The past one and a half year has seen a big paradigm shift in the markets. The economic impact of the pandemic has been huge, affecting small and strong economics alike. Just how badly has India been impacted? Were we able to shield the big blow? What about the China effect on world economics? The New Indian seeks answers to these and more economy-related questions from Sanjeev Sanyal, the Principal Economic Adviser to the Government of India in the Ministry of Finance. In conversation with Aarti Tikoo.
Aarti Tikoo: The Pandemic has left a lasting impact on the world. We have seen the economies collapse. Even the most advanced economies appear to be struggling.
Sanjeev Sanyal: The world economy is gradually gathering pace. You can see world trade picking up. Our exports are doing particularly well. Investments have started coming in, the economic activity has begun. So in all fair judgment, the world is on track to recovery.
From an economist’s perspective, I am worried about the longer-term fallout. Many countries have taken on enormous debt, which eventually has to be paid off. There are others who may try to inflate it away. We must remember that we are going through major geopolitical changes. This means the supply chains of the future may not be quite the same. And while I’m not of the view that you can simply wish away China’s role in the global supply chains, it is the case where a lot of rethinking and reorganisation is taking place.
Aarti Tikoo: Has the pandemic affected India more than other developing economies?
Sanjeev Sanyal: Every country in the world has been impacted. The degree may vary. For India, we are yet to complete the cycle. So we do not know the real-time impact. Our response to the crisis is different. While for most of the world, it has been a demand shock, for us, it has been a demand as well as a supply shock.
Aarti Tikoo: The growth trajectory in terms of sectors got majorly skewed post the onset of the pandemic.
Sanjeev Sanyal: Hospitality, entertainment, restaurants, and so on. All of them went through a big shock because we had to shut things down. This is not a demand problem. Here, you must understand the distinction of a sector going through a lot of pain, because of a supply-side shock, like shutting you down because of a lockdown. The best way to deal with situations such as this would be to put protocols in place, open things up in a systematic way and keep them that way. Ironically, because we have been relatively careful through these last 18 months, we are one of the few countries in the world to have fiscal space, even monetary space. The other countries are at zero interest rates. There is no scope for them to reduce it further. Whereas, for us, we can work our way around, depending upon the situation. What we need is to be sure that we do not hit any speed bumps from the third wave. Once we are comfortable with that, we can wrap this up.
Aarti Tikoo: Work From Home as a concept emerged big during this time. This led to a lot of jobs related to office spaces, such as office helps, guards, to vanish. Similarly, people who maintain more than one car, purely for the ease of commute for the other members of the family, are considering selling the extra one. Could we safely say that this is bound to affect the demand for new cars?
Sanjeev Sanyal: The automobile industry being the case in point, we need to look at it from the supply and demand perspective. As the situation stands, from the supply perspective, there is a shortage of cars in the market because of the chip shortage. I see it as a short term setback and hope that it will be resolved within six months to a year. But the consumer behaviour, that you mention, is volatile. I would say Work From Home for some is a cost-effective measure and was bound to happen someday. Covid may have sped it up.
The key thing here is that we do not expend energy on-demand expansion to try and save those dying jobs. What you need to do is to carry out reforms that would open up new vistas and create new kinds of jobs that should naturally emerge from such a situation. For instance, we have opened up new sectors, such as the drone sector, which could be as big as the automobile sector in perhaps a few years’ time. Then, there is the cartography and geospatial sector… We all use Google Maps, but most didn’t realise that till March this year that Google Maps was technically illegal in India because the Survey of India had a monopoly over it.
In the times to come, every technological change will bring about a transition. So while you have to soften the transition — which is why you can and should utilize monetary and fiscal resources to dampen the shock – you have to be very clear that it is a safety net and not the source of new jobs. If you confuse the two, you will end up using Apple’s resources to re-inflate dying industries!
Aarti Tikoo: Is the government really catching up with the shift that has happened?
