Q&A with Arvind Panagariya, Vice Chairman of NITI Aayog

January 19, 2016

By Manoj Kumar and Douglas Busvine

India has every chance of becoming an export powerhouse, Prime Minister Narendra Modi’s top economic adviser Arvind Panagariya told Reuters, despite an ill wind blowing from China that has hurt the ability of Asia’s third-largest economy to compete.

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REUTERS INTERVIEW
India can still emulate China’s export miracle – Panagariya
India would be very concerned by big China devaluation – Panagariya
India should review monetary policy framework, cut rates – Panagariya
Modi adviser opposes “tinkering” with fiscal deficit targets
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Here are edited excerpts from the interview:

You have just come back from a G20 sherpas’ meeting in China. What is your takeaway on China’s leadership of the G20 and the state of its economy, financial markets and currency? Do the Chinese have the situation under control? What are the areas of concern?

Arvind Panagariya, head of the government's main economic advisory body, gestures during an interview with Reuters in New Delhi, India, January 18, 2016. India would be very concerned if China were to allow a major devaluation in the yuan currency, Panagariya, India's Group of 20 summit negotiator, told Reuters, adding that he doubted Beijing would allow this to happen. Picture taken January 18. To match Interview INDIA-ECONOMY/YUAN   REUTERS/Adnan Abidi - RTX22ZWY

Arvind Panagariya, head of the government’s main economic advisory body, gestures during an interview with Reuters in New Delhi, January 18, 2016. REUTERS/Adnan Abidi

Let me start with how they are doing at G20 … I think they are definitely having a slightly different focus, with some continuity. But, predictably, one area where they are actually making a bigger push than perhaps in the past is trade and investment. I say predictably because the Chinese economy has flourished largely in trade and investment.

So the other area, where they are somewhat changing the focus, is also on growth. Growth was always an issue in the G20. But the Chinese presidency is trying to now focus more on innovation, the digital economy and the new industrial revolution, so to say. Looking at those three, it kind of gives you a window into the Chinese thinking that while manufacturing is still the backbone of their economy, they are also preparing for a futuristic economy. So I think they are to some degree indicative of the way they are taking their economy. That is the very broad take.

The weak Chinese currency is a concern right now. How do you assess contagion risks, specifically for India. Do you have advice for the Chinese on communication or managing market expectations?
I may have more of a minority view on this, but my own view is that the decline in Chinese growth is predictable. The timing may not be completely predictable. But the fact that we were heading towards a decline in the growth rate was very clear to me well before this happened. Because one knows from past experience that there is not a single economy which has grown at 10 percent or more (over an extended period). In fact, continuously China is probably the only one, which decade after decade has growth at 10 percent or more. But whatever, 8-10 percent, what I call miracle growth, there is no example of growth going beyond three or three-and-a-half decades. So it was only a matter of time.

For India, this natural slowdown of the Chinese economy offers a kind of opportunity, because part of the slowdown is also the wages, which have now risen to a very high level and the demographic transition which is making labour scarcer and scarcer. That process will continue as demography reveals itself as we go forward. Both of these facts really mean that some of the most labour-intensive sectors of the economy would probably be shifting elsewhere in the world. Some of this shift is happening to Vietnam, and to other countries. But none of these has the size that is required eventually, so India is a sort of natural destination.

That does not mean automatically that they will come to India; India has to do things internally to make it happen. But, certainly, it does offer India a fantastic opportunity. This is a more optimistic view than many pessimists who think that manufacturing is now passe … that the robots are coming, 3D printing is coming. I think that none of those factors are going to be a barrier to India becoming a manufacturing hub right now.

Are you seriously concerned about a competitive devaluation of the Chinese yuan in the short term causing an external shock to India?
India has to be certainly very concerned if a massive or very large devaluation of the yuan happens, because in the end that not only makes Indian goods less competitive in the Chinese market but also India’s ability to compete with the Chinese in third markets is impacted. In some ways, this latter factor is rather more important.

But at the same time, I also am of the view that the Chinese are not going to let the yuan devalue excessively. They themselves cannot afford because in the end they are seeking stability and trying to convince the world that yuan should be seen as a key currency. If the Chinese let the yuan really devalue by leaps and bounds, that I think is a very negative signal for the global community in accepting the yuan as a key currency.

