Adviser’s account

An insightful collection of writings and speeches of Arvind Subramanian when he was Chief Economic Adviser in India.

D URING the first four years of the Bharatiya Janata Party-led National Democratic Alliance (BJP-NDA) government (2014-18), Arvind Subramanian was its Chief Economic Adviser (CEA). In that capacity, he introduced many innovative ways of communicating the economic programme of the new government, the chief among them being the Economic Survey placed before Parliament on the eve of the presentation of the Union Budget and whose format and contents he changed significantly. This was probably his major contribution, because he frankly admits: “I often found myself a lone voice….”

The present volume consists of selected writings of Arvind Subramanian and the speeches he delivered during his tenure as the CEA. A brief account of his background and convictions will help one understand the contents of the book. He teaches at Harvard Kennedy School. He has held positions in the International Monetary Fund (IMF) and the World Trade Organisation (WTO) and has been claimed by Foreign Policy magazine as one of the top 100 Global Thinkers. The assignment in New Delhi was his first experience of working with the government of a country.

Arvind Subramanian maintains that the kind of problems that India confronts arise from the fact that it made a major departure from the experience of the present-day developed countries: it took up democratisation before economic development. India, therefore, was caught between socialism with commitment to redistribution on the one hand and stigmatised capitalism with “half-hearted embrace of the private sector and private capital” on the other. He did try to persuade the government to give up some measures such as minimum support price for foodgrains, and admits: “My failure in nudging these policies in the right direction was one of the biggest disappointments of my tenure.” At the same time, he is excited about the new experiments with direct benefit transfers of cash payments to designated beneficiaries. Indeed, one of the causes he has championed is a universal or at least quasi-universal basic income.

With this background about the man and his mission, the main themes addressed in the book can be taken up. What strikes one as one goes through the substantive chapters is the brilliant mind at work, gathering relevant empirical data, analysing them with the help of theoretical insights and arriving at conclusions that may go against one’s own reasoned positions. If this is a paradox, it can be easily explained. The divergence comes because of the basic premises: for Arvind Subramanian it all goes back to the “original sin” of departing from the capitalist path. According to him, “the two egregious economic sins committed in our past were… the Industrial Policy Resolution, which started the licensing of industry, and bank nationalisation in 1969”. One can almost say that that the rest naturally follows.

Bank loans

A major problem that Arvind Subramanian confronted immediately after he took over as the CEA was that a large number of major corporates were unable to repay the loans they were liberally granted by public sector banks, thus making the position of both borrowers and lenders extremely vulnerable. He found that since 2007-08, the debt of the top 10 stressed corporate groups had multiplied five times, reaching more than Rs.7.5 lakh crore. This also resulted in the reduction in private investment, adversely affecting growth.

And the remedy: set up a Public Sector Asset Rehabilitation Agency whose primary responsibility would be to write off the debts of these large companies. “It is an economic problem, not a morality play,” he says.

The procedure would call for substantial recapitalisation of public sector banks and there are ways of doing it, including large profits the Reserve Bank of India (RBI) has made and continues to make. To complement the process of rehabilitating the corporates, a carefully crafted bankruptcy law will also be required, and it has already been taken up.

Agriculture sector

An unusual but sensible comment that Arvind Subramanian makes is the need to move out of “the pampered cereal sector” to the “neglected non-cereal sector”, mainly pulses, dairy and livestock. Dependence on cereals has been the traditional pattern in agriculture, and if moving the workforce out of agriculture is to be the development strategy, it can be stimulated by a shift to pulses and other commercial crops. Already, a cereal weariness has set in as can be seen in Punjab where agricultural growth was well ahead of the all-India average until the end of the 1980s but has been sliding down since then. That apart, pulses use less fertilizers, less water and incur fewer emissions, and will replenish the soil with nitrogen.

On the question of the “holy cow”, he takes a reasoned stand that the costs of maintaining unproductive livestock should be taken into account and that there are additional social costs, too. “Stray cattle, and a lot of it, will have to be looked after; otherwise, diseases [foot and mouth] could spread, leading to health hazards.”

Closely related is the question of subsidies and loan waivers. In both instances, the beneficiaries tend to be the larger farmers. The exemption of agricultural income from tax certainly favours those with larger incomes. In the case of fertilizer subsidy, only about one-third of the total goes to small and marginal farmers. On loan waivers, too, the beneficiaries are usually the larger farmers because the smaller ones rely little on formal financial institutions.

