ASHUTOSH VARSHNEY:
Let me welcome you all to the 15th installment
of the OP Jindal Distinguished Lectures. This is the eighth year
and the 15th installment. I'm Ashutosh Varshney, director
of the Center for Contemporary South Asia, and professor
here at the Watson Institute in the Department of
Political Science. Let me start with a word about
the genesis of these lectures. Sajjan and Sangeeta
Jindal, Brown parents 2012, have endowed these
lectures in perpetuity in memory of OP Jindal,
Sajjan's deceased father. The purpose of the
endowment is to promote a discussion of the politics,
economics, society and culture of modern India here at Brown. These lectures are held
once every semester. The previous lecturers
include Kaushik Basu, who among other things
served as the chief economist of the World Bank, Ram
Guha, a historian, Ashis Nandy, a political
psychologist, William Dalrymple, a literary figure
and founder of the [INAUDIBLE] Festival, Amitav Ghosh,
a novelist, [INAUDIBLE],, an economic policymaker,
and Pratap Mehta, a political philosopher
and until recently the vice chancellor of Ashoka
University, and several others. Today's agenda lecture
is Raghuram Rajan, who is the Katherine Dusak
Miller Distinguished Service Professor of Finance at
the University of Chicago at the Booth School of Business. He was the 23rd governor of
the Reserve Bank of India, which is India's fed,
between September 2013 and September 2016
for three years. And before that he was
also, among other things, for three years the chief
economist of the International Monetary Fund in Washington. Raghu, as we call him,
his research interests are in banking,
corporate finance and economic development,
especially the role that finance plays
in development. His books include
The Third Pillar: How Markets and the State Leave
the Community Behind, published earlier this year. I Do What I Do: On Reform,
Rhetoric and Resolve published in 2017, and the
very well known Fault Lines: How Hidden Fractures Still
Threaten the World Economy, for which he was awarded the
Financial Times Goldman Sachs prize for the best
business book in 2010. Raghu was the president of
American Finance Association in 2011, and in January
2003, the American Finance Association also awarded him
the inaugural Fischer Black Prize for the best finance
researcher under the age of 40. The other awards include the
Infosys Prize in the Economic Sciences in 2012, the
Deutsche Bank Prize for Financial Economics
in 2013, and just I would note one more among
others, the Euro Money Central Bank Governor of the
Year Award in 2014 In this first of the
two lectures Raghu will speak to us for 45, 50,
55 minutes on India's economy, how did we get here
and what can be done. That's the title. I might add, it's an
important addition, that this is Raghu's
first full length public lecture on India's economic
policy since leaving office in September 2016, first
public full length lecture. He has given statements
on economic policy, but this is the first
lecture, and we are of course very proud that this lecture is
being given at the [INAUDIBLE] Center at Watson Institute. I will introduce the discussion
to Arvind Subramanian later after Raghu's
lecture is over. So please welcome
Raghuram Rajan. RAGHURAM RAJAN: Thank you. Thank you very much, and
it's a great privilege to be asked to
deliver this lecture, especially given the
illustrious names who have preceded me here. And I thank the Jindals for
endowing this lectureship. So what I want to
talk about today is really where we are
in the Indian economy. By the way, I've got you
under false prextent. I'm only going to talk
about how we got here. What we do about it is
for the next lecture, which is on Friday. So let me talk a
little bit about where we are, and let me start
by saying we are in a very worrisome place in India today. Growth has slowed considerably. The fiscal deficit is
large, leaving little room to do something
about that growth. And there's rising debt
levels in many areas in the Indian economy,
some of that distress. So India is an economy
which for 25 years has been growing at
7%, but what we see today is much slower growth. And if we are to believe
Arvind Subramanian's work, I'll talk a little bit about
it later, perhaps even lower than the headline
numbers that we see. So what I want to talk
about is how we got here. Why are we here? What are the things
that we've done wrong along the way, both
sins of commission as well as sins of omission,
things we didn't do, that have brought
us to this pass. So I want to focus on,
the next few slides, talk a little bit about
growth, talk a little bit about the fiscal, and talk
a little bit about debt and distress just to give you a
sense of where we are, and then spend a lot more time
on trying to analyze the roots of the
problem, which then will help us think a little bit about
what can be done to rectify it. So the first is to show
you that, in fact, we have been slowing. Again, this is not
taking into account some of Arvind's concerns. We were growing really fast
before the great recession, and then 2009 was a year
of very poor growth. We started climbing a
little bit after it, but since then,
since about 2012, we have had a steady
upward movement in growth going back to the
pre-2000, pre-financial crisis growth rates. And then since
about mid-2016, we have seen a steady deceleration. And now the latest numbers
were 5% for the last quarter, but when you look at some
of the investment bank projections for
the next quarter, they're not very happy. It doesn't look
like there's going to be a rebound in
the very short run. Now, some of the reasons for
this, the first two series are the fiscal year 2005
to 2011 sources of growth. 2005 [INAUDIBLE] was
under new [INAUDIBLE] The one thing that
[INAUDIBLE] you between these two steps
[INAUDIBLE] But let's focus on the middle. So the first point
that one has to make is investment has
been falling steadily in the Indian economy
ever since probably the global financial
crisis, but it's been falling steadily actually
from a few years after that. Consumption has been
relatively strong and holding up across
these two periods, but more recently, consumption
has also been falling. Net exports were never a strong
source of additional growth. So again, continuing
on the same theme, what you see most recently is,
consumption is falling rapidly. If you look at every element
of the auto industry, look at cars, look at commercial
vehicles, look at two wheelers, two wheelers are a good
proxy for rural demand, commercial vehicles are a good
proxy for industrial demand, and of course, cars are a
good proxy for urban demand. And you see all of them tanking,
tanking to the extent of 30%, 40% levels of
negative growth, OK. Now, some of this is
because of policy changes that came in, for
example, changes in emission requirements. Some of it is because
of uncertainty about whether the value added
tax will be changed for these. So if I think the value added
tax is going to come down from 28% for cars,
I might say I'll wait and see before
buying a car, because it does make
a lot of difference in the price of cars. But a lot of it is
because of a shortfall in credit availability
to households as well as households themselves
postponing consumption. And finally, when you look
at the trade balance, what you see is that in the
years of strong growth, India's exports were
growing, in fact, growing faster than GDP so that
exports rose as a share of GDP. Over the last so
many years, they've been growing slower
than GDP growth, and therefore falling
as a fraction of GDP. And this is true when
you even take out oil. The numbers on the right hand
side are non-oil exports, and you see that that
has been falling. So India's investments
have been falling. India's consumption is falling. And India's exports
are not doing as well as they did in the past
when they were growing really strongly, especially in
the years of strong growth when India became a
much more open economy by the usual measures. Today, it's in
some sense closing down relative to the past. Now, I said on the
one hand, growth has been relatively
slow, but the fiscal is also a source of concern. India's fiscal deficit
to GDP is officially 7%. That's the sum of the state
government's fiscal deficit and the central government's
fiscal deficit, is about 7%. It has been right around
that the last few years. But the reality is this
fiscal deficit conceals a lot. The headline numbers,
again, conceal a lot. If you look at the projections
for the coming year, the revenue projections are very
optimistic by most accounts. And we just had a corporate
tax cut, which you know, estimates of its
cost vary, but that's going to add the burden
of the fiscal deficit. What is less noted,
but something that the Auditor General
has pointed out in India, is there's a lot of
borrowing which is going off balance sheet and
which is not being counted in the fiscal deficit. For example, the Food
Cooperation of India is essentially a department
of the government. The Food Corporation's
borrowing should be thought of as part
of the fiscal deficit, but is off balance sheet. And you can see that
skyrocketing over the last couple of years
from about 0.7% of GDP to 1.1%, bit 0.4
percentage points of GDP are buried in Food Corporation
of India borrowing. And similarly, the National
Highway Authority of India, that's the chart on
the right hand side, you see borrowing there
go up from 0.2% of GDP to 0.7% of GDP, another
0.5 percentage points GDP. In other words,
add these two, you get 1 percentage
point of GDP that is not counted in
the fiscal deficit but is actually part
of the fiscal deficit. Add to that a whole variety
of normal shenanigans that the Finance Ministry does. I was in the Finance Ministry,
so I know exactly what we do. We accelerate any revenues we
can find and push any payments we have to make. Well, at some point,
that catches up with you. And so put all this together. Add to them the
fact that we have rising contingent
liabilities in India. The rising non-performing
assets means that banks need recapitalization. Some has been done,
but going forward, there is a question of
how much more is needed. You're seeing the non-bank
financial companies, so I'll come to that in
a little bit of time, they are in trouble. And they may need
some state support. You've got rising
health care commitments. We have a whole new health
program, Ayushman Bharat, which is being rolled out. As it rolls out, it will
require more resources. So these are all
contingent liabilities. We don't account for
them well in the budget, but they hit future budgets,
and so contingent liabilities are rising, which leads
respectable investment banks like JP Morgan to put
the actual fiscal deficit at somewhere between
9% and 10% of GDP. That's a large number. It's especially large in India,
because we brought inflation down. In the past when inflation was
available as the inflation tax, you could inflate
away your debt, and that helped make your
finances look a lot healthier. Today, with inflation so low,
it's much harder to do that. You actually cannot inflate
away your debt that easily, and therefore that's
a source of concern. Fiscal is tighter than similar
numbers would be in the past. Now, let me go on to
debt and distress. One of the worrying things
about the recent environment is household
savings are falling. So households are saving less. Now, Indian households
are natural savers, and the fact that
they're saving less should be one source of concern. Why aren't they saving more? Because after all,
Asian economies grew on the basis of strong
savings invested well. So savings are falling
over the last few years, but increasingly, you're
seeing that also reflected in higher debt levels. Household debt
levels are increasing by 9 to 10 percentage
points of GDP over the last four
or five years. So households are borrowing
much more, saving less. That's not a good combination. They did not have a whole
lot of debt earlier, so they started from a
