I wish to thank the BI and ADB for inviting me to speak at this important and timely seminar.

Transcription

1 Indonesia : BI- ADB Seminar Growth and Structural Reform in Asia Indian Perspective By Dr Ajay Chhibber, Visiting Distinguished Professor, National Institute of Public Finance and Policy and Former DG, Independent Evaluation Office ( Minister of State) Govt. of India I wish to thank the BI and ADB for inviting me to speak at this important and timely seminar. India is at an important turning point. India grew at 8 percent on average for a decade from , on the back of first stage reforms and liberalization - set in motion by the 1991 balance of payments crisis. India was less affected by the Asian financial crisis of and even the Global Financial Crisis of Since then it's growth slowed down to under 5 % in But with a revision in GDP series the economy is now reportedly growing at 7.5 %. There is no doubt that the economy's growth rate has bottomed out - but there are questions over the speed at which the economy is currently growing and therefore the effort needed to revive growth. To put this in perspective India' s GDP at over $2 trillion will be only $ 4-5 trillion by 2030 if the economy grows at 5 percent growth, but would reach $9-10 trillion by 2030 if the economy could grow at 8-9 % growth rate. This would make it the third largest economy in the world after China and the USA. So the stakes are very high. Can India generate the growth spurt through a combination of structural and administrative reform, improvement in the quality of expenditure, and fiscal devolution to unleash the economy's potential or will it remain stuck in a middle income trap. These are the key questions for India. Proposition 1. India's Macro- economic picture looks unbelievably good: but the real picture not so rosy : So today given the limited time I will organize my remarks into five major propositions : India is being hailed as the sweet spot in the world : fastest growing emerging economy 7.5 percent growth ( faster than China), declining inflation - down from 11% in 2012 to 5 %, low current account deficit - around 1.3 % of GDP, contained fiscal deficit - 3.5% of GDP. India's foreign exchange reserves at $350 bill ion. The IMF and others have hailed India as the sweet spot in the global economy.

2 India has achieved macro- economic stabilization: India's growth rate had declined sharply from 8-9 % to under 5 % in , while inflation reached double digits - just the opposite of what India wanted. Since then inflation has declined ( largely because of falling commodity prices and fiscal policy and food supply management). The GDP series was revised and suddenly the GDP growth was upped by about 2 % points : to %. But other indicators are not so rosy. Investment to GDP ratio has declined from a peak of 37% of GDP in to under 30% of GDP - with private corporate investment a major growth engine declining from 15 % of GDP to under 8% of GDP. Corporate profits are falling, freight traffic has fallen, credit demand is weak. Exports have fallen for 16 months in a row. So major engines of growth, private investment, public investment, exports weak. Indian growth now largely fueled by private consumption. India follows a fiscal responsibility act : but deviated last year from the target to delay fiscal adjustment to increase public investment by 0.4 % of GDP. The fiscal deficit in was upped from 3.5% of GDP to 3.9% of GDP. But even with the increase public investment at under 2% of GDP remains too low - even if add in investment by public enterprises it remains at around 4% of GDP compared to 10% of GDP in countries like China. India met the fiscal target of of 3.9% of GDP, but largely because of oil windfall of around 1% of GDP most of which was captured by government and not passed on to consumers. This coming year India kept to the fiscal responsibility act path with a fiscal deficit of 3.5 % but at some cost to public investment growth. India has adopted a new Monetary Policy regime by introducing : inflation targeting - on CPI. However, CPI and WPI have deviated widely. The CPI has come down but remains at 5-6 % but WPI has been negative for the past 16 months. The RBI reference rate at 6.75 % remains too high. RBI resistant to cut interest rates and monetary policy remains too tight. With high banking margins the real interest rates is almost percent if based on the WPI and around 6-7 % if based on the CPI. So overall macro picture not as good as the headline numbers suggest. Proposition 2 : India needs second generation factor market reforms : but all of them are blocked. The WSJ has tracked India 13 years after China and on several macro indicators : GDP, Investment, FDI - India tracked China very well until But can India maintain this catch-up without serious second generation factor market reforms and administrative reforms. Delays in land acquisition remains a major cost of doing business