Direct transfer of benefits

Arvind Subramanian also makes a strong case for direct transfer of benefits instead of subsidies. The idea of a Universal Basic Income (UBI), which is being discussed in many Western countries, was introduced in the Economic Survey of 2016-17. It has led to the spelling out of the concept and a discussion of its feasibility. A major defence of the UBI is that there is already an indirect transfer from the state to different sections of society through a wide variety of subsidies. While subsidies are easier to administer, they are also associated with significant leakages. The example of subsidised kerosene is quoted: “As much as 41 per cent of subsidised kerosene… is ‘unaccounted for’ and is probably lost to the black market. Dealers sell it to middlemen who mix diesel into fuel and resell it….” Also, many subsidies go to those who do not deserve it.

A good example is subsidy for electric power, which so far had been used largely by the more well-to-do sections of society. Reaching out to beneficiaries directly had not been easy until now, but the widespread starting of bank accounts, Aadhaar (nearly 1 billion citizens have already got their numbers) and the rapidly spreading use of mobile phones (about half of the population has cell phones) now make direct transfers much easier. But the fact remains too that there are only 40,000 rural bank branches to serve 600,000 villages.

Two closely related themes that are dealt with in the book are the changing patterns of globalisation and the ambivalent attitude towards environmental issues. The great enthusiasm that most countries of the world showed about globalisation towards the end of the past century and the early years of the present century waned considerably after the crisis of 2008.

The developed countries that were great supporters of globalisation in the 20th century have become weary; indeed, under President Donald Trump the United States is attempting to close its borders to people and goods from other parts of the world. India, which followed a largely closed economy pattern immediately after Independence, should not now return to it, says Arvind Subramanian. A domestic market-oriented policy will not generate the kind of growth India needs: only an export-led growth is sustainable and India should keep foreign direct investment flows open because that, in turn, will keep international markets open.

Rich countries, particularly the U.S., are also retreating from commitments made to global environment. While India should stand firmly committed to environmental concerns, it should change the strategy that it has been following. The advanced countries depended on coal for their growth, thereby causing damage to the environment, but are now insisting that the less developed ones should switch over to renewables.

However, India cannot escape from its dependence on coal in the immediate future. Hence, while remaining fully committed to a cleaner environment, India should change its negotiating strategy. An interesting aspect that Arvind Subramanian brings out in this discussion is the wide range of electricity tariff in a single State, Bihar.

Demonetisation

One of the biggest policy issues during the past four years was that of demonetisation announced by the Prime Minister in his famous television speech on November 8, 2016. Reading between the lines, it would appear that the CEA had no prior knowledge about it.

In a short chapter dealing with it, he poses two puzzles. The first is why the ruling party received overwhelming support in the Uttar Pradesh elections held soon after demonetisation was imposed. And the answer he provides is that the poor were willing to accept the suffering caused by demonetisation because they felt that the rich would be hit even harder. This economic explanation of a political event was soon seen to be far-fetched when subsequent electoral events in the State showed that the ruling party’s prospects depended on how united the opposition parties were. Is it possible that the continuing adverse effects of demonetisation on the poorer sections is part of the explanation for the defeat of the BJP in the 2018 Assembly elections in Rajasthan, Chhattisgarh and Madhya Pradesh?

The second puzzle is, why the draconian 86 per cent reduction in cash supply did not have bigger effects on the overall economic growth. One can only say that it is too early to provide a clear answer to that question.

The book concludes with the author’s observations on “Speaking Truth to Power”—not an easy task. This is partly because the CEA “must be fully supportive of the government without spinning on its behalf”. Experts and administrators are not frank; they say what policymakers want to hear. And so, it is important to have disinterested voices from universities, think tanks, and so on.

If the subtitle of the book, “The Challenges of the Modi-Jaitley Economy”, is taken seriously, it can be said that the reader will not learn much about it, and whatever has been said is not particularly complimentary.

I would strongly recommend that those who read this book, especially students of economics and those concerned with economic policies, study it keeping in mind a few questions. One of the conclusions and recommendations of the author is that a sustained annual growth of 8 to 10 per cent is possible and necessary for India. Is growth a number to be counted or a process to be evaluated? Is growth led by finance and transactions India’s need today? Will growth that depends on services stimulate productive forces? Can the future of the rising generations be left to the corporates? Can a regime that crucially depends on the performance of corporates for its survival pursue an independent course of its own?

These are questions that Arvind Subramanian does not raise and could not have raised because of his unexamined commitment to a market-dominated economic order with pronounced inequalities in resource power.