low base, but they're borrowing quite
rapidly, and that has to be an additional
source of concern. And you can see emerging
signs of distress. For example on the
corporate side, what we see is if you look at
credit rating companies, credit rating
companies will give you ratios of the number of credit
upgrades to credit downgrades. And so the lower this
number is, the more stress your corporate sector has. And this level of stress
is at a six year high. In other words, the
upgrades to downgrades ratio is at a six year low. We're as bad as we
were at that point where we were starting
to grow again. So stress is piling
up in the system, probably as a result of
low demand, slow earnings growth and difficulties in
serving the servicing debt. So I've talked to you
about what we see today and why we should be worried. Let me talk a little bit about
what the roots of the problem are. And I want to argue
broadly that we've really had no significant continued
reforms in India to propel economic growth since 2004. Now, what is that year? That is the year of the
last BJP government. The NDA won. Under Atal Bihari
Vajpayee, that's when it lost the election. We had first , a reforming
Congress government in the early '90s followed by
a number of coalitions followed by the BJP government. That 14 year period from
the early 1990s to 2004 was a period of
significant reforms, where we cut down our tariffs,
became a more open economy, and even did some privatizations
under the Vajpayee government. That was also a period where
growth was not that strong, but it created the environment
for really strong growth. The problem with the
Vajpayee government was that even by
the end of its term, we still hadn't got to
the spectacular growth we saw in the next three
or four years afterwards. At least the
experience of growth amongst the broader people
was not that strong, and so the Vajpayee
government's campaign for re-election in 2004, which
was based on India rising, simply didn't catch hold. And they lost
narrowly the Congress. Congress came in with
a coalition government, which had the communists
in it and really could not continue the reforms
that the NDA had started, because simply there
wasn't that much consensus within the coalition partners. Nevertheless, there was an
explosion in investment, and what you can
see here is the rise in new projects announced as
we go into three, four, five. Just before the
financial crisis, you have a substantial
explosion in projects announced, strong growth, and
many of these projects were completed on time. Power plants, many power
plants completed, road building projects completed. The Golden
Quadrilateral in India was done during the
Vajpayee regime. So there was strong
infrastructure investment, strong growth. Now, the collateral effect
of that strong growth was it put a lot of pressure
on resource allocation, including the
institutions who allocate dollars, to lot
more need for land, lot more need for iron ore,
a lot more need for coal, a lot more need for spectrum. All these pressures
rising at the same time as demand for these across
the world is rising, iron ore for example,
strong demand in China, the prices of these things
are going through the roof. But we don't have strong
systems for allocation, because they were
never that valuable. And so iron ore, we really
had no system to allocate it. First come, first serve. Take it. But as they grew more valuable,
the old systems of allocation simply didn't work
anymore, and we needed more formal structure. But we didn't put those
formal structures in place. We still had the old
informal arrangements, and that became the source
of tremendous amounts of corruption. So one of the consequences
of the strong growth was a series of
corruption scandals which came to light in UPA 2,
the second term of the UPA government. Now, UPA, the Congress led
United Progressive Alliance, got what it thought was a boost
at the end of its first term to a massive farm loan waiver. My suspicion, as well
as of some analysis, is that really the boost came
from the strong growth they experienced through much
of that [INAUDIBLE],, but the belief was these
populist measures were an important factor
in their re-election, and so when UPA 2
came into power, further reforms were stymied
despite their ability to do further
reforms by the fact that they really
believed it was not from growth but from
these populist policies that they had gotten reelected. And the emphasis was much more
on populist policies in UPA 2. The net effect was
right through UPA 1 and UPA 2, there were
relatively few of the growth enhancing, liberalizing
reforms, especially because in UPA 2, even the
reforms they wanted to do, like the goods and services tax,
was stymied by the opposition protests which grew
louder and louder as some of these corruption
scandals came to light. So UPA 2 was
essentially a period where we didn't have significant
growth enhancing reforms. We had a lot more spending,
especially on distribution of stuff such as the-- the Food Security
Bill, and inflation started going through the roof. Inflation started going
through the roof in part because of strong
demand, but in part also because we saw increasing
supply bottlenecks being created in the economy, for example
because land acquisition got much harder. Many of the bureaucrats, because
of these corruption scandals, became much less willing
to put out for fear that they would
be sort of held up by investigative authorities. The bankers, who
were really quite willing to lend in the phase
before the financial crisis when projects were
doing really well, now became a little more
risk averse, also for fear that if a loan went bad,
they'd get hauled up by the investigative
authorities. So essentially, the economy
started slowing down considerably
post-financial crisis, but also, it had high
levels of inflation. So macro stability was a
great concern at this time, and India had basically all
the [? bats, ?] high levels of inflation, high fiscal
deficits, and not so strong growth, at which point there
was a course correction in the Congress government. It started the process
of fiscal consolidation. [INAUDIBLE] came back
to the finance ministry to focus on that, and
we had done little bit when we were faced
with the taper tantrum. Those of you who
remember that time, essentially, Ben
Bernanke said that he was going to end the process of
quantitative easing in the US, and that immediately set off
a real bout of volatility in financial markets. Capital started flowing out of
a number of emerging markets, and emerging markets that
didn't have good macro numbers, amongst which there
was India, were thought of as prime
candidates for money to leave. India was one of the
fragile five at that time, and we lost capital
very quickly. So that was a wake up call. And the government
listened at that time and transformed to focus
much more on macro stability. Bring the fiscal deficit
down, try and enhance growth, try and do whatever
reforms were possible. And at that time, I
think the RBI also joined in in trying to
bring down inflation and to making that a focus. Move forward from
the UPA 2 to Modi 1. I'll call it Modi 1 just
to distinguish it from NDA. It came in on the basis
that the old government was relatively corrupt. It was going to be much cleaner. It was going to create jobs. It was going to create and
run a transparent government, and of course, there were
the traditional BJP elements like Kashmir Uniform Civil
Code, and [INAUDIBLE] that they wanted to make. But that was all on the side. The central issues were
jobs and lower corruption. And as it came in, it
started implementing some important reforms
on the macro side, on the sectoral side, and to
some extent on the household and populist side. I want to show you this as
the fact that during UPA 2, investments started
plummeting and has stayed low really since then. This is the other
platform, the other attempt at macro stability, which
was bring inflation down. That has been a success. We have brought
inflation down in India from the double digit
levels that were there. But what I want to emphasize
is that in this period, we had the advent of Prime
Minster Modi's government, and it started going
about macro, sectoral, and household focused reforms. Unfortunately, it
has been a mixed bag. It has been a mixed bag
because on the one hand, as I just showed, we haven't
been able to revive investment. We haven't brought
investment back. A lot of the promoters who
started projects in the past are now highly stressed
with high levels of debt. They simply cannot
start new projects. And banks say, India? We're not interested
in lending to them. Even old projects, if you
look at the projects that are stalled, they have
also been increasing and haven't been brought
down significantly. The reason they are stalled
is because promoters have lost interest. Now, one of the successes of
both the old UPA government as well as the NDA
government was essentially giving the RBI a free hand
to bring down inflation. That has been a success. Inflation is low
and has stayed low for a considerable
period of time. The RBI also undertook
a series of reforms, for example, opening
up branching, licensing, improving
retail electronic payments. We now have a state
of the art payment system for retail payments
called the Universal Payment Interface which
actually is better than many places in the world. These were all
small level reforms. But one of the big
concerns there was there was that as projects sort
of [? initiated, ?] fell, there were also a whole lot of
all projects which were stalled and getting into distress. Bad loans started building
up in bank balance sheets. And that's what you
see here, that is, the NPAs of public sector
banks started rising. Now, the problem with banks
when they start seeing bad loans is there's a temptation
to hide them, to push them under the carpet,
especially if the bank's CEO has a short horizon. I'm going to be
gone in two years. Why do I have to recognize
all the bad loans now? They're going to hit
my profitability. Why not bury them for
the next two years. Next guy can deal
with them, right. So evergreening is
a constant feature in banking systems
across the world, and you really have to
force the banks to recognize the bad stuff, because
until they recognize it, they don't do anything about it. And so good money
gets thrown after bad in keeping these projects
afloat, even though they simply need to be restructured if
they have to have any hope. So what happened
here in [INAUDIBLE].. The RBI undertook an exercise
to clean up the banks and essentially
forced them to start recognizing their bad loans. And what happened as a result,
this was the asset quality review undertaken by the RBI, is
the NPAs of the banks shot up, because there's a lot of stuff
they'd been burying which came to light at that point. Now the classic way
of dealing with this is force them to
recognize, force them to start dealing
with these loans and working them out
with the promoter so that they can
be put on track. In the meantime,
recapitalize the banks so that they have enough
cash to make new loans where lending is necessary. Now, bank recapitalization
has been halting. The government has done some
but typically been a little behind the curve. What the government did,
which was very important, was pass the Insolvency
and Bankruptcy Act. And one of the problems
in India in the past, as some of you in India
know, is that it's very hard for a lender to
recover money from a borrower, because there's no
way of essentially forcing the borrower to pay up. We had a bunch of acts pass, but
every time we had an act pass, it worked initially. For example, what was called
[INAUDIBLE],, an attempt to give lenders the right
to seize collateral. But after a little
while, the promoters figured out how to stymie
the lenders once again. [INAUDIBLE] got clogged
up in the courts. The debt recovery tribunals
got clogged up in the courts. And so the Insolvency
