Arvind Panagariya came to head the NITI Aayog in January 2015, when the Narendra Modi government started dismantling old structures, as part of a policy shift. During his 31 months at Yojana Bhavan, he saw up close what the country needed, and, perhaps, what was not working, and suggested many a change. In August 2017, he returned to teach at Columbia University. Now, the economist is back with a bolder and sharper agenda.
Panagariya’s new book, India Unlimited: Reclaiming the lost glory, makes a compelling case for initiating vigorous reforms to put India on the growth trajectory, which would make it the third largest economy in the world by 2027. The book has arrived at a time when the world economy is in a crisis triggered by a pandemic and governments are thinking afresh to get out it. But anyone who wants to understand the direction Modi government is taking will understand it better through Panagariya’s book.
Panagariya proposes a break from the country’s recent past, even from the bureaucracy which he says is rooted in socialist and leftist ideology. He recommends the repeal or overhaul of the MNREGA, the Food Security Act, the land acquisition act and the RTE Act—all initiated by the UPA government—as they have outlived their utility.
Panagariya suggests migration of the large agriculture workforce to more productive jobs in industry and services. “The more we delay this migration, the longer will be the period of farmer distress,” says the book. To address the low output of workers in industry and services sector, he recommends allowing significantly larger firms in the manufacturing industry, and also export as an important course correction for economic transformation along with the services sector.
Another suggestion is privatisation of public sector banks by repealing the nationalisation legislation, diluting government equity to under 50 per cent, and bringing them at par with private banks in terms of regulation by the Reserve Bank of India. Panagariya also charts out a system for setting up world class institutes at a time India is yet to come out with a new education policy.
India Unlimited nudges the government in the direction in which its many pro-reform supporters thought it was moving but it actually was not. Not everyone will agree with Panagariya’s prescription for India, but it certainly pushes the public policy debate further. Excerpts from an exclusive interview:
Q/ The global economy is under stress because of the Covid-19 pandemic, which has created a twin challenge of demand and supply. How can we tide over this crisis?
A/ First and foremost, we need to focus squarely on containing the virus. So far, we have been lucky to keep the spread to clusters. If the virus transitions from clusters to communities, our challenge and economic fallout will rise manifold. The key to limiting economic damage is to limit the spread of virus. For that, we need to majorly scale up the production of test kits and N95 masks. Ordinary citizens need to stay indoors and use masks and gloves when they go out. To help the vulnerable who may lose their livelihoods, the government must make generous cash transfers and provide increased volumes of subsidised grains. The target group for this could be urban BPL families under the Food Security Act.
Q/ The rise in NPAs of banks have exacerbated the financial crisis. Many financial institutions and industries that have huge debt on their books are on the verge of collapse. When do you see things getting settle down?
A/ There is no doubt that India’s financial sector has been subject to deep disruption. I discuss this in great detail in my new book, India Unlimited. Contrary to the practice in nearly all well-run countries, we allowed restructured loans to retain their standard classification. As a result, bad loans that should have been recognised as NPAs and dealt with on a regular basis over the years kept accumulating. The result was that by 2015, when the RBI finally confronted the reality, we ended up with massive NPAs. Even then, the clean up process did not begin till mid-2017. Moreover, the weaknesses in banking spilled over into non-banking finance companies. The RBI, the NCLT and the government are now working to put the sector back on its feet. But the experience in all countries shows that the job of NPA cleanup, if not done on a regular basis, takes a long time. We know the post global financial crisis story in the United States.
Q/ There is a credibility crisis in the banking industry. How can the Central bank and the government make people repose faith in banks again? You pushed for privatisation of banks and other PSUs. Are you satisfied with the pace of privatisation?
A/ In India, the government has always stood behind banks. The speed with which it has put Yes Bank back on its feet is a good example. This being said, much work needs to be done to strengthen the banking sector. The fact that so many scandals in both public and private sector banks went undetected for so long suggests that there are large gaps in their oversight by the RBI. While government backing keeps depositors confident that their money is safe in the banks, the cost of ensuring that safety in the face of the scandals to the tax payer is large. The RBI needs to ramp up its information-gathering machinery and regulation to detect the wrongdoing by banks early in the game. Privatisation is a separate issue.