In the short term, would some weakness in the rupee against the dollar be appropriate?
The rupee, maybe not against the dollar, but against most of the other currencies, is already substantially appreciated. So that remains a concern, for sure. The strength of the rupee is a concern, because I do think that while the global economy, in terms of exports, has been very tepid, still global exports have risen by 2.5 percent. India’s exports have declined over the last year significantly. India’s share in global trade was already small – in 2014, our share was 1.75 percent compared with China’s 12 percent. So we have already lost some share. While one can say that some of the decline is due to the global economy itself, in terms of export markets barely growing, I think some of the burden also falls on the appreciation of the rupee.

Real economic growth may be flattered by the GDP deflator, while nominal GDP growth is weakening. Is the economy as strong as real GDP would indicate? And would it be prudent to allow the deficit to GDP ratio to increase to reflect the weakening of nominal GDP growth?

Indian currency of different denominations are seen in this picture illustration taken in Mumbai April 30, 2012. The Reserve Bank of India's battle to contain a falling rupee just got tougher. The current account deficit is widening and a weak global investment climate coupled with policy paralysis in New Delhi, sticky inflation and slowing growth have increased the aversion of foreign investors to India, pushing the capital account into the red. Last week's move by rating agency Standard & Poor's to cut the country's credit rating outlook to "negative" has complicated matters further for the RBI, which has few options other than intervention and tinkering with rules on export credit to encourage inflows, RBI officials say. REUTERS/Vivek Prakash (INDIA - Tags: BUSINESS) - RTR31EIF

Rupee notes and coins are seen in this picture illustration taken in Mumbai April 30, 2012. REUTERS/Vivek Prakash

I personally don’t think we should be tinkering with the deficit as a percentage of GDP. I think the time for that is a little past. I myself argued last year, internally, that we should readjust the calendar that we had inherited from the UPA (Congress-led coalition government), and really supported the decision of the finance minister to turn the period of transition to three years from two years. But, having committed to this revised calendar last year, I personally think we should stick to it. There is a credibility issue, so I would be opposed to letting go of the fiscal deficit as a proportion of GDP – notwithstanding the fact that the denominator having shrunken makes the task a little harder.

Luckily on the positive side, oil prices have come to the rescue, and – very wisely – a large part of this has been captured in the increased revenues for the government on petroleum and diesel. So I think that, without actually going back on the expenditure commitments, it seems to me still feasible to meet the fiscal target as it’s been set. Is the economy not as robust as the real GDP figures show? I certainly think that real GDP growth is real. I have not been among the doubters who say that somehow this is an artefact of the new GDP calculations.

Is the fact that growth in the GDP deflator has turned negative a concern? Yes. Nominal GDP matters a lot – earnings are nominal. So also, at the end of the day, for profits to rise, prices have to rise. Purely through adjustment of quantities profits may rise, but rising prices are very important. Where the balance is required is that food inflation should not get out of hand. But if automobile prices, refrigerator prices, air conditioner prices rose some – I think that would not be such a bad thing. This is not a call to go to double-digit inflation: that’s not what I’m saying.

Last year’s budget was a budget for infrastructure. The message we are getting this year is that the social side should get greater attention. What’s more important?
Make no mistake: Both. Even last year’s budget, as more revenues became available, 5,000 crores (50 billion rupees) were put into NREGA (a rural employment scheme). The prime minister is very sensitive to the social side, whereas he is very keen to plug the loopholes and get the wastage out. He’s a big proponent of Direct Benefit Transfers, so that the leakages in the system are taken out but then, he is of the view that we should plough the savings that result back into social sector spending. Like LPG, for instance, his pitch has been that we are going to use these cylinders saved as a result to pass these on to the folks who are using biomass for cooking.

How do you feel about the monetary policy framework that has been put in? Are you happy with CPI target? Are you happy with the accountability of the central bank?
Probably I am boldest within the government to say this. But I think we should go back to review the monetary policy framework. This has been in place a year, notwithstanding the fact that, yes, the decision-making side has to be sorted out. Nevertheless, the basic framework of targeting inflation 4 percent, plus/minus two, is in place. One year’s experience must be reviewed and if any revisions are warranted then we ought to think about it.

You appear not to support the target.
The framework is fine, but the target needs to be revisited. It’s been there for a year and we should review it.