and Bankruptcy Act was yet another attempt to
try and force the borrower to repay their
lenders and not have the lenders go from
pillar to post in trying to look for their money. And initially, it has worked. Initially, it worked in putting
the fear of God in borrowers and forcing them to repay. More recently, however,
it seems as if it's going the way of the old acts. The promoters have figured
out how to end run the banks, and the judiciary has
also intervened in a way as to make it longer and longer
and costlier and costlier. And so unless we do something
about the Insolvency and Bankruptcy Code,
it will go the same way as the older reforms. It will be essentially
gamed to ineffectiveness. What also has happened in
India in the financial sector is that we've had
the public sector banks getting into trouble. Because they got into
trouble, their lending started slowing
down significantly. So what you see is
that the public sector banks, that's the blue
line, were lending a lot. And then as the
loans started getting in trouble, [INAUDIBLE]. So in recent years,
the public sector banks have started lending much less. The private banks and
non-bank financial companies have lent much more. Now, the private banks have
been relatively careful about their loans. A lot of the loans
are retail loans. The non-bank financial
companies were also generally careful
about retail loans, but one source of lending has
been a lot more problematic for them, which is they lend
to developers who built out some of these projects. And those developers have
gotten into trouble because of the slowdown in the retail
sector, and as a result, the non-bank financial
companies also had incipient loan losses
on their balance sheet. But this came to a head when a
big non-bank financial company, ILFS, essentially imploded
in September 2018, and as a result of that,
non-bank financial companies found it hard to get credit. A lot of them have gotten
into deep trouble since, because not only do they
have little access to credit, but they have loans building
up on their asset side which are going from bad to worse. So this is broadly legacy
problems piling up. We're not able to clean up
the projects that are stuck. We're not able to clean
up the banks fully, but that process is under way. Non-bank financial companies
have filled the breach, but are also starting to get
in a little bit of trouble. Now, two big actions also
happen over this time which create significantly more
problems for the [? system. ?] The first is, out
of the blue, India demonetized 87.5%
of the currency. Now, essentially what happened
was the government said, 500 rupee note and 1,000 rupee
note are no longer current. Now, what happens
when you demonetize 87.5% of the currency? Basically, people
don't have currency to do transactions with. Some of it was replaced,
but it was replaced slowly. It took three, four months
to replace it entirely. In that period,
the informal sector basically didn't have money
to do its transactions with. These are people who
don't use credit cards, don't have checks. And essentially, a whole lot
of them got into trouble. It's hard to measure
the damage that was done to the informal sector
because we really don't collect statistics on them, but
the anecdotal evidence is a lot of people
went out of business, and there's some actual
studies which show it now, that especially in rural
areas, there's a lot more fall in transactions done as a
result of the demonetizing. But in addition, there are
sectors which deal primarily in cash for a large
part of the transaction, or some significant
part of the transaction. Real estate is one sector that
is especially focused on cash, and this sector was already,
as I said, weakening, but with demonetization,
it got into further and further trouble. And that also then spilled
over to the developers who had built this real
estate, and then further to the non-bank
finance company. So that was blow number one. And measures of how
much the setback wrote varied from 2% to 3% of GDP
for a couple of quarters to 2%, 3% of GDP
on an annual basis. Now, this is all using
stuff we can measure. What is harder is to think about
the stuff we can't measure. Certainly, if you look
at employment numbers, for example, put
out by the CMIE, unemployment went
up significantly post-demonetization. The second big blow was
the goods and services tax. Now, democratization
was introduced without substantial preparation. I say substantial
because we know there wasn't enough
currency printed to replace the currency
that was taken out. You had to print at full speed
for the next four months. Typically, you don't
do such things. You typically when
you democratize have the money ready to roll
out on the day you demonetize. That was not done,
suggesting the timing was chosen for other reasons than
everybody was fully prepared. That leads to the
next issue, which is we had the roll out of
the goods and services tax. This is a wonderful concept. Demonetization was
misguided in concept. It was not a thing which
either effected its aims, which was to bring down black
money, or effected what became a later aim, which
was to substantially increase the level of electronic payments
or substantially formalize the economy. What it did was
create a lot of pain in a very short period
of time, especially for the poorer informal
segments of the economy. It was brilliant politically,
though, because the government won the UP election soon
after demonetization. So it was sold
politically very well, but it was not an economically
well thought out idea. The goods and services tax
was the next big reform, and it is something that the
UPA government has been pushing. It hadn't gone through because
the BJP had opposed it. Then the BJP took it
on, and to its credit, managed to push it through as
a constitutional amendment. It was a sound concept,
but again, initiated without enough preparation. The computers weren't ready
for the volume of transactions, which means right off the bat,
you had to say don't do this, don't do that. OK, we're going to
simplify the forms. There's a lot of back and
forth which essentially undercut compliance. And the constant fiddling with
the rates, I would presume, also created uncertainty. One could argue that some of the
recent fall in demand for cars, for example, is because people
are still trying to figure out, are they going to reduce the
tax, the goods and services tax on this from 28% in
order to enhance demand. If so, I don't want to buy now. I want to wait until
they reduce it. So this fiddling back
and forth creates uncertainty, which eventually
has effects on growth. And so ideally, you would want
everything to be planned out, everything to be rolled out. Nothing in life actually
happens that way. You have to roll it out to
see some of the problems. But arguably, the
goods and services tax had thought less about what
would happen than one would want in such a big reform. One could even argue with
the benefit of hindsight that one should have run
a parallel experiment to see if it worked before
really running it out on such a massive scale across India. You could say that you never
experience the full volume that you would experience
running it out all over India. Nevertheless it
was an experiment that should have
been better planned. In hindsight, it
has been costly. So let me quickly walk through
some of the sectoral reforms. Agriculture-- there has
been again some reform. Crop insurance has
been broadened. There's been a
significant increase in the roll out of direct
benefits for fertilizers rather than
subsidizing them, etc. But the reality is despite
some of these changes, agriculture is still a
big problem for India. Too much of the population
still depends on it. And productivity has
been abysmally low, even though India has had
some successes in food and agriculture. For example, we're the
largest milk producing country in the world. Nobody knows this. I mean, few people know this. But we are. And we have done it on the back
of a substantial revolution in milk production. And similarly, yields
in a variety of crops have been increasing, but
not to the extent desirable. And this has been
compounded in recent years by the fall in the
agricultural terms of trade. That is, the prices that
are obtained by farmers have, in fact, not kept up. And have fallen
relative, for example, to the cost of their inputs. And so there is deep
agricultural stress. And the way governments
across India deal with this is periodically waiving
off agricultural loans. The problem there is
that the poorest farmers don't get loans. They go to the moneylender. So the beneficiary
of loan waivers typically are the
richer farmers, and it does create problems
in terms of the inequality and who benefits, as well as
creating massive fiscal issues for the state. What we really need is much
more careful investment in agriculture, especially
in agricultural extension, seed provision, and
technology upgradation. India needs to reduce
the fragmentation of agricultural holding. The reason people don't
have high productivity is they don't have
good holdings. So they can't use technology-- they're averse to
using some of that. Fragmentation would get
reduced if some of these people could lease their land out
and go work off the farm. But leasing is also something
we haven't made easy. And that holds back some
of the increase in size. But the most important
problem in Indian farming is the price the farmer gets
is often very low compared to the price at your table. And that's because
there's a whole range of middlemen in between who
absorb some of the rents. Every politician
comes to power saying I'm going to make
the farmer get more. But they come up against strong
vested interests, many of whom have political connections,
amongst the middlemen. And so we've found it hard
to remove that middlemen. There's been initiators on
creating electronic markets, on creating warehouses-- we need to do far
more of that in order to give the farmer a good deal. In the meantime,
India's old habits-- you saw an example of
that just a few days ago. When the price of any
agricultural commodity gets particularly high, they
ban exports of that commodity. Immediately the price falls. But the poor
farmer, who for once was getting some benefit
from price rising, gets hurt at that point. So farmers are protesting
in Maharashtra today because of these bans. But this is a problem. We don't have a
systematic policy of supporting the farmer
with either insurance or procurement at reasonable
prices across India. Instead we do it haphazardly. But often when it comes to
a choice between the farmer and the customer, we choose the
customer because the customer-- votes matter a lot. Onion prices are an important
political issue in India. And with elections coming
up, the price of onions is extremely poor. Other places where we've
had mixed success-- power. India is in a position to
generate tremendous amounts of power today-- enough for the most part
in going towards 24/7, or in many parts of the country. The problem in India is that
we have distribution companies sitting between the consumer and
the producer who simply are-- for want of a better word-- incapable of running
themselves efficiently. So these distribution
companies essentially make enormous losses. They're state owned
distribution companies. So in situations where there's
plenty of power available, they simply don't buy it and
sell it to the final consumer because they don't have
the finances to buy it. So distribution
companies actually are standing in the way. We do need to restructure
these distribution companies. Put them on a sound
financial footing. We've done that three times. And every time we put them back
on a sound financial footing because we haven't changed
either the fact that they're not charging adequately
for power on the revenue side, and that they see a lot of
theft happening of power, which they cannot
essentially claim. These companies start making
