Sanjeev Sanyal on Reconfiguring Indian Economy

Sanjeev Sanyal, Principal Economic Adviser, Government of India in conversation with Ms Supriya Shrinate, Executive Editor – News, ET Now on ‘Reconfiguring Economy: Coding a New Growth Algorithm: Reconfiguring the Economy’ at AIMA’s 4th National Leadership Conclave 2018.

Sanjeev Sanyal in conversation with Supriya Shrinate

Sanjeev Sanyal in conversation with Supriya Shrinate

The world is seeing a potential trade war in the making, do you believe those fears are for real? Do you believe India will have to take sides on this one, we can’t be a mute spectator?

As far as taking sides is concerned, I’m very clear on whose side we are on. We’re on India’s side. Coming to the question of protectionism and the emerging global scenario. Let me be clear while indeed there are all kinds of protectionist tendencies popping up around the world, we in India remain committed to the globalized system, we are old experimenters in import substitution so our own history should more than adequately tell us that if we overdo import substitution or isolationist policies it always ends in tears. So while it is fair that occasionally you use some sorts of incentives to protect certain industries from dumping or maybe even do some protection for infant industries. Different countries have their own dynamics but in general we do need an open globalized system and in the end, we have to be willing to do deals with the rest of the world and the rest of the world has to be willing to do deals with us. But yes, the old system as it seems may have come to its grinding halt and let’s not blame the individual political leaders. My view is that the old system has come to a creaking halt at multiple levels. In the US there has been a simmering discontent about Chinese imports for a while, the fact of the matter is that it has come to a halt now.

So what’s the new world order? You’re saying the globalization in its earlier form is not going to survive it hasn’t served the developed world and which is why they are looking inwards, so what’s the new form?

In the end, we need a set of global rules to trade so we need a multilateral system of trading and everybody intellectually agrees with it but what has happened over time for a variety of reasons is that we have ended up with these complex system of trade deals. Some of them are bilateral trade deals, some of them are trading blocks, now we have TPP and so on. In fact, in the end, this is probably unworkable because it’s just too complicated after a while. In some sense are reaching a logical end of that old path of globalization. I’m a firm believer that there will be another round of globalization but I think those who think about the long history of these things need to begin to go back to first – Principles, to rethink what this regime will be and second – this regime must be fair to all participants and unlike the old globalized world it must take account of the localized impact of these things. I’m not entirely convinced that you can have a certain regime where a tiny globalized elite is the primary beneficiary of this and considers the rest of the population as despicable.

I’m glad that you’re bringing a fresh perspective to this debate. How should India brace up for this new order of globalization? What will it mean for our own economy in terms of exports? Because our export model is still very aligned with the old globalized order.

The first point is we need to keep championing globalization. There is now a long debate that globalization led to inequality, but let me take that by the horns. What do you mean by inequality? In fact, while inequality may have gone up particularly in western countries inside each individual country but humanity as a whole is more equal than its ever been at least since the industrial revolution. China and India have become richer in the last few years, per capita income has gone up, poverty has come down. If you want to judge globalization, you must judge it for what happened between the countries, with China catching up with the West and India growing much faster than the rest of the world, inequality for the world as a whole has diminished because of globalization. This story of inequality rising is actually a very disingenuous one because this is an easy thing to use to justify protectionism in rich countries and build a narrative of victimhood which can then be used ironically against poorer countries which actually need to grow faster. So I think that story has to be countered that globalization is a good thing, we need to take account of the localized impact of this, we cannot simply brush them under the carpet, we need to think about the transition time, we need to invest into what needs to be done in order to take along these populations. The globalization over the last half a century has been a good thing for humanity overall.

The second point, how do we then engage with this going forward? And that actually is a very tricky thing. There are extraordinary technological changes happening, whether it is artificial intelligence, new forms of manufacturing processes, new energy sources and so on. We are at the cusp at where there’ s going to be enormous rapid change. The problem is that nobody in the world has any idea of what it might lead to. Let me tell you this is nothing new, in 1898 the worlds first urban conference was held, the main discussion in this urban conference in New York was horse manure and everybody was discussing how London will be under 5 ft of horse manure if nothing was done and within 15 years horses disappeared from the streets of all the major cities in the world. So, let no consultant no matter how clever the presentation tell you that they know where this is going. We don’t. The question is how do we adjust for what is very rapidly going to happen to all of us and how do we prepare for it. In the end, the most important thing is not our great ability to predict what changes will happen as a result of these technologies which we have no idea about but our ability to respond quickly to whatever happens. The most important thing about the T-rex is not that it is big, it has a large body and teeth, the most important thing about T-rex is that it’s extinct.