Sanjeev Sanyal: Our focus is to open these sectors out and let new sectors, entrepreneurs, start-ups and unicorns emerge. Of course, there is a transition. And so you need to provide a certain amount of backstop to demand. We have the resources to provide that support. But we are doing it in a very different way. Our emphasis is on safety nets, not on generating growth through demand. And, we have done it iteratively.
Aarti Tikoo: Why are we against China?
Sanjeev Sanyal: China is ahead of us as things stand. But, we must not forget that their success is only three decades old. We started about a decade later. We started carrying out reforms in the 90s, but it’s only in the 2000s that we began to gather some base.
To catch up with China, there are certain things that we need to do. First, we need to open up our economy to allow new entrepreneurship, new companies to set base. We need a situation where both the government and private sector need to invest and build up capacities. You cannot become China based on consumer-led growth. There is no instance in history of consumer-led growth being sustained over long periods. Even the West may now be consumer-driven. In the 19th century, when the UK was going through its high growth phase, it was an investment-driven economy. Victorian investments in infrastructure are still functioning. Case in point, London Underground is a Victorian investment project. Similarly, the United States in the first half of the 20th century was an investment-driven economy. Eisenhower’s highways or the Empire State Building are all of that. That was the time, they were at their high investment phase and they had high GDP growth. The same was true of Japan and Germany in the second half of the post-war period.
Our problem is to get world-class infrastructure to eastern UP or Bihar or the Northeast. Because that is what generates both the demand and the growth. Only, if you create world-class infrastructure and give the poor access to, better highways, access to better airports, access to 24 hours, electricity, then they will become rich.
Aarti Tikoo: So, you are saying that FDI is critical? And if that is the case, how do you reconcile this with Atma Nirbhar Bharat? How are we going to bridge the gap? Or is it really in synchronization with each other?
Sanjeev Sanyal: I think there is a complete misunderstanding surrounding Atma Nirbhar Bharat. In no way does Atma Nirbhar Bharat mean going back to Nehruvian license permit Raj. And certainly not return to pre-1991 import substitution. It is about leveraging our internal strengths to be able to compete with the rest of the world. It is to create and develop capacities that do not make us dependent upon others. For instance, we should have had the capacity to manufacture chips for the automobile sector. Then, our auto production wouldn’t have stalled for the shortage of this component. Now, that is a technology that takes years to perfect. The truth is that even if you want to be an outward-oriented, export-oriented, investment-driven economy, you need to have some basic inherent strengths here to be able to compete.
Aarti Tikoo: So that brings me back to my first question — that there was a hope that because of the disruption in supply chains, and because of the pandemic, we will see a lot of investment flowing out of China and flowing into India. Is that happening? Are we really getting a lot of investments?
Sanjeev Sanyal: I don’t know about the outflow from China, but we are seeing record FDI inflows. We are also seeing a rise in the portfolio and other kinds of flows, as a result of which foreign exchange reserves are spiralling up. We can see new capacities popping up everywhere. And this is not just by way of foreign investment. We ourselves are investing in all kinds of new capacities. Ola just opened the world’s largest two-wheeler factory in Tamil Nadu Chennai and they are doing very well.
Aarti Tikoo: There was a period when China and India were engaged in a standoff on the line of actual control in Ladakh, and a lot of Indians called out for a ban on Chinese imported goods and materials. Are we seeing any shift in China India trade consequent of that?
Sanjeev Sanyal: We cannot wish away China’s role in global trade systems. We also trade with them and there are many critical inputs that are simply cheaper to buy from China. We also export to China in certain segments, although it could be that we import more than we export to the country. There are certain areas where we would not even consider accepting Chinese investment – say, militarily strategic sectors or sensitive sectors, where we are extremely careful. But then, there are other areas where we have no problem with having Chinese capital invested. In the end, we have to look after our interests, while participating in global economic activity. We have to have a pragmatic view on the matter.
Aarti Tikoo: There has been a rising concern among people in India about food price inflation. Why is that happening? And what are the remedies?