big losses once again. So we have restructured
them three times. We will have to
do it once again. But we don't seem
to learn the lesson that after restructuring, we
need to make sure that they are also reasonably profitable. So India now has the
paradox of having huge unutilized
generation capacity but even though the customer
wants 24/7 power and can and benefit from that, we are
not able to provide it to them. So interestingly, power
is a success story even despite all
this in the sense that we have been growing power
consumption about 6.5% a year. But much of this is not
in the industrial states where power consumption
has been relatively flat, but because we are bringing new
states into electrification. And we are growing in that way. Ideally what we'd want to
do is create enough power across the country
so that we can benefit from electric power. And finally, two other
sectors that I'll quickly talk about-- we've had an
attempted banking sector reforms. Remember I told you the
public sector banks got in trouble by making bad loans. It is generally recognized that
we need to improve governance in the public sector banks. And there have been
some efforts on this under the Modi government. We have created something
called the Bank Board Bureau to recommend some
of these public sector appointments. But the real problem is
that Bank Board Bureau doesn't have much power. The recommendations it makes
goes up to the ministry and then to the prime minister's
office in the same way as it's always happened. So it's not an
independent agency which can make
independent appointments. Similarly, the public
sector bank boards have little power of their own
to appoint the chief executive or to take
significant decisions. And as in the past, they
have been politicized. Of course one of the problems
with public sector firms is all public sector
firms typically overpay at the
bottom, because that's part of their social function. And they underpay at the top. But this is a bad way to
run a firm because you don't get much talent to run
the firm, because you're underpaying at the top. And this is a problem with
the public sector banks also. And I think this has to be
fixed because increasingly in the financial
system, there is a need for really capable
people to run these banks. But you simply cannot attract
them with the kinds of salaries you pay, even if you're willing
to recruit from the private sector, which historically
hasn't happened except for two instances-- again, to give
credit to the Modi government-- under that government. What has happened most
recently is something that I think was unnecessary. And we'll see how it plays out. Recently what's happened
is in an attempt to improve the public sector
banks, we've consolidated them. We've picked-- you
three get together, those three get together, the
other three get together-- largely, I think, on the basis
of the kind of information technology they
use, so that they have the common information
technology, and also the areas they service. The problem, as everybody
associated with banking knows is, mergers take a lot of time. And they're a big headache. Who occupies which position? How do we merge
departments together, etc? These bank mergers are coming
at a time the banks are already dealing with high
levels of NPA's-- non-performing assets. They are coming at a time
that the economy is slowing. It's probably not
the right time. It may be the right move,
but it's not the right time. And public sector
banks are going to be engulfed in managing the
mergers over the next few years instead of actually focusing
on making better loans. And finally, one of the problems
with public sector banks is that they have government
mandates imposed on them. Thou shalt do this. And those mandates are
generally uncompensated. The latest mandate comes from
the Modi government's emphasis on lending to small
and medium companies. There is a whole
scheme called the mudra scheme which got them to lend. Unfortunately that experience
hasn't been turning out particularly well. But what do we do when that
experience doesn't turn out well? Do we clean up the system? I think what we've
seen now is an attempt to try and not recognize
the problem, which is we're going to
have forbearance on the MSME loans that go bad. In other words, they
will not be recognized. And in fact, we're
going the other way. In order to revive credit
because credit is not flowing, we now have the
concept of loan mela. There was a few-- anybody
know what a mela is? It's a fare, right? And a loan mela is a loan fare. Come one, come all,
get your loan, right? Now, you wonder how
much credit, you know, careful credit assessment
goes in when you're supposed to give loans in a loan mela. I think the early
signs are the banks are trying to do credit analysis. We will see going forward
what kind of pressure they are subject to in
order to make these loans. So the broader problem
is, the public sector banks are in difficulty. The reality is they need
significant governance reform. Much of what is being done is-- initially, there was
some appetite to do it. Unfortunately, now we're doing
stuff which probably takes away from governance, takes away from
cleaning up the balance sheet rather than
necessarily improving the quality of
the balance sheet. One example of this
that I pointed to was the pressure on
public sector banks to make some of
these MSME loans. And finally, let me come to the
issue of trade and investment. That has been a focus
of the Modi government, a good and necessary focus. However, what trade
and investment needs really is an increase in
the ease of doing business. Because, ultimately,
you get more trade if you have more
efficient firms, who are able to produce both
for the domestic economy and international. Now, here again,
what one would want for is a slashing in some
of the old regulations that hold back firms and
focusing on improving the ease of doing business. Now, there's been some
attention, but largely focused on the World Bank indicators
of the ease of doing business rather than the
actual conditions in India on what prevents
businesses from working easily. So as a result, we haven't got
that significant boost so far in business opening. Because, in fact,
it may not have become that much easier for
businesses to operate in India. One of the recent concerns
has been on tariffs and taxes. If you want more trade, you
should bring down your tariffs. Because today, the
way trade happens is through global supply chains,
moving goods back and forth. In order to move goods back
and forth across borders, you need lower and
stable tariffs. Instead, what we have is
high and fluctuating tariffs in certain areas-- not all areas,
but certain areas. And that becomes a
concern for business. What will the
tariff be next month if, in fact, I open a business? India is not part of any
significant global supply chains. And that makes it
a problem if India wants to increase its exports. Similarly, taxes, the recent
cut in corporate taxes is beneficial in
attracting firms to India. But what firm's worry
about is not just the level but the changes. Is this going to change? Am I assured that when I
put my investment in India, it will spend 15% to 17%? And unfortunately in
India, we have a history of going back and
forth, some of which was reflected in the
recent budget in taxes on foreign investment. So we need to have a process
by which we stabilize rules and regulations
and taxes and tariffs if we want to attract
new companies into India. That's one reason
why if you look at the level of foreign
direct investment in India, despite the
emphasis on Make in India, you see in the last
four years, the level of foreign direct investment
hasn't changed very much. We get about $40 billion. In comparison, Brazil gets
$90 billion in the FDI. I'm not even
talking about China. China is a different-- occupies a different space. We have had some successes. We have had some successes. For example, in India, we-- actually, let me start with
the success, cell phones. Cell phones, we are starting
to assemble more cell phones in India. And this has gone up. If you look at the
cell phone imports, they have come
down significantly. And that's not because we're
buying fewer cell phone. It's because we're
importing them. And if you look at exports,
that is the black bar there. That has gone up. So India is starting
to export cell phones that it assembles in India. That's good. The problem, however, is
it's largely just assembly. Because one of the counterparts
to the increasing cell phones is the fact that you look
at electronic components, we are importing far more. If you look here, here importing
far more electronics as cell phone production is increasing. In other words, we
are doing assembly. Now, that's not
to be sneezed at. We didn't do assembly before. And doing assembly
today is a good thing. But it's not
value-added assembly. It's basically
importing the components and putting them together. In places which are
more value-added-- and this is why I want
you to look at textiles. China is moving out
of textiles, right? Who's taking its place? India has moved up from about
3% of world exports in textiles to 3.3%. Now, that might seem
like a reasonable number, but it's over a period
of nearly 20 years. On the other hand, if
you look at Bangladesh, it's gone from 2.6% to 6.4%. If you look at Vietnam,
it's gone from 0.9% to 6.2%. So Vietnam and Bangladesh are
absorbing the textile market, while we have plenty
of people to work and we're not getting any
of the textile market. That suggests we
are still not seen as an export-friendly place, OK? Our businesses are not doing
as well as they should. And what's holding
us back, we don't have appropriate logistics
power, land, office space, and qualified manpower
relative to some of these other countries,
even a competitor that we think is very similar
to us, such as Bangladesh. And so that's something
to worry about. Let me end this talk
about the sectoral issues and then I'll come to
what's going wrong. One place where
the Modi government has had a fair
amount of success is in people-oriented [INAUDIBLE]. For example, what-- I think you coined
the term JAM-- what Arvind calls
JAM. [? Jantung, ?] which is a bank account
for everybody, Aadhaar, which is the unique
ID, and mobile phones. You combine these two, you
can do direct benefit runs. And what the government
has been doing increasingly is do more direct
benefit transfers for things like pensions,
subsidies, scholarships, et cetera. That's been a great improvement
in the lives of people. Because instead of
going, petitioning a government officer to
release their pension, they now get it directly
in the bank account. That's something
really important. Similarly, Clean
India, Swachh Bharat, the signature program of Prime
Minister Modi, in building toilets for all. Now there's a lot of complaint
that these toilets are built, don't have connections
to the sewerage system and essentially
are non-functional. But nevertheless, a large
number has been built. And there is a change to some
extent in how these are viewed. So that is a benefit. India needed to end
open defecation. And if we have
made some progress, if not actually
achieved that goal, it is an important step forward. Similarly, you know, attempts
to reduce the burdens on the poor, cooking gas, for
example, for the very poor, that's very beneficial because
they don't have to burn wood, which can be tremendously
harmful for the housewife as she breathes that wood. So cooking gas
connections for the poor, another positive with the
subsidies for that cooking gas being paid these
direct benefit transfers. And finally, Ayushman
Bharat, the attempt for health care for all,
at least for the very poor, I think is an
important step forward. Now all these are good steps. But, clearly, there is more
need for rigorous evaluation of how they are working
and to make sure they work as well as they can. For example, there was
investigation of accounts. And while a lot of