You mentioned something important, Globalisation will now have to be looked at the local impact context. Given that the kind of custom duties that have gone up in India after the budget and some people have frowned upon this that after espousing and embracing globalization why are we doing this? Is this the new normal? Is this the new reality? While we will talk about a globalized world, we are going to first protect our turf, just like America has?

We have not violated any international obligation. We as a country are allowed to tinker with them as we deem fit. This should not be seen as a strategic withdrawal from globalization, this is a tactical move for a variety of reasons to help the incipient and infant industries in certain pockets. This is a tactical move, not a strategic move. We have remained well within our rights to do it. The fact of the matter is that we live in a world and we adjust to it. Yes, there is a world evolving and we will make sure Indian interests are protected while following international obligations.

Let’s talk about the numbers, growth numbers of 7.2, 7.5% till about a year and a half and 2 years back we were the sweetest brightest spot in the world, we were the shining armour for the global economy that was looking gloomy. Then there we decisions taken that were disruptive, whether it was demonetisation or GST some of which were warranted. Are we back to a level where the Indian economy is set for a takeoff?

Well I hope so, the fact of the matter is, for a variety of reasons, 2017 was picked to carry out a very large number of very painful reforms. In some ways, Demonetization shouldn’t just be looked at an attempt to take out black money in cash. Everybody knows that the cash part of the black money is a very small part of the black economy. What demonetization really does is a signal of the regime shift. That’s is a much more important thing to understand about demonetisation. Demonetisation was an attempt to clearly signal a break from the past. Since then if you see that a large number of other measures were put in place, which changes, the framework of reference of how our society and political economy functions. The banking system was cleaned up using the insolvency and bankruptcy code. This was a deliberate attempt to break from the old style of evergreening. You can now see as things are getting tightened in the banking system. All kinds of fishy things and skeletons are popping up. This is just one area. What is being done, painful as it may be, is putting an end to what our ancient text called Matsya Nyaya. Matsya Nyaya is the law of the fish, where the big fish eat the smaller fish and the smaller one eats the even smaller one. This was a system a political economy based on patronage, rent-seeking and perpetuation of the power of the small group of people. This is now being replaced with a new India which beliefs in rule of law, entrepreneurship, social mobility, risk-taking and so on. In order to do this, we have to create a framework for governance. Less government more governance doesn’t mean that you simply withdraw the government and governance happens, no, you have to impose the frameworks of the governance before you withdraw the government.

What are those frameworks that are being imposed? The first one was ‘Insolvency and the Bankruptcy Code’ because we went from a system where we had socialism without entry to a system of capitalism without exit. So we have now moved to a market-based system where we have created disruption and exit is allowed.

Another major framework was ‘GST’. May not have worked beautifully well in the first instance but we kept fixing it and will work better 6 months from now. Another framework was this ‘Jam Trinity’. So what we’re doing is, introducing frameworks. Going forward there are some more frameworks that need to be fixed. Basically, this is an attempt to create frameworks so that this patronage-based system where rules did not matter, what mattered was who you knew is replaced by a system where the rule of law is the main driving system.

We took some very bitter pills in 2017 it was the year of pain, When will all of those begin to show results? Ill talk about GST separately, but the cleanup act that has begun, let’s talk about the banks, the NPA crackdown, by when do you believe concrete results will be visible in the Indian economy?

If you went back a year ago, even when Raghu was there, everybody knew that the banks were in real trouble and we have had many episodes of a cleanup. In the 1990’s also by the way we had a similar position, one could argue it was worse than it is now. This problem has perpetuated itself over a period of time. One solution that was being discussed was to create a bad bank, stick all the bad loans in there and recapitalize the banks and get them going. But that would have warehoused the old stuff just like the old DFIR used to and perpetuated them. Meanwhile, there would have been no culture change in the banks. The banks would have been re-capitalized and would have gone back to doing what they were doing before. Instead, the bull was taken by its horns. We implemented a brand new ‘Insolvency and Bankruptcy code’, which had never been tested and to take 50 largest cases which by the way accounted for some two-thirds of the bad loans and to basically take them through a process. There is a process to it which is now culminating as we speak. Many of the auction and liquidations will happen in the next 8 weeks. So let’s see how that works out. Maybe not all of it will work out perfectly. At least the old impunity is being challenged. And of course, by the way, it’s not just the political system or the business class we can see major failures on the regulatory side. Nobody is covering themselves in glory in all of this.

