From Express Adda
Chief Economic Adviser to the Government of India Krishnamurthy V Subramanian was the guest at the Express Adda in Mumbai recently. He spoke on the deceleration in growth, the government’s response, privatisation, trust deficit, and the wisdom of ancient texts
On deceleration in growth rates
If you look at the deceleration in growth rates, a good part of that stems from the financial sector. It is important to understand where we are. So if one looks at corporate credit, we plotted it from 2006 onwards, it peaked in 2013 and then there is a decline. There is a boom and bust. Across the world, we have seen that supply-led credit booms eventually become busts, which is what we had.
The global financial crisis affected investment as well and that has affected GDP growth, with a lag. If you look at any macro variable, the impact on another macro variable happens with a significant lag. In the Economic Survey, we show that the highest correlation is with lag with four years. Post 2013, the decline in credit and then investment has had an impact on growth since 2017.
On the times we are in
I would call it part of business cycles in an economy. If you look at business cycles since 1991, on an average the phase of acceleration has been 12 and a half quarters, and the phase of deceleration has been 9 and a half quarters. There is actual data and empirical work that shows it. If you look at the recent cycle, we accelerated for 13 quarters which is almost the same as the average of 12 and a half, and we have decelerated for 13 quarters, which is more than 9 and a half quarter average.
That is why actually relating it to the financial sector is very critical because research across the world shows that if you have a slowdown or a recession, you take any episode in a country when that slowdown or recession originated from the financial sector, it is far more prolonged than average. And that explains why we have a slowdown for 13 quarters. It is part of the business cycle phenomenon, which tells me that we are quite likely hitting the bottom, and while it will be actually good to hit 7 per cent very quickly, it will happen over time.
On the period between 1991 and 2011
You were referring to the Economic Survey, there is a particular chart we show there of the Sensex hitting different milestones. Sensex is one measure of the economy. I would want to respond to the question using this particular index. It was created in 1986, the first 5,000 took about 180 months. I remember very well because this was just before I went for my PhD.
I used to work for a financial institution and when we reached 5,000, all of us from the treasury had those bells and we rang them. Since then, the next milestone from 5,000 to 10,000 took about 80 months. Then, till about 2007, there was an accelerated phase where every milestone was reached much faster and that was the period till 2004. Then from 2007 to 2014, it took another 80 months for the next milestone to be reached, which is basically the slowdown phase.
Then there’s a third phase of revival where the milestones have been hit faster but with one exception, which is recent. The last milestone of 35,000-40,000 has taken a little longer. And why do I bring this up? What is happening in the real economy is reflected in this as well. The best phase in terms of reforms was up till about 2004.
2004-2014 was a period where we actually did not undertake many structural reforms. In the chapter on pro-business versus pro-crony, if you look at the Transparency International ranking, the perception of corruption had reached its peak in 2011. If you also look at the returns that “connected” companies generated vis-a-vis the BSE Sensex that was far higher till 2011 and after that, they have been losing a lot of value.
On their priority for next two years
The first set of measures, we should look at all those laws that are anachronistic because they were implemented at a time when the economy was very different. What we need to recognise is that when the government intervenes, the trade-off is between market failure and state failure. Many times, when laws have outlived their existence, state failure can actually be greater than market failure.
For instance, what we have shown is the raids which are conducted as part of the Essential Commodities Act have no co-relation with changes in prices. So, we have an infrastructure that basically implements an Act that seems to have no effect on consumer welfare or overall welfare.
The second, a lot more steps on ease of doing business. We have certainly made significant strides, so we have moved from being 142 in 2014, in terms of the ease of doing business rankings to 63, but we have to make further progress.
The third, which is very critical for me is the financial sector and within that, while in policy making discussions we often mention that we need to develop bond markets. Undeniably, we need to do that. But, if we look at the banking sector, it is really sub-scale. I am going to give you some facts pointed out in the Economic Survey.
So, if you, for instance, go and look at the last 50-70 years, take any of the top five economies, they have all been supported by proportionate banking sectors. Even if we look in terms of credit penetration, which is measured by the private credit to GDP, there also we are a significant outlier on the negative side. The private credit to GDP should be about 80 per cent greater than what it is.