accounts had been opened, some hadn't been used,
simply because when you give bureaucrats
a number to achieve, they achieve it without
necessarily thinking about the larger goal, which
is accounts need to be opened, but also used. Similarly, toilets need to
be built, but also used. We have to work on this to
make it much more effective. But it's an important
step forward. And finally, there are, as
with everything in India, accusations of fraud. For example, with the
health care program now there is talk of some
of the private hospitals having billed the government
and billed it for things that are not actually happening. Let me spend three minutes-- and then I'll give
it over to you-- what's going on and
why is India slowing despite all these reforms. And I would argue
that, you know, there's an attempt to say this
is because of the outside, the world is slowing. Well, the world actually
was growing more slowly in the earlier period. Sometimes we want
to pin it on oil. Well, oil is
actually cheaper now than it was in
the earlier period when we were growing strongly. And, of course, sometimes
we want to pin it on trade. But trade has been relatively
weak in both periods. I think looking to the outside,
to blame the outside for what's going on is probably wrong. What is probably a better
explanation is really this is a consequence of not
having invested for nearly 15 years or, I should say, probably
since the global financial crisis not having picked
up the pace of investment. That's one. And the second is
the lack of reform, of significant reform
over the same period. And both those have
combined with-- these are acts of
omission, in some sense-- with acts of commission. The sequence of demonetization
and the Goods and Services Tax essentially was a
straw that seems to have broken the
Indian economy's back. Because it came at a point
when the economy was already relatively weak. So if you look at
one investment we have slowed down relative
to our peers, that's one big source of concern. But if you look at why
things have slowed down, you see that
post-demonetization, we had a substantial
fall in growth. Then we had the goods
and services tax. I think that just
about that time, the economy was rebounding
from the demonetization. But that-- the effects of
the goods and services tax plus the NBFC crisis, all
those compounded, once again, to bring these things down. The bottom line is we need to,
essentially, enhance growth. Last point I will
say is all this is before we even come to
Arvind Subramanian's critique. Arvind argues that even
this low level of growth-- he's not talking
about the most recent, but he's talking up to 2016-- even that growth may be
somewhat mismeasured. And essentially, this
is a slide that he wants us to look at, which
is in the previous period, pre-2011 growth, we had
substantial investment credit, exports, imports. And Since then, what we've
seen is that everything has tanked except the GDP number. Even though investment has
come down, rent has come down, exports have come
down, GDP has not down. That's one version of
what he's trying to say. The other version of
what he's trying to say-- I think this I found
very interesting-- is when you look at the
central government's direct tax collections, even that
has fallen considerably. When a country grows richer,
actually taxes go up. Because people move into higher
tax brackets and can pay more. And especially with
all the reforms this government has done,
we should see higher taxes. Instead, real
taxes have actually fallen as have nominal
taxes over this period. So that's something of concern. Let me end. So basically, signs of
deep malaise, growth is significantly lower, the
fiscal space is narrowing, debt and [INAUDIBLE] India
is losing its economic way. I will argue next time
that perhaps the reason is because we are
centralizing power without a persuasive
economic vision. And if we do this,
we risk wasting the demographic dividend. We talk a lot more about
this in the next talk. Let me stop there. Thank you. [APPLAUSE] ASHUTOSH VARSHNEY:
Thank you, Raghu. Our commentator is
Arvind Subramanian. He is currently a
visiting lecturer in public policy
at Harvard Kennedy School and nonresident
senior fellow at the Peterson Institute
of International Economics in Washington. He was the chief
economic advisor to the government of
India between October 2014 and July 2018,
almost four years. And as chief
economic advisor, he oversaw the publication of
the annual economic survey of India, which became a
very widely-read document. And here is a
piece of statistics that you would find
very interesting. The 2018 survey had 20 million
views from over 190 countries in its first year
of publication. So I don't think,
I mean, novels are read that widely
and pop books are read that widely, but the
idea that an economic survey document, an annual
economic survey document had 20 million views
over 190 countries, we've all given Arvind
credit for that. His latest best-selling
book is a reflection on his time spent as the
chief economic advisor, Of Counsel: The Challenges
of the Modi-Jaitley Economy, published last
year, December 2018. And while at the
Peterson Institute, he wrote the award-winning
book that many of us read, Eclipse: Living in the
Shadow of China's Economic Dominance. That was 2011, 130,000
copies sold worldwide. So let's welcome
Arvind to Brown. And he'll speak for
15 minutes or so and comment on Raghu's lecture. [APPLAUSE] ARVIND SUBRAMANIAN: Thanks. Can the PowerPoint be-- yeah-- replaced? OK, while that's being done,
let me thank Ashu, Brown, and the Watson center for
inviting me to provide comments on Raghu's first lecture. It's a real pleasure to be
discussing it because, I mean, as you saw, very thoughtful-- I [INAUDIBLE] and
they said [INAUDIBLE].. Yeah, while this
is being uploaded-- yeah? So, as you saw, it's a
very, very thoughtful and comprehensive lecture. And it's a pleasure to comment
on it because, you know, there's a lot to agree with. There's some amount
to disagree with. And I think there's also
lots to collectively think through going forward. So let me summarize Raghu's-- yeah, thanks. Let me summarize Raghu's
lecture, really powerful lecture, by saying,
you know, the diagnosis is that there is a deep malaise,
both fiscal debt and distress. And the explanation
he unfortunately didn't spend enough time on and
maybe I'll kind of take issue with it even though he didn't
elaborate on that, which I think is actually quite an
interesting and insightful and kind of a nice
way of looking at it-- I mean, I disagree with it. But I still think it's
worth thinking about. The explanation
is that, you know, India is losing
its economic way, in part because it's
centralizing power without necessarily having a
concomitant economic vision, as it were. So let me take each of these-- just in the interest
of time, I won't do the overview of the overview. But let me start
with the diagnosis. I think Raghu and I think
probably are on the same page. And I think he emphasized
this quite a lot. I just want to emphasize, again,
that the malaise is not recent. I think there's a much longer
period of malaise afflicting the economy. My own view and I
think, again, echoing very much what Raghu says,
that essentially India never recovered from the
global financial crisis. And if you look at-- you know,
if you look at economic growth around developing
countries, what motors it, the main engine, are
investment and exports. Those things drive
growth in India. They drove growth in East Asia. Essentially, those two engines
have basically collapsed. You know, investment
collapses around 2010, and you can see the
difference between this period and the credit thing
also collapses along with investment. And trade collapsed as well. And where I disagree
with all the analysts, for reasons I will say, is that
actually consumer consumption, the other engine of growth,
also actually collapses and only picks up very briefly in 2016-17
and '17-'18 because of this credit bubble that
the NBFCs fueled. So consumption also-- so
basically everything really declines. And so the economy is a
very different economy post-global financial crisis. Unfortunately, it doesn't
get reflected in GDP growth. Raghu mentioned that. I don't want to talk about this. But I will come back to
that later in a while. So think about the two engines
of growth, I think, collapsing. And I'm not going to talk
about the export collapse because I think it's
much more complicated. I've been doing some recent
work with a colleague. If there's Q&A, I'll
talk about this. I think the export story
I understand, actually, a little bit less. I think it's the investment
and credit story that I want to focus on a little bit more. And, as you can
see, essentially, if you look at what I call the
twin balance sheet challenge-- this is what I thought afflicted
the Indian economy, which is firm are overindebted because
of the boom, they overinvested, things went bad, they're saddled
with all these huge amount of debt. The counterpart, bad
loans are with the banks, so bank balance
sheets are stressed, corporate balance
sheets are stressed, corporate profits are down. And, therefore, we
have what Keynes might have called a magneto
problem, which is essentially the financial system is
jammed and firms are also heavily reluctant to invest. So I think this
is, in some ways-- and this has been with us,
as kind of Raghu also said, since the global
financial crisis. I think I'll come to what it's
morphed into in just a second. But I think this is
at the heart of what has been India's challenge
over the last 10 years. I think what the government
and the RBI and somewhat Raghu says is that-- would say is that, look,
it's one of many problems. And in any case, we've
done a lot of things, including, as Raghu said, the
Insolvency and Bankruptcy Code. And so, I mean, we're acting. It's one among many
problems, we're acting. And so what's the problem? And I'm going to argue
that this kind of neither captures how critical
the problem is and nor how insufficient
the response has been. And I think this has
been a key, I think, problem, challenge holding back
the inadequacy of the response, and maybe an under-recognition
of how serious the problem is. So, you know, at the
risk of wading into, you know, what is Raghu's
natural territory, I'm not a banking expert. But I do want to dwell
on this for some time because I think that
there are things which speak very deeply
about the Indian economy. And I would like--
you know, there's no one better than Raghu to kind
of help us think through this. But I think there
are things which I think I disagree a
little bit with him and maybe things which he also
maybe didn't emphasize enough. And I want to go through that. So when you want to solve
this problem of, you know, balance sheets on both
sides being stressed, I think you want to do what
I would call the five Rs. You want to do recognition. You want to recognize what
the magnitude of the problem. You don't want to hide
it under the carpet. Resolution, all the,
you know, the bad loans with the companies, you
want to kind of extract whatever value there is
or liquidate it otherwise, you know, they can't clean
up the balance sheet, they can't invest. And then, you know,
banks have to take a hit. You have to recapitalize. Of course, the regulator
has to regulate. And all of this has
to be done along with changing the way banks
operate in order to prevent a recurrence of the problem. Especially with the public
sector banks in India, I think we've had a big problem. So how have we fared
on these five Rs over the last five or six years? And I would say that
on recognition, I think Raghu being modest, I
think glossed over the fact that I think the
asset quality review that he started
in 2015 and 2016 I think did quite a lot to
actually-- for the banking system to come clean. But I would argue
still that, you know, this is something I
have to point out, Raghu, is that, you know,
for so many years, RBI the real [? stress ?]