But when you say the regulatory side, I must ask you two questions there. The critics are saying that the government is taking a textbook approach, you know a blanket ban on promoters, guarantors, related parties, is that going to stall the system? Could the government have taken a more nuanced approach than a blanket textbook approach?

So you’re absolutely right. I’ll argue that that’s not textbook because we are responding as it goes. We are criticized for changing the rules too often. One of the reasons is that we, in fact, are making a lot of major changes. We are in unchartered territories. The best that can be done in such is to take feedback and respond rather than taking a rigid textbook approach. Is there a risk of jamming up the system with too much? Yes, there is. As policy makers, we have to keep our eyes open to this. So it is a tightrope where you have to impose enough order But you don’t want to do so much that you jam up the whole system and people who have good credits to become bad credits. This is a very tricky game. Bureaucracy is not fast or adept enough to move with that but that has to change and that’s where political leadership at every level comes in. Leadership matters under these circumstances because you have to look at what is happening and respond and If the response doesn’t happen then there no point saying later that operation successful but patient dead.

Absolutely, at least you’re being candid enough to admit that we run the risk of an overreach but we have to be agile and keep responding to the situation. Let me just quote two instances. The last night ban by RBI on LOU’s and perhaps scanning of 50 crores worth of NPA’s, passport details. Is this the overreach risk that we run?

I’m not in a position to comment on an RBI decision that they’ve just introduced. But the general point remains that you have to take a nuanced view of these things particularly because you are not dealing with a silo system. You are dealing with an interconnected eco-system and if you block off oxygen to one part it rapidly spreads to the entire system. You have to take care of these things. This is something that the policymakers have to be careful about.

But is this a time as good as any to talk about the banking sector reforms? There is a lot of buzzes, articles are written every day, we have commentators on TV channels talking about privatization being the way out. Do you believe there is a remedy?

At the very least I’m very pleased, that there is a loud debate about the banking system. This state of affairs has festered for a very long time. The fact that it’s being brought into the sunshine is in itself a good thing. There should be a debate. Let me clarify, however, privatization is not an immediate top of the table thing that was being considered by the government. There are many other things that we had to do immediately, including, this last part of the IBC process for the first top 12 defaulters. There are bigger picture things we need to think about. There has to be a public debate about privatization and governance. Have a debate about what do you mean by privatisation? There are many shades of such things.

But is privatization the answer to some of the ills that plague the Private sector banking?

Yes and No. Public sector banks do have a role to play in our economy. Public banks at times do what private banks won’t. But does that mean we should have 70% public sector banks? Maybe, maybe not. How do you go about changing this? There are many ways to do this. One could be to privatize the public banks, another could be to help private banks (better ones) grow faster. But then you can allow some of the Public sector banks grow faster. Some of them are not so bad, they’re pretty well run. There are many permutations and combinations of the things that can be done. All options should be considered. The important thing here is that while we are carrying out some very important measures that are on the resolution, auction, and liquidation of very big companies that we don’t take our eyes off the ball. More immediate things need to be done about governance including fixing regulatory and supervision lapses that have popped up with this recent fraud case. We also need to do something about the boards and the human capital in such banks for which attempts have been made in the past with BBB but clearly, we need to do more on that.

You say very pragmatically as a policymaker that we need to be agile and we have to keep responding and nothing can be iron cast and many people in the industry will often tell you that the IBC norms need a little bit of a change. The government is of the view that it needs to change, how soon will we see the minor tweaking that’s on the cards?

Always. The point I’m making is that this is a feedback based government. Tell us what needs to be done But remember With each change you make the system more complicated. So beware of the unintended consequences of everything that is done. In the end, all governance structures basically function by allowing for some give at the edges, but the question is What are the trade-offs we will make? Every system will have a trade-off. When the law was originally made it certainly had some trade-offs. Later on, in November/December we decided No, the trade-offs were better at this time to not allow the old promoters to bid. Now clearly there is a cost to it because it restricts the number of entries to this. But for variety of reasons we decided, what we are attempting is a wider change in the political economy then this is a price worth paying at this time in history because we want to change the whole ecosystem itself and not allow it to be subverted by the existence of rules which to at this point may be too liberal. Similarly, we will make other changes but at every change, there will be some trade-offs and if those trade-offs are worthwhile to the policy makers of that time it should be done. Nothing is cast in iron.

But as a policymaker when you see it from the other side, the rules of the game have changed, we cannot play by the old rules. Is there greater acceptance, acknowledgement, endorsement from the industry about the change in rules? What applied in the past, doesn’t apply any more, the debt can no longer be treated as equity no matter who you are.