If you were to propose an ideal inflation target, what would it be? Would it be symmetrical? Would it be higher?
It is premature to speculate what I would say. But I would go in with an open mind. If revisions have to happen, they will have to be upward because plus/minus two means that the floor is 2 percent. Who has a floor of 2 percent among the developing countries? I have never heard of a developing country on a sustained basis having 2 percent or 3 percent inflation. That is the sort of target that most of developed countries have. If you revisit it and review it, and you are going to take a band which is as wide as plus/minus 2 percent, then if there is any revision it’s not going to be a downward revision.

Is food inflation an issue – it makes up half of the CPI basket?
Food I am OK with. It is the other components. Food inflation has to be low, relatively, because it clearly does have a very direct impact on the poor. So food inflation is an issue for sure. Everyone in the government would support 4 percent inflation as far as food is concerned. We ought to be no more than that.

So the upshot is the monetary stance of the RBI has been a bit hawkish for your liking. Would you have preferred to see more rate cuts?
I have said at the time that the rate was cut by 50 basis points, I was of the view that we needed a rate cut of about 100 basis points. My calculation is that 50 basis points still remains.

On the banking sector: India has a small but compromised balance sheet. Do you think enough is being done to repair that balance sheet and enable banks to lend to viable businesses?

When it comes to cleaning balance sheets – it is never too fast. Look at the U.S. experience, or any cases of cleaning up balance sheets, the constraints are very much financial and political. The government doesn’t have unlimited revenues. If there were unlimited revenues, you go in, take the assets out, recapitalise the banks. Done. It is never easy.

Could it be faster? Yes. But saying that is a lot easier than doing it. The government is certainly very vigilant. There is a plan in place. And if the plan can be accelerated within the financial constraints then it will be done. But that is going to be an ongoing reform. And, luckily, I don’t think at all that India faces the threat of a crisis or anything. The system is quite sound. So luckily there is that wiggle room that you require.

Arvind Panagariya, head of the government's main economic advisory body, poses for a picture after an interview with Reuters in New Delhi, India, January 18, 2016. India would be very concerned if China were to allow a major devaluation in the yuan currency, Panagariya, India's Group of 20 summit negotiator, told Reuters, adding that he doubted Beijing would allow this to happen. Picture taken January 18. To match Interview INDIA-ECONOMY/YUAN  REUTERS/Adnan Abidi - RTX22ZWW

Arvind Panagariya, head of the government’s main economic advisory body, poses for a picture after an interview with Reuters in New Delhi, January 18, 2016. REUTERS/Adnan Abidi

What is your view on merger of weak banks with stronger banks?
Some of it, I think we should consider. You know the arguments. We have 27 banks. Many are very small. And I think if merger brings the number to fewer banks they can manage better. They are then able to compete better also in the markets. The principle is correct. The question really is when and how.

You’ve completed just over a year at NITI Aayog. How is your work progressing? Would you expect the current five-year plan to be the last? Might you shift to a more flexible, medium-term strategic framework?
I have been very clear on what my personal view is, because the decision on what we do on planning or even five-year plans is that of the prime minister – because he is ultimately the chairman of this institution. But with market-based decision making in the private sector, planning … in the sense of physical targets for output for various commodities or sectors is really no longer a feasible exercise. But three-year, medium-term planning of expenditure and revenues is an option certainly we ought to look at. On that decision, there would have to be a lot of discussion.

What are likely to be the broad priorities of the next budget?
I will not speculate on that. But I expect the reforms process to continue and whatever needs to stimulate growth would continue. Great emphasis on agriculture I would expect because the prime minister is very keen.

How important is unblocking reforms like GST and land reform to India’s long-term growth story?
It’s very important, naturally. If the government cannot pass legislation, then clearly its functioning will be impacted. So we do need the impasse to end. It’s certainly not been for the lack of trying by the government.

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India needs major and radical structural reforms in the agric sector.In order to realise the full potential of this sector–enhancing the food security, increase in agric exports and share in the GDP.In order to raise the productivity per unit of investment on land, labour, capital, managerial talent, private and public support systems–subsidies, grants, investment on technologies and institutions etc–we have to change the way we manage our agric production systems in the country.It has got to be modernized and made internationally competitive. It should be given status of an industry and gradual switch over to corporate agric should be encouraged.The land nder small, marginal and kitchen garden sized holdings must be brought down drastically.The farming profession must be made more dignified, economic and graceful.

Posted by R.S.Sachan | Report as abusive