estimate of what the bank loans were were much below what
they actually turned out to be and much below what
many [INAUDIBLE].. So I think Raghu came along
and I think [INAUDIBLE] but I think we were behind
[INAUDIBLE] for very long. So recognition achieved, Raghu
gets a lot of credit for that. But delay, and now,
this is the problem, we are back to
uncertainty because of all the things [INAUDIBLE]. We don't know now how
much is the problem with the non-bank financial
companies and the rebound, I mean, the consequence of
those back to the public sector banks. So I would argue that, you
know, the asset quality review that Raghu initiated,
I think we're sorely overdue or another one, both
for the NBFCs and the banks. Because, once again, there's
too much uncertainty. And, sure, I think it's where
I'd be most critical of, you know, the RBI and government. I think when you think
about a financial system, I think it has to be regulated. I think we've had so many
kind of big kind of problems in standards that,
frankly, you know, we even didn't even recognize
that these were problems for a very, very long time. I mean, what is
happening now is that the [INAUDIBLE] blue
line [INAUDIBLE].. And Raghu alluded to
the fact that, you know, quality is now becoming
concerned with these NBFCs. But even before
that, ILFS, Raghu, 90,000 crore company escaped-- you know, it's not that people,
you know, it's one thing, I think, to say, look, we
knew what the problem was, but we are limited
in what we can do because of all kinds
of political [INAUDIBLE].. And I think that's a
very valid argument. And I think there are
many cases here where I think the RBI could
invoke that, I think. But there are some things
we just completely-- everybody missed. ILFS came out of left
field, completely unrecognized, unidentified. And so we've had a
series of scandals-- I mean, really major problems. And so the quality of
regulation, I think, has been seriously inadequate
both by the RBI and, of course, by the government. So I think regulation
has been a big problem. I think on the resolution,
see, remember why is resolution so important? I think if you were to ask
me, describe what happened-- describe Indian development
over the last 50 years in one sentence,
I would say India went from socialism
without entry to capitalism without exit. So basically, there's
no exit in India. So why the IBC is so
important, why resolution is so important is
because, you know, I mean, capitalism is as
much about getting out as it's about coming in. That's what
Schumpeter taught us, the destruction part of
creative destruction. I think we've not been
successful for the reasons that Raghu mentioned. And I think this IBC is
a very good initiative. But after initial successes,
the magnitudes, the recoveries, the timing have all slipped. And so now, you know,
we're kind of having to reassess once again. I think on the reform,
very limited reform, the PSBs still thrive. Many banks which ought
not to be lending, which were under some kind
of close supervision had been brought back to life. But I think some good
actions have been taken on the private sector banks. So that's kind of-- so my overall assessment
of this is that, you know, after five hours,
there's been financing. The financial system has
been kept alive basically through recapitalization. I mean, the government has,
in fact, pumped, you know, about 3.1 billion-- trillion rupees into
the banking system. And it's been capitalized,
recapitalization and through weakening of the
regulatory standards. You saw the NBFCs' lending,
basically a form of a weakening of regulatory standards. So, in a sense what's
happened is that now they, as a consequence of limited
action, limited reform, the fact that growth
has been slow, we've really gone from a twin
balance sheet challenge, which was the banks and the
infrastructure companies, to what I would call a twin
plus twin balance sheet challenge, where on
the financial side, the non-bank financial companies
have been added to the stress. And on the borrowing side, it's
not just big infrastructure companies, but certainly real
estate companies have also come into the [INAUDIBLE]. So we have a twin
balance sheet-- a twin plus twin
balance sheet challenge. We have rising NPAs once
again and intensification of corporate stress. And this is a chart from Ashish
Gupta of Credit Suisse where NPA is rising, we
are coming down, but now they've
jumped once again. And we are back at, you
know, very high levels. And remember, this is something
that I don't know whether-- I'm going to call it
the Subramanian law of non-recognition, maybe
Raghu would agree with that-- at any point in time in
any financial system, distressed assets are
25%, 30%, 40% more than what the regulator
wants you to believe or what they claim it
is at any point in time. So this is almost,
you know, we can't-- I mean, this
[INAUDIBLE] officially, but we don't really know. So in a sense, investment and
growth cannot totally revive unless we address the this
twin plus twin challenge. And that's why I think it kind
of echoes what Raghu said once again, that if we don't
crack this financial system thing in some
reasonable way, we will be in this kind of eternal
cycle of, you know, bad lending or, you know, problematic
lending, financing, very little reform and the cycle
just continues again and again. And I don't think, frankly,
we've been able to crack it. We've tried. But it really hasn't happened. And I think this is one
of the big bottlenecks that the Indian system
faces going forward. Now let me come to, I think,
what Raghu didn't talk about. And maybe if I'm putting
words in Raghu's mouth, I think he should challenge me. I think Raghu's
point is that there's kind of lack of a
[? persuasive ?] vision and there's a kind of
centralization of power. Yeah, five minutes. What I would argue is
that I think more broadly, I don't think there
is a lack of vision. I think you may want
to dispute the vision. But I think that there
is a lot of vision and a kind of
thing-- what went on. I'll give you an
example, I actually think that what Raghu called
the household stuff is actually a grand vision, which I would
call the new welfarism, which is it's very, very kind
of carefully thought out. It's the public provision
of essential private goods and services to the poor. And it's, you know,
bank accounts, cooking gas, toilets, housing,
power, medical insurance, and now water. It's a vision. It's backed up with
zealous implementation. And it's backed up with really
far-sighted political thinking. So you may agree, disagree. But I think you have to
accept that this is really the animating vision
of the Modi government. Similarly, on GST, I
think that, you know, there is a little
bit of a trap-- while I agree with
what Raghu said-- there's a bit of a trap when
you assess all these things. I mean, it's like when
the economist's wife turns to the economist and
says, "Honey, do you love me?" And he says "Relative to what?" You know? So I think you have to say
relative to what at the GST? Relative to what
happened when before, I think it's a vast improvement. Relative to what
it could have been, Raghu is absolutely right. I think, you know,
implementation could have been, could have been
much, much better. But I think the process
is by and large, you know, it's learning,
they're making mistakes, but they're learning. And so I think I'm still
quite hopeful on the GST. Similarly, the IBC, it's
a very reasonable response to the twin balance
sheet challenge. It's just proving insufficient. So we need to correct. But you can't accuse
the government of a lack of vision or
not doing the right thing. Similarly, demonetization
you cannot accuse it of lack of vision or whatever else
you may want to accuse it of. I think it's part of some very-- and similarly, there's recently
been some bold and welcome corporate tax reform. So if UPA-2 was paralysis, I
think Modi 1 was hyperactivity with vision. So I think that can
be the criticism. Now, I'm kind of going
to cheat a little bit and anticipate what Raghu is
going to say and criticize that to some extent. Because you say, Raghu,
there's no vision, instead we should have
an alternative vision. And the alternative vision
is, do land reform, labor reform, reduce ease
of doing business, improve state capacity,
you know, the same litany. And my response to
that list is, one, if this were so blindingly
obvious and good, why haven't we been able
to do it for 40 years? So even as you recommend
this, you must have the, you know, some
sense of how you're going to articulate the
politics in a way that's going to be different from
the past which would allow that to be implemented. Similarly, I think
it's very important when you allocate this thing. Analytically, if these were such
important binding constraints, how come we enjoyed a
decade of gangbuster growth without any of this stuff? You know, between
about 2002 and 2010-11, India grew gangbusters. Exports grew gangbusters. None of these things
were a problem. How come suddenly
they're a problem? So we have to think more
carefully about this. Similarly, when you talk about,
you know, a state capacity or whatever, I think you
must remember in India, the intelligent question is
not why is state capacity poor? I don't think it's
a good question. The good question is, why is it
that state capacity is so good? GST, Aadhaar, MNREGA, we can
roll things out on scale-- I mean, whatever warts and all-- but it's we can't do
other things on scale. So I think that's the
interesting question, not that state
capacity is uniformly weak, et cetera, et cetera. Similarly, when we
talk about agriculture, I think Raghu was absolutely
spot-on in saying agriculture is a huge problem in India. But even as you say that and
even as we kind of recognize something needs to be done, we
have to confront the fact that in India, almost every subject
now going forward cannot be done by the center
or by the states. Those days are gone. It has to be done cooperatively. Agriculture, some policies
are controlled by the center, some policies are
controlled by the state. Power, some aspects
are controlled by the center, some aspects
controlled by the state. So the question is, it's
not a centralization, decentralization, but how do
we do cooperative federalism? And we did it so
well on the GST, why can't we do it on the other? And so that, I think,
those are the kind of questions we need to be
asking and thinking why. So let me end with a couple of
kind of deeper thoughts, two, three minutes and I end. I said, see, while, I
mean, I kind of little bit disagree with Raghu
that the problem is a lack of vision, et cetera,
but what then is the problem? To me, I think
certainly there was a problem of underdiagnosis. If almost every major
indicator is tanking and, yet, your GDP is saying
numbers are pretty good, you go to a policymaker and say,
look, all this is happening, but he says, no, we're doing
well, GDP growth is 7%, what's the problem? So I think that this data issue
that Raghu highlighted has had deeper implications than
just a question of, you know, credibility and things. It has influenced the
incentive for reform, the urgency for reform
in a way that I think-- that applies to the GDP
data, the employment data, the fiscal data, and
of course, once again, the quality of assets
in the banking system. If, for example,
today in asset quality delivered like the Raghu asset
quality review and, you know, the numbers are kind
of stuck and shocking, I think the impetus for
action will be, I think, quite different. I, on the financial
sector, having been critical of both
government and RBI, I actually am really
skeptical about, can we really crack the problem? Because the problems
are much deeper. Raghu, you know,
governance reform of the public sector banks
[? isn't ?] going to happen. I mean, it's like Einstein's
definition of insanity. You know, we do the same
thing over and over again, but really nothing
changes, right? [? RAGHURAM RAJAN: ?]
