming back after our banks are now clean, some parts of the private sector will hopefully come back and begin investing again. All of that suggests eight to eight-and-a-half per cent growth rate is very doable.
Is this sustainable in the long run? Well, I am a complex systems guy. I anyway do not believe in something called the trajectory of growth or the new normal. There is no such thing as a new normal in my worldview. Given this caveat, should we get an open space somewhere where inflation is reasonable and there is no shock, just like you have periods of where all kinds of shocks come up, we will also occasionally get to periods when you may get the open road. Should we get open roads, as we did in the early 2000s, I think we should be able to sustain very high growth rates. But again, I cannot predict geopolitical events in east Asia or Europe or other parts.
But, I think, there are many things that will support this [projected growth]. First of all, I think people have underestimated the amount of structural reform we have done in the last nine years, whether it is difficult things like the GST [goods and services tax] or the insolvency and bankruptcy code and the enormous amount of deregulation we have done in just last two years during Covid-19. There are very few sectors that are regulated in that sense. Even space and defence have been opened up. This is a pretty open economy. And, similarly, an unbelievable amount of process reforms has got done, whether it is getting a passport or other kinds of government services. It is not perfect, but nobody can claim that it is what it used to be in the old days. We are fixing processes like the voluntary closure of companies. In the Economic Survey, we mentioned a whole bunch of process reforms that have either been done or we are proposing them, like in patents. I think the supply side is much more flexible and cleaned up than it used to be.
Second, we have been doing the infrastructure push now for some years. We are going to accelerate it. At some point in time, the sheer weight of better infrastructure will also show. The fact is that highways across the country are genuinely better now. You can take a flight to strange parts of the country and you will find a decent airport when you land.
So one aspect is [fixing] the processes, deregulation, privatization and getting rid of legacy issues, like retrospective tax, which all are done. Then, we are putting physical infrastructure into place. There is a genuine increase in people taking risks, as the start-up culture shows. All these are big structural changes, which surely will have a positive impact eventually.
Now, the question is, do we get a clear road somewhere where that can be pushed? I cannot predict it. But, I think at some point, we will get it, and then you will see a few years of very high growth, the sort of rates China achieved in its high-growth phase. But, I cannot predict exactly when all of it will come together.
The Economic Survey also talks about capital expenditure in a big way. Even the budget has been all about the Capex push. One thing is that the private sector investment has been muted even from before the pandemic. While the government Capex is on track, are you concerned about private sector investment not picking up?
Government Capex being important is a good thing, because, during uncertain times, that is what governments are supposed to do. A lot of great infrastructure in the West was also built under these kinds of things. The rebuilding of infrastructure in Europe after World War II was about government Capex. That was true of Japan and many other places. Government Capex building the infrastructure as a way of growth is nothing new.
Secondly, quite apart from the demand aspects of it, simply creating infrastructure is a good thing in its own right. Why are rich parts of the world richer? Or, even inside the country, why are some parts of the country richer than others? Simply because the richer people have access to better infrastructure. That is all the reason. If your electricity supply is not stable, and you do not have decent highways, you have no way of going in and out of airports. Your quality of life and productivity are going to be lower. Simply putting good infrastructure, particularly in parts of eastern Uttar Pradesh, northeast Bihar and so on, in itself will radically improve the quality of life and investment opportunities. You can certainly now set up a factory in places you could not before. Consequently, that in itself is crowding in, not just in the narrow sense that I do some investing so that I increase the demand for certain products and therefore somebody begins to invest and produce. That is the first round. The real kicker from investment is that I create a better city or better highways and it creates the multiplier effects of doing all kinds of things. That is the real crux of it.
So you are not particularly concerned about the private sector investment being muted at the moment?
Under the circumstances of uncertainty, you will have [muted private investments]. There were two reasons on why it was already slowing prior to the Covid-19 crisis. One was that the banking system was being cleaned. There were no resources to do the investing. Two, there was a lot of overhang of excess capacity. Now, banks are genuinely cleaned up. They are much better capitalised. The capital markets have allowed companies to raise a lot of risk capital that can be leveraged. The financing part of it is sorted.
The other thing is that there are some areas where the capacity utilisation is low, but even in those areas, I discovered that in almost every case it is not a demand problem. In some parts, like automobiles and two-wheelers, the problem is not that people do not want to buy these things. The problem is that there are no chips. It is not a demand problem. Similarly, it is not like people do not want to go on holiday. You are not allowing hotels to function. The moment you remove the supply-side bottlenecks, I think you will find a lot of investment coming back.
The finance minister has reiterated her commitment to bringing down the fiscal deficit in her budget speech. Given the situation that we are in right now and the uncertainties, how relevant do you think is the debate around fiscal consolidation versus fiscal expansion?
It is a relevant debate but it is a trade-off. You have to make a trade-off between the fact that you have to provide some support to the economy. On the other hand, you cannot keep running fiscal deficits forever because obviously, that is not sustainable. It increases borrowing costs and causes inflation. It causes macro-economic distortions of various types. The key point is to signal that we do understand that there is a trade-off and over time we will consolidate. That is the sensible thing to do and that is also what we are doing. Last year [2020-21], we had gone up to nine per cent or so. It had gone up sharply. We then brought it down to 6.9 per cent. We will now bring it down to 6.5 per cent. And in the next few years, we will bring it down to 4.5 per cent. It is a clear route. We think removing the fiscal impulse by 0.5 per cent every year is something that the system can bear. At the same time, we are not doing it suddenly.
Experts have said that the revenue and divestment targets in this year’s budget are conservative. Do you agree with this assessment?
We have certainly been somewhat conservative, but do take into account that excise tax has been cut. But, even after taking that into account, some people may think we are being conservative, which may be the case. We are a conservative government. I would much rather under-promise and over-deliver. We did that last year too.