3 A new Land acquisition law was passed by previous UPA government with support from the current ruling party just before last election in But the law would delay even further the time taken to acquire land and increases the cost of land acquisition with a cumbersome approval process. The current NDA government tried to revise the law after coming to power but could not do it as UPA in opposition blocked it in the upper House of Parliament where government does not enjoy a majority. India also has the most absurd labor laws : private companies above 100 workers cannot lay off workers. So India has very few companies in the size category above 100 workers. The government has decided to leave this controversial issue to the states. Several states - Rajasthan, Haryana, MP have started amending Labor laws but comprehensive reform is not on the cards. Financial Reform : the RBI would like to pursue financial reforms but overall moving very slowly. Big roadblock is that a very large share of the banking system remains in government hands with huge non performing loans (NPLs) but there appears no plan to privatize these. NPLs revealed around $60 billion - but could be as high as $200 billion ( close to 10% of GDP). Government does not have the funds to deal with this - has budgeted under $ 4 billion in current budget and is trying various half hearted measures : consolidation, mergers etc but no clear plan has emerged. If not careful - along with tight monetary policy India could slide into a banking crisis. Tax Reform : India 's tax GDP ratio at around 10 % of GDP is too low for a modern state. Many ways to raise this : by widening the tax base. But not easy to do as tax avoidance remains huge. General Services T ax (GST) was introduced to increase tax intake and to create a common market. GST stuck in parliament. It was originally a UPA idea which NDA governments ( including PM Modi when he was Chief Minister of Gujarat) opposed. Now the UPA in opposition does not allow the GST Bill to be passed in parliament. Proposition 3: India's ability to execute is hampered by a complicated legal and regulatory structure and lack of administrative reforms. India liberalized in 1991 and did away with industrial controls and opened up the economy. But now a complicated regulatory structure has mushroomed with out any clear plan. India has 36 regulators - 9 in the financial sector alone with 26 of them headed by ex- bureaucrats who regulate with a control mindset, not an industry growth mindset. Legal system goes back to colonial times. Going to court is a sign of giving up the case. Bankruptcy law very weak and a new law still doing the rounds. India moved up a notch on ease of doing business : competition among states has started and things could improve in the coming years - but still remain a huge challenge.

4 India should have done a huge administrative reform some 15 years after economic reforms - just as China did under Premier Zhu Rong Ji. An administrative reforms commission was set up- it came up with 1600 recommendations. But with the onset of the global economic crisis in no serious administrative reform was undertaken and was shelved. Without serious administrative reform implementation slows down hugely. Proposition 4 : India became a welfare state before it became a developed state. India has built up a large subsidy system over the years to help the poor as it attempts to reduce poverty. But the delivery of subsidies riddled with leakages and corruption. Subsidies were running at around 4% of GDP, much larger than public investment. It is now down to around 3% of GDP as fuel subsidies have been reduced ( India even has a modest carbon tax). But food and fuel subsidies remain large. Government has adopted the Unique identity card - Aadhar to help target better - which is good but politically it is difficult to handle sensitive subsidies like food and fertilizer. An expenditure commission was established but political compulsions make subsidies hard to tackle. A new Food security law now provides virtually free food to almost half the population and subsidised food to another one- third. Cash transfers are the obvious way out but India has been fighting the Bali trade accord instead of using it to shift out of cumbersome, costly and corrupt food distribution system to cash subsidies like most middle income countries are doing. Rationalisation of expenditure and greater focus on public service delivery remains a major challenge for India. Proposition 5 : Cooperative federalism with Fiscal devolution is underway but there are no plans to privatise public sector banks and companies India is a unitary state not a federal state. Most tax revenue are collected at the central level and then distributed to states and local governments. The finance commission recommended increasing the states share from 32 % to 42% which was accepted by the government. Huge fiscal devolution means India must move to consolidated public sector accounts and use the PSBR. The PSBR is above 6 % of GDP. So overall fiscal policy not as tight as is suggested by the central fiscal deficit of 3.5% of GDP. Competition among states is growing and states are competing to attract new investment which should help the ease of doing business. New fiscal resources will give development minded states more resources to create better enabling environment and help deliver better services - especially health, education to people. But whether all this happens remains to be seen. Public sector undertakings (PSU's ) account for 25% of GDP but government shows no sign of Privatization. State banks are about 50% of GDP. Modi government focused on better functioning of state owned companies and banks - not Privatisation. India has not had much experience with Privatisation except for brief episode of previous NDA

5 government which privatized several companies but with good outcomes. So India should privatise two thirds of these companies and convert those funds into public infrastructure to crowd-in more private investment. Then only will the government's slogan " maximum governance - minimum government " come true. Concluding remarks: India is surely changing : but at a slow pace. The new government appears to be trying but it's hard to get the kind of serious reform needed to get India to grow at 8-9 %. In the short term if there are problems externally such as in China or elsewhere, India would be affected. By itself a crisis may not be a bad thing as it will goad more reforms. Over the medium to long term India is clearly on the move. People aspirations are very high and development is the key to winning elections at the central and state level in today's India. Whether India can grow at 8-9 % by 2030 to become a $9-10 trillion economy or stumble along at 4-5 % to be at best a $ 5 trillion economy -stuck in a middle income trap, remains to be seen. My own sense is that it will be somewhere in between because in a messy democracy the path of reform is always difficult and not linear. But there is no doubt India will be a major global player in the next 15 years. Thank you.