But in the past-- ARVIND SUBRAMANIAN: No, no,
even bank board, governance. See, because I think that's
a much deeper problem is, you know, we have the
stigmatized capitalism problem. I think there are skeletons
all over the place, right? And regulator and
government, do they really have the incentives, the
ability to crack through this? And there's what I
call the 4 C problem. In India, what the
4 C problem is, the investigative institutions
are hyperactive, CBI, courts, CVC, CAG. So there is kind of
decision-making paralysis in all public sector
agencies, including the banks. So the question is, you
know, can we crack this? I don't know. Because if we don't crack that,
I'm not sure how we can do, you know, private investment,
coming back again. I've spoken about
center and states. I'll end with this
two last points. I think that more and
more I think about this and more and more I see what
the reactions to, you know, some of the GDP work that I've
done is, I think countries carry these narratives
about, you know, including about growth. So, for example, India,
I think there is now cognitive benchmark that because
we did so well for 10 years, that we're kind of entitled
to this going forward. And so it's almost
as if, you know, you were lulled into believing
that, you know, you do nothing and you're owed 7%, 8% growth,
instead of saying, you know, no. So I think one
critical understanding that India collectively
needs to come to is whether 2000s were the
aberration or were they normal? I think you could make the
case that the 2000s were the aberration. And let me give you one piece of
evidence which I'm working on. If you look at export
performance of India, India in the post-global
financial crisis [INAUDIBLE] has actually done
better than the world. What happened in
the 2000s was we did exceptionally
better than the world. I mean, we did-- I think we were the
fastest-growing exporting economy between 2002-- faster than China, by the way--
between 2002 and 2011, '10-'11. So, was that the normal or going
back to being a normal export economy? And I don't have a very
good answer for that. But I think it's very important. Because if we think
that, you know, the exceptional
performance was the norm, then I think we might be
in for disappointments and, you know, especially
if you think we can do that without all the hard work. Last point I think is that,
I think in all of this when we assess governments,
what is the model we have for how governments behave? And I think that's
something that, you know, we need to think about
much more deeply. I mean, it's possible
that the model is, you know, we deliver
low inflation and Raghu, his onion example was spot on. I think there's a big premium
on delivering low inflation, even if there are costs
elsewhere the system. I mean, if, for
example, the model is you deliver low inflation and
you deliver the new welfarism and you think that that's
going to be good politics, then, you, know that's a
very different approach to policymaking than
someone who says, you know, I want
to reform, I want to get growth, et
cetera, et cetera. So I think our
understanding of how politics and political
models work I think needs to be much more
sharpened, especially in the context of all
that's happened in India in the last five, 10 years. Sorry I've kept you too long. Thank you very much. [APPLAUSE] ASHUTOSH VARSHNEY:
Yes, over there. You first. About 18 minutes left, 17. Would you-- Raghu, would
you like to respond to him or shall we collect
responses from the audience? What would you like? RAGHURAM RAJAN: Well,
I mean, since this is fresh in people's mind, let
me quickly talk about a couple of things. First, Arvind, problems
in the financial system are a symptom of
problems elsewhere. If you don't have profitability,
you get more bad loans. If you don't have
reforms which allow you to put in the
infrastructure, you get more bad
infrastructure loans. So to think of this as
exhaustion and the real problem is cleaning up in the banking
system is really missing, you know, a lot. And so the question
you should be asking is, why don't we have
the conditions for growth that we had in the two-- before
pre-financial crisis period? And blaming it all on the
outside is, I think, too easy. Blaming it all on slow growth
elsewhere, India is poor. It has a lot of potential
for growth on its own without relying on the outside. Yes, exports helped
tremendously then. They help less now. But why aren't we growing-- maybe not at 10%, 9%,
10%, but at 7%, 8%? Why are we growing so slowly? So to put financial sector
problems before, I think, is probably missing
the cart for the horse. ASHUTOSH VARSHNEY: Trade over
GDP should be 40%, right, or it's not there? RAGHURAM RAJAN: It's come down. It's come down. ASHUTOSH VARSHNEY:
It's come down. ARVIND SUBRAMANIAN: It's come
down everywhere in the world. ASHUTOSH VARSHNEY: Everywhere
in the world, so it's what? It's now 32%, 33%,
something like that? yeah. ARVIND SUBRAMANIAN: In
India, it's something like-- no, it's 45%, goods and
non-factory services, but 45%. ASHUTOSH VARSHNEY: [INAUDIBLE] ARVIND SUBRAMANIAN:
[? 40%, ?] 45%. RAGHURAM RAJAN: The second,
which I didn't get to and which I'll talk a
little, lot more about, which is the broader vision
of the Modi government, I mean, I find it strange
to call demonetization something with vision. I mean, there, of
course, everything has a vision behind it. The question is, is
it a coherent vision? Is it a vision that
takes us forward? And, unfortunately, I disagree
with you on that particular act whether it signifies-- it's a vision worth having,
especially if it's so poorly, if its effects are so bad. On GST, this has been in the
Indian DNA for a long time. What the BJP did was it didn't
have it opposing the GST and managed to get it
through the parliament, which was a [? coup, ?] absolutely. But the problem was
after getting it through, it wasn't properly executed. And, yes, I agree with you,
cup half full, cup half empty. But this is a government which
is known for implementation. Why wasn't more thought given
to implementation there? Apart from that,
the bankruptcy code has been talked about for
a long time, as you know, both in UP and India. And Finally India did
it, which is good. But, again, these
are not-- these are things that are in
the pipeline, so to speak, of ideas. Question is, how do you
put all this together into a coherent set of ideas? And that's where I think
there is incoherence. You say you want to export more. At the same time, you
keep increasing tariffs, keep [? changing ?] taxes. You're not creating
an environment to get an export-led economy. That's the sense
in which I think we need far more coherence. You want bureaucrats to go
out there and actually make decisions. You're empowering them. At the same time, you
file cases against the previous
government's bureaucrats for taking decisions
which seemed like in the ordinary
course of business. So what is your vision if you're
not thinking through all this? That's the question I have. ASHUTOSH VARSHNEY: Arvind,
one question for you, what is your estimate
of the negative effect of demonetization on growth? ARVIND SUBRAMANIAN:
Look, I have not done any independent assessment. But let me say one or
two things on that. One, as Raghu rightly said, I
think on the informal sector, we don't know. We've had some studies which
say they could be sizable. That's 0.1, 0.2. But if you see
this latest study-- ASHUTOSH VARSHNEY:
Gita Gopinath. ARVIND SUBRAMANIAN:
--Gita [INAUDIBLE] study, I think what is
surprising about that is how small and brief
the impact is on GDP. To me, kind of the
puzzle is why we don't see much bigger
impacts on the big numbers of demonetization than I think
the studies are suggesting. And I have one plausible
explanation, but I know, I am not-- but so both that the impact
on the informal sector was sizable, but we
haven't measured it enough. But the studies on
the formal things seem to suggest that
they were actually, well, you know, I mean,
surprisingly small. ASHUTOSH VARSHNEY:
If an estimated 90% of the workforce
or 85% of the workforce or 93%, whatever the
actual number is, was in the informal sector and
was hit by the monetization, then isn't it logically
speaking going to cause a lot of
dislocation and, therefore, a reduction in growth? RAGHURAM RAJAN: I mean, you just
look at the broad GDP numbers, right? You see from that quarter of
demonetization, a steep fall, steep fall for the next
two or three quarters, I mean, we have the
picture up there. What do you attribute that to? Because the world economy
wasn't tanking at that point? ARVIND SUBRAMANIAN:
So Raghu, you know, I was looking at these
numbers a little bit more carefully last night. If you look at, actually,
the Indian annual GDP growth rate, look, first,
I mean, I am not trying to defend
demonetization or say-- I do think that the impact
was substantially adverse in the informal sector. I'm just surprised
you're not picking it up in the GDP numbers. I think the Gita Gopinath
study is probably the most, you know, rigorous that we have. And Ragh, what I was
surprised by looking last night is if you look
at the annual numbers, all your numbers
actually pick up. Say, '15-'16 is the low
point, growth, you know, picks up in '16-'17 and
'17-'18 according to all the-- so whatever the
quarterly fluctuations, the trend after '15-'16 is up-- RAGHURAM RAJAN: Growth peaks
in summer of '16-'17, in that summer. That's the first quarter
by Indian calendar. And then demonetization occurs
just after the second quarter. And since then, the numbers-- I mean, since the second
quarter, it's been plunging. ARVIND SUBRAMANIAN:
Yeah, see, I think what is what confounds
everything is that remember that
the NBFC credit surge happens from about-- if you look at the
numbers, '16-'17 it surges. So that, I think,
masks the impact-- ASHUTOSH VARSHNEY:
So demonetization has an adverse impact, but
non-bank finance sector is beginning to
give a lot of loans. ARVIND SUBRAMANIAN: And
maybe that's confounding-- ASHUTOSH VARSHNEY:
And so it makes up-- it makes up to a
substantial extent. ARVIND SUBRAMANIAN: Exactly. ASHUTOSH VARSHNEY: And that's
why Gita Gopinath, one reason would be that's why
she's not getting-- ARVIND SUBRAMANIAN: No, no,
she controls for all that. [INAUDIBLE] have an
identification strategy one could debate here. RAGHURAM RAJAN: OK, but
that's not the point. The broader point is-- ARVIND SUBRAMANIAN:
I mean, but-- RAGHURAM RAJAN:
The point here is-- my broader point was,
which I didn't come to, which I'll come to
in the next talk, that one of the problems
with the way economic policy is carried out in India, there
are these legacy programs-- GST, et cetera-- which are
normal, reasonable things to do. And then there are certain
brainwaves, the corporate tax cut for example
or demonetization, which essentially
haven't been part of a larger sort of discussion. If one was to cut
