India’s GDP growth has receded since 2018 because of high growth in the first four years of the Modi government, and to get back to 7% plus growth rate, India must open itself to free trade and recapitalize banks urgently, says Professor Arvind Panagariya, Former Vice Chairman, NITI Aayog and Professor of Economics at Columbia University.
Professor Panagariya was speaking at the 47th National Management Convention of All India Management Association (AIMA).
According to Prof Panagariya, Indian economy can tolerate 6%-7% inflation and RBI should not be too obsessed with keeping the inflation low. He says that the higher inflation in the April-June period was because of a supply shock and it would drop as supply returns. He wants RBI to work harder to prevent appreciation of the rupee in order to prevent erosion of the value of India’s exports.
However, in a separate session, Mr Rajnish Kumar, Chairman, State Bank of India pointed out that interest rate cuts had not led to increase in investment, despite the banks passing on the rate cuts to the customers. He said that credit growth had been slow this year as capex was not happening at the usual pace. He pointed out that in the last crisis in 2008, banks had increased lending by diluting norms and the country had paid a high price for that, so banks were being prudent this time.
Infrastructure spending was the way to restore economic growth, according to SBI Chairman. He pointed out that India has a 5-year pipeline of infrastructure projects worth Rs 10 trillion, which alone could boost the economy because construction creates jobs and demand.
For Prof Panagariya, the most critical step required to bring Indian economy back to 7% growth trajectory is urgent and adequate recapitalization of banks. He points out that the economic growth has slid in the past couple of years because of the stress in the financial sector which has filtered into the general economy.
“Restructuring loans will only delay NPAs and bankruptcies and not prevent those,” he says. The economy paid heavily for the delay in Insolvency and Bankruptcy Code, according to him, and a credit collapse will happen again if the problem is not addressed immediately.
The government revenue also needs to be restored to prevent a severe escalation of debt to GDP ratio, and that requires more privatization and monetization of government assets, he says.
Prof Panagariya argues that while agriculture reforms were good for the farmers, as they would redistribute agriculture income in their favour, those would do very little for the economic growth. He points out that Indian economy shrank 24% despite 4% growth in agriculture in the April-June quarter. “With only 15% share in the GDP, at its best performance, agriculture would contribute merely 0.6% to the GDP growth,” he says. Also, with average farm size being less than a hectare, doubling or even trebling farmer income will make little difference, he argues.
On Atmanirbhar Bharat, Prof Panagariya says that it was a rhetoric meant only for the domestic audience, mainly farmers, and it merely meant people looking after themselves instead of expecting handouts from the government. However, he points out, the import substitution activity has been going on for three years, which is not helpful. “Keeping imports out protects disability of the domestic companies by making foreign competitors less able. Instead, India needs to raise its productivity and lower its costs,” he says.
Prof Panagariya argues that only a handful countries have grown at more than 10% ever and all those did so by opening up and trading with the world. The global merchandize market is worth $17 trillion and the global services market is worth about $7 trillion, which is the biggest opportunity there is, he argues. He says that since India cannot trust China anymore, the country should do free trade deals with the US and UK and upgrade its trade with Japan, South Korea, Australia, New Zealand, ASEAN. However, he points out that the US will not do a deal without India opening its market to its farmers, which, he argues, should not be an issue because Indian farmers can compete with imports.
Prof Panagariya says that Indian auto industry will also emerge stronger if the tariff protection was removed, as the large number of small manufacturing plants will be replaced with a few large, world-scale ones. “That would be in the interest of the country,” he says.
Mr Sanjiv Mehta, Chairman & Managing Director, Hindustan Unilever Limited, said in a separate session that FMCG industry’s volumes had almost returned to normal, albeit the demand pattern had shifted almost entirely to the essential items and away from the discretionary items. He pointed out that the rural demand had remained strong because of absence of lockdowns, good harvest and good rains. However, the local lockdowns in states had created problems in the supply chain, which has now been taken care of by the central government. Mr Mehta said that now the economy needed interest cuts to start the investment cycle.
Mr Sanjiv Bajaj, Chairman and Managing Director, Bajaj Finserv Ltd, said that the way to revive the economy was to prevent random lockdowns and keep the economy running with the necessary precautions. “It will take 2-4 quarters for the things to normalize,” he said. Mr Bajaj said that it would help to expand credit by opening 2-3 new banks each year for the next 10 years, and the distinction between banks and NBFCs had to go. “The incumbents cannot be protected forever,” he said.
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