I think the culture has changed at multiple levels. Everybody accepts that we are playing by the new rules. People are figuring out what new landscape means. I think everybody will be better off it because, in the end, It’s a much more rule-based system, everybody plays the game in a transparent way. That doesn’t mean this new system is cast in iron and doesn’t need tweaking, some major framework changes might be needed going forward as well no in the area of enforcement of a contract, dispute resolution and so on and the whole area of the legal sector that we need to have a serious debate on. It is not for nothing that the economic survey has a full chapter on the need for reforming the legal sector, not just the judiciary but the whole eco-system. Landscape needs to be re-thought and there are many areas that need to be re-done.

How would you assuage concerns as part of the Indian Industry who feels that as a part of the clean-up there is an environment of suspicion, they are being looked suspiciously because they are in business.

I wouldn’t argue that. The core support base of the government comes from small business and industry, the political leadership is more than aware that some pain was inflicted on it. In fact, it is quite surprising the extent to which as a society we have been willing to take the pain in order to move on to this new platform and it comes very rarely in history when society is willing to take this kind of change. Everybody grumbles about it but let’s give everybody some credit here in that people have been willing to take enormous changes in their stride. This is a country where for a minor thing you’ll have riots, ten and thousands of people will come and agitate etc but everybody by and large politely queued up for demonetization. Everybody grumbles about Aadhaar, but by and large, everybody has moved on to it and there are huge benefits of Aadhaar by the way. Yes, there are problems with Aadhaar also, my own thumb doesn’t work I use the IRIS scan. So it is not that it’s a perfect system but it is an improvement to the past. Tens of thousands of fake teachers have been found, more than 80,000 fake teachers existed in the system, Railways alone had about 30000 fake ghost employees. These are eye-popping numbers and everybody was being affected by it. This is clean up is happening at the national level, there are many things happening at the state level.

Just take an example of one state, Uttar Pradesh it imposed strict controls on cheating and a million students dropped out of the exam taking process. That’s a ridiculous number. Now you can argue this is an indictment of the education system. That so many kids feel that they cannot pass the exam without cheating and that too needs to be fixed. But at least we have re-imposed the sanctity of the examination system.

Fair enough and I don’t think anyone will doubt that but a quick question on GST. You have been candid enough to say that there have been teething problems and it hasn’t been the most ideal take-off and perhaps for a reform of that size and for a country like ours it wasn’t going to be. But when will the teething troubles be over and the compliance level being low is an area of concern policymakers?

We could argue if GST could have been implemented better. We debated it for 20 years we could have debated it for another 20 years. The only way to introduce some major changes like this in India was to introduce it and then make changes, because there were always going to be unintended consequences no matter how much you thought, by the way, much simpler countries with much simpler GST systems had many problems with GST. Australia comes to mind but almost all the countries had teething troubles. Our system isn’t perfect, should it have been simpler?, Yes it should’ve been. In fact, the central government always wanted a simpler system but we couldn’t negotiate with the State governments to come to it. By the way, now these states except that it would have done better but now we don’t want to change it all over again so we let it settle for a while. But believe me ideally a few years from now if you left it to me at least I would end up with a much much simpler system. Don’t hold me to it, this is my personal opinion. Ideally, the system should have a bulk of goods at a certain rate, say 15%, and some exceptions to it like luxury items for 25% or food for 5% etc. An average shopkeeper without having to go through some booklet should be able to tell you which item is at which tax rate just at the top of their head. That’s when you know that the system works.

There is this raging debate after this Nirav Modi scam, on the role of auditors and institutions and how supervision failure led to this scam. Is there a need for a complete overhaul of how auditors and institutions and regulators work in India?

There needs to be a debate on who is held accountable for these things. This is true for all the regulators. It also implies to other professions that are supposed to do truth telling like CA’s Auditors etc. Now let me take you back to demonetization, why it is important to signal regime change. It is very difficult to move on to a new equilibrium because the institutions of the old equilibrium will very strongly suck you back.

But will you support demonetisation despite the fact that a lot of money that was not supposed to come back came back into the system?

It’s good that money came back, but the point is how much went out. Do you know where that money now is? Yes, you do because now its recorded. That’s a minor part of what demonetization was about, to reduce demonetization to that is to miss the point. Demonetization signals regime change. From here on, the old rules do not apply. From then on you see IBC being imposed, GST introduced, the JAM trinity being introduced. So that is what demonetization really is.

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