taxes today, would one cut it on corporations
or would one cut it on the broader public? I mean, now there's a lot
of talk about cutting it for the broader public. I mean, these are questions that
need to be debated and thought through more carefully. One of the worries is, these
decisions are happening without that broader
discussion and how it fits into the
broader reform process. ASHUTOSH VARSHNEY: Let's
go to the audience. We have 10 more minutes
so let's see hands first. Rajeev hasn't had--
Rajeev [INAUDIBLE].. So I'm not sure Raghu is the
right person to answer that. This is for
political scientists. This is for
political scientists. RAGHURAM RAJAN: Go ahead, Ashu. ASHUTOSH VARSHNEY: You-- Rajeev's assumption is that
economics drives elections. [INAUDIBLE] ASHUTOSH VARSHNEY:
Religious nationalism is a rather serious force-- ARVIND SUBRAMANIAN: No, no-- ASHUTOSH VARSHNEY:
--in determining-- on one axis, you
have to demonetizing, the pain inflicted
by that, on another, the expectation of,
you know, the benefits that religious nationalism will
bring to the Hindu majority, you compare that to, you
calculate which one is better. RAGHURAM RAJAN: But let
me just attempt an answer. As an economist, I don't know
anything about politics, right? I mean, I think
the narrative was, look, those fat cats who
cheated on their taxes are standing in line
with you and they've lost a lot of this money. That's why the details on
how much money came back were not released. Because it gave the impression
that a lot of these people had lost money and they
were standing in line along with you. Well, of course, they didn't. They paid 10%. That was the going rate for
converting black to white. And, of course, instead
of their black money sitting in their basement
earning no interest, it now was earning interest
in the public sector banks. But that's a different issue. The issue is, it was popular
because finally somebody-- and this was how
it was sold-- we're taking on the vested interests. And I'm not in any way
defending the tax evaders. We need to get them. It just seemed that if you
look at all that happened, the tax evaders managed to get
their money back in the banks. None of them have
actually been prosecuted in a significant way. This was what [INAUDIBLE]
said would happen and we're seeing it happen. On the other hand,
the broader public, including the very
poor, suffered a lot during this period,
both in terms of the harassment of
standing in those lines, but also in seeing their
businesses collapse because they couldn't get
credit for the few days. So that is a concern, that
this was not thought through on who it would impact
and whether it would have any positive effect at all. ASHUTOSH VARSHNEY:
But there is no regret on the part of
the ruling regime, but they've won, kept winning
elections despite all this. ARVIND SUBRAMANIAN: I'm
not a politician either, but I have a-- a chapter in my book
is devoted to this. I almost-- I don't completely
buy or believe what I argued completely, but I think there
is a strong [? shelling-like ?] case to be made that the
economic cost and the severity were intrinsic to the
political success, i.e. that that's a feature,
not a bug of that. And we can go into
it over dinner. I'll explain why
that's the case. But I think, you know,
for me, what was also-- you know, when we
talk about the GST, I think the other
problem with the GST was it was burdened by the
fact that demonetization preceded it. And so the GST had and
demonetization, as Raghu said, the GST was, I think,
in concept and design, I think everyone agreed with it. But it in the short run
affected the same people that demonetization affected. So GST had to carry the burden
of its implementing GST, but also the burden
of demonetization. ASHUTOSH VARSHNEY:
Other questions? Yes, sir. Yeah. ARVIND SUBRAMANIAN: Yeah,
so, so I think [INAUDIBLE] of the vision that I think
[INAUDIBLE] would raise is this new welfarism, low inflation,
[INAUDIBLE] the political model is, I mean, I'm not-- [INAUDIBLE] that's what, you
know, sustains [INAUDIBLE].. Then I think even for
sustaining [INAUDIBLE] I mean, part of the coherence,
I don't know. But I think that, you know,
it may not manifest itself in, you know, a concerted effort
to kind of get growth going. [INAUDIBLE] doing enough today
to keep this welfarist thing [INAUDIBLE] work or not
and how long [? it will. ?] ASHUTOSH VARSHNEY: So let me
understand, is the argument that this new welfarism
can be sustained without a significant
upward accrual of-- a significant increase
in tax revenue? That's not the argument, right? ARVIND SUBRAMANIAN:
No, I don't-- as an economist, I feel
it cannot be sustained. There's no question. It can't be sustained
because, as Raghu showed, the kind of, you know, debt
levels are rising [INAUDIBLE].. But, I mean, the point is
that you can sustain it for some period of
time, especially if you can influence
the narrative, you know, if you can, you know,
do other kinds of things to keep it going. I think in the long run,
it's not sustainable. But I think how long is long? I just don't know. ASHUTOSH VARSHNEY: One election
cycle or two election cycles, it can work, you're saying? ARVIND SUBRAMANIAN:
Exactly, yeah. ASHUTOSH VARSHNEY:
It's possible. ARVIND SUBRAMANIAN:
Yeah, it's possible. ASHUTOSH VARSHNEY: You've
got an election cycle, it is [? worth ?] [INAUDIBLE]. ARVIND SUBRAMANIAN: Exactly. ASHUTOSH VARSHNEY: A
second also it can work-- ARVIND SUBRAMANIAN: Exactly. ASHUTOSH VARSHNEY: --without
tax revenues going, revenues going up significantly. ARVIND SUBRAMANIAN:
Exactly, you know, because you can do, you know,
the off balance sheet stuff, you know, you have the
narrative that, you know, India is booming and the
poor are getting a thing. So, certainly, one cycle, yes. But in the long run,
it's not sustainable. And I think that is it. Do we have that? Do the people have
that coherence? Let's see. We'll wait and see. ASHUTOSH VARSHNEY:
Other questions? Andrew, Andrew Foster? ASHUTOSH VARSHNEY: This would
also explain why IT boomed. It was a new sector-- ANDREW FOSTER: Yes,
IT boomed [INAUDIBLE].. RAGHURAM RAJAN:
Well, I mean, there is something to
what you're saying, which is, for example, land
reform, making it easier to map land, digitize
it, but also acquire it, which would be beneficial
to all concerned, but has the worry that
the poor will be exploited by the developer and, as a
result, there will be problems. So we have to have
protections, absolutely. But we don't have
to have an act which makes it virtually
impossible to acquire land, which is what we've got now. So the government,
the Modi government, again to its credit
early on, tried to reform or was talking about reforming
the Land Acquisition Act. And then it was accused of
being suit-boot ki sarkar. The government of people
were suited and booted, and it backed off. Now that's an example
of a place where the sort of the
political ramifications-- so while social security
is the third rail here, land acquisition is the
third rail in India. Because it's very
easy for people to protest not just that the
land was sold at a price, but they didn't get
the absolute highest price that could possibly be
obtained taking into account-- so there are ways of
dealing with this. For example, sharing the
land revenues down the line, developing land
and giving people back a piece of
the developed land. I mean, there are
ways of doing it. But we haven't approached those. And if we don't get
land acquisition right, we're not going to get
the infrastructure built. And, of course, many
stalled projects are stalled because they
haven't got land, including, as I understand, the
government's signature project, the
Mumbai-Ahmedabad high speed rail is being held up because
land acquisition has been difficult. So the point
here is, you need to invest political capital here. But that means you have to
have a sense of how it all fits together. And that goes back
to my complaint, what is the overall vision
of how it fits together? What are the key points on which
you've go to spend capital? Because we are spending capital,
but maybe not in the right places. [INTERPOSING VOICES] ARVIND SUBRAMANIAN: I
think very fair point, I think that most of
the things that you see are kind of de novo
rather, you know, but we know that taking
away entitlements everywhere is difficult. But the one
exception is the GST reform because it's come,
you know, it's kind of hard to revamp the
existing tax administration at the sector and the states. And there was a lot of
pushback against that. So broadly, I think
your point is right. See, I think Raghu's-- let me give you one other
example why, you know, I feel I am less competent
to make these judgments about vision and coherence. I think broad points
is well taken. Let me give one example-- two examples. Agriculture, you know, the
lack of policy stability, big problem, right? And in my time, I've been
through three cycles of onion prices going up, export
taxes coming down, tariffs when it comes down. And you say, I mean, this
hurts farmers, I mean, your uncertainty, but
if your political model is that I, you know, am
willing to sacrifice farmers because I care about price
inflation for the middle class, it's not such a crazy
thing to do politically. Similarly, I think, Raghu,
one thing I'll talk-- RAGHURAM RAJAN: No,
no, but Arvind, you can't at the same time intervene
wherever you want whenever you want and at
the same time say I want to improve the
ease of doing business, I want to make-- I mean, I understand there
are some trade-offs you make, but if you are, in a sense,
impulsive-- or not impulsive, but you don't have a process
by which you change tariffs, by which you change exports,
imports, by which you-- then you're not incentivizing
the other effect. All I'm saying is the
things don't hang together. ARVIND SUBRAMANIAN: Yeah,
but sir, one last, just one-- see, Raghu referred to
the corporate tax reform. It's come out of
the blue recently. It's a major
corporate tax reform and partly driven by
the fact that the backs are against the wall. So it was like a kind of we
have to do something to-- so I think this was an
idea that was actually actively considered four or
five years ago and rejected. I don't want to go into all
the personal angles here. But looking back, I realize
that the taunt of suit-boot ki sarkar, that the government
was vulnerable to also made it difficult to undertake
the corporate tax reform. It's this new welfarism
that burnishes the, you know, pro-poor credentials
that then you acquire political capital to do
the more difficult reforms like the corporate tax reform. So I'm not saying that-- so
I'm saying it's not all-- there is kind of
some deeper kind of thing going on here, which
we just can't dismiss so easily. And the corporate tax reform
is an example of that. ASHUTOSH VARSHNEY: We are
coming to the close of-- to the end of this meeting.
