Going forward, what are the areas where you think the government will progress upon? We have seen a lot of work happening in infrastructure, power, and many others starting with digital infra. What could be the new areas, the next generation reform which is being spoken about in your view?
Sanjeev Sanyal: So, these are my views. What will be done in the Prime Minister’s vision document later on is not up to me to decide. I can tell you what I would like to be done in the next few years.
Well, first of all, the infrastructure build-out has to continue. We are at the very early stages of this build-out. We are building out the highways, the ports, etc, now. But there are lots of other things, water supply, garbage clearance, there is a lot of other infrastructure that needs to be built. We are also for the first-time seeing momentum return in private sector investment, coming back very strongly and that has to be maintained now for years.
This is something that we need to also curate. So, if you are thinking in terms of growth momentum, I have argued for many years that sustained growth is driven by investment, not by consumption. We need to have a long consumption cycle and we are in a position to sustain this. Investment rate is already above 32% of GDP and we can slowly bring that up over the next decade or so to a somewhat higher level.
That will mean that savings rates will also go up. I would argue that this is the real driver of growth rather than other people having other modules of growth consumption and so on. I am a big believer in investment-led growth and that is one big areas that we need to sustain.
The second big area of reform that I would argue we need to do, relates to administrative reforms. I have argued this also for many-many years that we have a bureaucracy that was inherited from the British and then through the socialist period. Essentially what happened is that it was designed essentially for control rather than to deliver service. In the last 30 years of reform, we have withdrawn this bureaucracy from various parts of the economy so that its ability to get in the way and be a hurdle in the way of progress has been diminished. But that does not mean that we have improved the bureaucracy. The bureaucracy is still the same. It is just that it’s ability to damage the economy is less. But we now need to flip it on its head and to build a bureaucracy that delivers services. There is no point in arguing with an individual bureaucrat. The whole system is set up for control, not service delivery. We need to shift this so that we can focus much more on service delivery rather than control in the bureaucracy and that requires a different mindset, the way we set it up and so on. So there is a whole new area of work on administrative reform that needs to be done. The third big area of reform where the government actually has a limited role, has to be done by the judiciary, to get the judicial system to work faster. We have an absurd situation with 50 million cases stuck in the legal system, the old cliche about tarikh pe tarikh, that has got to go. We need a modernised legal system and I have argued for years that this is the biggest bang for the buck in terms of if there is one area that needs to get reformed, the biggest gains will be from better enforcement of contracts, delivery of justice, and so on.
So, these would be really three big areas that I would do.
There is, of course, other reforms to be done. But the last big area of reform, which is not a specific reform but actually a type of reform, is the process reforms. So, throughout the government, there are large numbers of processes that need to be revisited. There are departments that need to be shut down, that have outlived their utility.
So, there has to be a big cleanup of the administrative system. In addition to the administrative reform that I was talking about, there has to be a process re-evaluation, a process re-engineering of the government itself. This is not true just of the government. Every institution in the country or every government in the world needs to do this from time to time.
Over the last decade or so, we have done quite a lot of it. We have got lots of old laws and so on. But we now need to do this in a systematic way inside departments. A lot of it has been top-down driven. But really, ministries need to own this and do it in a routine basis and some of that is happening in some parts, not in others. I think we need a big process reform agenda which seeps into the whole government process so that we are continuously cleaning up processes, laws and so on and that has to be done in an institutionalised way.
There was a time when some of the economists were looking at India in a quite derogatory manner and saying that we will be lucky if we have 5% growth. Look at how the data has stacked up, especially in the last three-four quarters. The RBI governor has said that he will not be surprised if our growth for the year lands up closer to 8%. So far, bulk of the heavy lifting has been done by the government. Do you think the private sector needs to come in and help?
Sanjeev Sanyal: See, I do not know where this idea comes from that the government infrastructure spending is the only thing driving growth, that is absolutely not true. The government’s spending on infrastructure simply could not generate 8% growth even if we wanted it to. So, this is not even true.
It has been an important contributor, but, private sector investment, household investment into things like building homes and have been the bigger drivers of growth. For quite some time now, the private sector has been investing. So, I do not know why this myth still persists that it is only government spending that is driving growth. It is not.
If anything, our fiscal deficit is coming down. So, the creditable part of this growth that we are now seeing is that there is a well-developed investment dynamic in the economy as a whole. There is also growth in construction which fits the story of investment but you are seeing that in all kinds of other areas, capital goods; you are seeing that in a lot of investment to services activities of all kinds and look at the boom in tourism, the boom in travel. So, there is a lot of other activities happening.
But what is notable about this growth is the extent to which this is driven almost entirely domestically. Unfortunately, almost all our export markets are moribund. There is a recession in Japan, the UK and Germany. Exports have not been a big driver of this growth. So, to have achieved near 8% growth rates under these external circumstances, is very creditable.
Do you see a higher band closer to 7% trending higher thanks to all inputs coming together from the policy side, private sector, the way the domestic economy is taking shape, for a reasonable period of time? Do we have that kind of visibility?
Sanjeev Sanyal: When you are looking at the quality of growth, that is not the way to think about it. The way to look at the quality of growth is to look at the stability indicators.Are we generating high growth without generating inflation, without causing stress to the banking system, causing stress to your external accounts? As far as quality of growth is concerned, in all of those parameters, inflation is running at about 5% which is within the band. Are we accumulating foreign exchange reserves? Our current account on the external front is well behaved, our banking system is well capitalised and profitable. None of those sectors are showing stress. So, in terms of quality of growth, that suggests that we are generating high growth without causing macroeconomic stresses.
How is this growth actually happening in various parts of income strata? Some early research done by SBI by looking at income tax data shows that there is a lot of upliftment from poverty. The lower middle class is coming towards the middle class; middle classes are moving higher. How is your observation around that because one section of the people also believe that it is a very K-shaped recovery and only the upper band is seeing high growth, while the lower part of the K is not. Where do you stand on that debate?
Sanjeev Sanyal: You will remember that the people who are talking about a K-shaped recovery are also the people who are predicting 5% growth at max. So, you should go and ask them about their math. It is not just SBI, there are lots of other indicators we have got as far as consumption is concerned.
We have got the NITI Aayog’s multi-level data on poverty. All of them indicate that poverty is being removed at a very rapid pace. It has not disappeared, but the very extreme parts of it have now become very small. There is, of course, lots of poverty still in India and there is still need to maintain this momentum over a long period of time, but jobs are being created, unemployment rate as far as the latest PLFS is drifting downwards.
So, generally speaking, the economy is in good nick. The game really is not whether the numbers are good now, whether or not we can compound it over time and to over 25 years if we want to be a developed country. The real issue is not whether we are generating good numbers now, we are. I get into pointless debates with people who repeatedly are not able to give the correct prognosis of the economy, but to get into the argument about why and how we can keep this going for 25 years and in that case right at the beginning we discussed the reforms we need to do.