Sanjeev Sanyal: We must know that there are two separate issues when you speak of food-related inflation. One, there is a seasonal bounce in India — and the onion prices always bounce up at a certain point in time, so let’s ignore that because that is a storage issue. The important thing here (which is related ultimately to the broader issue of farm law reform and an agriculture strategy) is that we decided to adopt a particular agricultural policy in the 1960s. Now this policy was in response to the requirements of that time. But what we have ended up doing is creating an agriculture policy that grows ever more calories. And that too, from particular cereals that are no longer required by our very own population. This doesn’t mean that there is no need for more food. But the way our agricultural system is set up is that it only subsidises this growth of cereals, which we don’t need. So yes, this is a concern that needs to be addressed.
Second, we have set up an agricultural system that grows a huge amount of produce, which is heavily oriented towards pumping out groundwater and poisoning the soil with various chemicals for fertilisers, which are also not very sustainable in the long run. In times when the race is to check the speed of climate change, one of our climate resilience strategies is surely to conserve water. And what better way to conserve water than to leave it in our aquifers and let it accumulate there. Instead, we are pumping it out to grow rice in places we shouldn’t be growing rice, for example. So we’ve got to rethink this entire strategy. This idea that we should ask our agricultural sector to grow certain kinds of cereals that we are not even eating is not going to lead us. Particularly, because we can’t even export these in many cases — as that would mean if we open up our agricultural market to export then you have to also accept other imports.
So, what we can do is have improved storage. This means you have to allow much more investment by the private sector. So you have to open up markets. We need to invest in cold storage and many other things and be extremely careful that we do not take an industrial view of expansion to the agricultural sector. We also need to protect the interests of people at the base level, such that it’s not the middle segment that eats up all the profits, but the profit goes to the bottom rung. All of this requires rethinking agriculture.
Aarti Tikoo: Within the ruling party that is the BJP, there have been views that the government must reconsider or review the farm laws. Do you agree with that?
Sanjeev Sanyal: I do not and I can’t comment on the political aspects of it. What I can say is that for at least 30 to 40 years, every economist worth their salt and every agricultural expert has argued for the kinds of farm laws that we have tried to implement. Now it is fair enough that there may be certain places where the edges can be smoothed out, the transition can be smoothed out, and so on. But the economic argument for carrying out these reforms remains that the agricultural and scientific arguments for bringing in these reforms have not been in any way argued against. Certain economists, particularly those based on the East Coast of the US have suddenly rediscovered the joys of the Monday system, but if you read their own papers from the past, you will find that they were recommending these exact same changes! Now, as I say this, there may be a case for transition management, and maybe some edges can be smoothed out to make it less painful. But I don’t think any serious intellectual argumentative case has been made for not carrying out these reforms.
Aarti Tikoo: What do you think is the larger or long-term vision/prediction for the Indian economy and Indian markets?
Sanjeev Sanyal: In my view, the most interesting thing that is happening as a result of these massive changes in our supply side, deregulation, ease of doing business, and so on is that we are going through a major change in the economic model that India has had for many years. So even after liberalisation, we never really became an export-driven investment-driven growth model. We improved from the past, but it was still largely a consumption and domestic-driven system. I would argue that the opening up of the markets makes India dramatically more competitive. We’ve already begun to see our exports beginning to ramp up.
Aarti Tikoo: Mr. Sanyal, what is your advice for new Indians?
Sanjeev Sanyal: The new Indian is perhaps about 18 years old today. My generation of not-so-new Indians was the product of the reforms of the early 90s. We’re basically living in a world of public sector dominance, we got a certain amount of freedom to go out and explore the world. What you need to do is to now build on that and take this country forward. My gauge of success would be if the 18-year-old of today wants to become an entrepreneur, a writer, or a sports person, or an engineer, or something that adds value, rather than a bureaucrat or a Deputy Commissioner. That transition from rent extraction to value creation and risk-taking is what the new Indian should be about!