Q/ How do you see the Modi government’s effort on reforms. Has the emphasis on the ideological agenda taken the government’s attention off the economy and reforms?
A/ I think this is a wholly false narrative. The media has been singularly focused on the social agenda items of the government and has neglected to highlight the rapid pace of economic reforms under Modi 2.0. [Recently], the Rajya Sabha passed bills providing for national commissions to regulate homeopathy and Indian systems of medicine. The Lok Sabha had already passed these bills. Along with the NMC Act, also passed under Modi 2.0, these new laws fully modernise the regulation of medical education in India. This is a huge reform that the past governments had been trying for more than a decade but without success.
The cut in the corporate profit tax rate to 25 per cent for existing firms and 17 per cent for new manufacturing firms is another big bang reform under Modi 2.0. The launch of the reform to simplify personal income taxation with all exemptions ended is another major step. Reforms in the works include massive privatisation programme extending to Air India and BPCL, listing of LIC and a national commission on higher education. There are also several lesser reforms, but I will desist from making the list longer.
As for Regional Comprehensive Economic Partnership, the government has not said no. It is seeking a better deal and may still sign it if other RCEP members grant some of the concessions India has sought.
Q/ In your book, you have emphasised that to improve the lives of agricultural workers one needs to move more than half of the people into industry and services. But there is also a view that the agricultural sector has helped the country withstand many financial downturns that happened in the industry and services sector. Moreover, when we are staring at an all-time high unemployment rate, how do you think this migration from agriculture sector to industry will be possible?
A/ The suggestion that agriculture lends stability to overall growth is an illusion at best and false at worst. For one thing, growth fluctuates a lot more in agriculture than in industry and services. More importantly, today, agriculture is less than 15 per cent of the GDP. Between 2013-14 and 2018-19, its growth average was 3.4 per cent. Even allowing for 4 per cent growth, the maximum agriculture can contribute to GDP growth is 0.6 per cent. This contribution is too small to stabilise any instability originating in industry and services. The reason why agriculture matters so much in India is that 44 per cent of India’s workforce is employed in agriculture. But, alas, a large part of this workforce is living on a very low income. Some 70 million Indian land holdings, accounting for 48 per cent of all holdings, are smaller than half a hectare. The average size of these holdings is only 0.23 hectare. Assuming that value added in agriculture is uniformly distributed over the cultivated area, the average value added on these 70 million holdings was just Rs41,000 per year per holding in 2017-18. No family can live on an income this small. Industry and services need to create many more good jobs for those dependent on these tiny land holdings.
Q/ The Modi government has set a target of achieving a $5 trillion economy by 2024. You also say India could rise to $7.1 trillion by 2030. You mentioned that there were policy mistakes that led to the fall in GDP in 2011-12 and 2013-14. Is it achievable given the current economic conditions?
A/ The $7.1 trillion target by 2030 is most surely achievable. Coronavirus has created greater uncertainty and the fallout from it can be significant in the next year, perhaps even in the next two years. But we will have a vaccine against it in about a year. That and the clean up of NPAs, which is under way, will pave the way for us to return to higher growth trajectory. Of course, many reforms will need to be undertaken as well. I outline these reforms in my book.
Q/ Do you agree with the argument that demonetisation was a mistake, as the GDP growth slowed down in the past three years?
A/ There is no evidence whatsoever that demonetisation caused the current slowdown. Demonetisation took place in November 2016. The growth rate in 2016-17 was 8.3 per cent. Even critics say that the effect of demonetisation had dissipated by the end of the last quarter of 2016-17. Any effect of a sharp and sudden decline in money supply must be felt in a collapse in prices. But no such collapse in prices took place because creative Indians found ways to transact.
Q/ Another key suggestion is to end the monopoly of the IAS. The prime minister has taken many initiatives, but those seem to be half-hearted. Would you agree? Or are you seeking a systemic overhaul of the bureaucracy?
A/ In my understanding, bureaucracy itself is the source of slower progress in this area. The effort by the prime minister is not half-hearted. We need a lot more outsiders with specialised skills. But this is not to imply that generalist IAS officers will not be needed. The system will always need generalists, but the current balance is not right. We need more specialists with decision-making authority.
India Unlimited: Reclaiming the lost glory
Author: Arvind Panagariya
Publisher: HarperCollins
Price: Rs799, Pages 370