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February 27, 2021

India’s Economy and Union Budget 2021: An Interview with Shri Sanjeev Sanyal, Principal Economic Adviser, Ministry of Finance, Government of India

Written By: Praket Arya

Praket Arya: We find ourselves in truly unique circumstances, facing a once in a century pandemic and the worst contraction in the economy since 1952. If I asked you to describe the Indian economy in less than three words after this budget, what words would you pick?

Sanjeev Sanyal: I would pick rebounding strongly. India has been through a major lockdown and made health-related choices which have been instrumental in keeping the pandemic in control. The vaccine has also been rolled out and the economy is now recovering as can be seen by virtually any high-frequency data. The budget has given extra fillip to boost the economy through an extended infrastructure build out that will last for several years. This, allied with the structural reforms that were done earlier will go a long way in getting the economy back on track, with India poised to be among the fastest, if not the fastest economy, in the next couple of years.

Praket Arya: There is a perception with respect to the direction the Indian economy is heading, particularly after this budget, that the government is unsure as to where it wants to position itself in the political economy spectrum. This budget indicates a shift towards growth in what we call ‘trickle-down economics’, compared to all the previous budgets since 2014, which according to many, focused primarily on redistribution and social policies like direct benefit transfers. What is your take on this?

Sanjeev Sanyal: In the ultimate analysis, we need to grow, and that requires the energy of the private sector. This was recently reiterated by the Prime Minister on the floor of the house. But we also need trickle down to occur, for which the channels have to be created. So, a significant amount of effort was devoted in previous years, in creating the Jan Dhan system or the health insurance network et cetera, to create both a safety net as well as the channels of that trickle down. But in the end, you have to go for growth, for which the private sector is the key. Our growth model is about private investment, private innovation. We are also inviting foreign direct investment in various ways into our economy. In this investment driven model of economics, we have taken care of the pathways for trickle down and also made sure of a safety net. This was done through the lockdown period from April 2020 onwards wherein free food was given to 800 million people, which is perhaps the world’s largest food distribution program. Money was also provided to the poorest people through the Jan Dhan accounts. A safety net was also provided to the MSME sector. So, due emphasis was paid to the business of how to make sure trickle down happens, but in the end, the growth engine, the creation of wealth has to be done by the private sector. That is why we have laid emphasis on keeping taxes low, and on deregulation. Where government resources are invested, it is towards creating infrastructure, which of course the general public can use, but a business can also take advantage of. So, all of this has a particular tilt which we are completely unapologetic about.

Praket Arya: If I may ask you point blank, is it not a complete U-turn in the government’s approach?

Sanjeev Sanyal: No, we have believed in a minimum government, maximum governance. I think many people here believe only one part or the other, depending on their proclivities. I am not a libertarian who believes in the minimal state; I believe in a strong state, but I also believe in a limited state. It is perhaps the Chanakyan worldview, as opposed to say the Nehruvian worldview which is an all pervasive but weak state. So those things the state does, it should take seriously and do a good job of, whether it is in terms of security and defense related issues, or providing basic infrastructure or regulations which are needed. But these have to be limited to what they are supposed to do and not have this all-pervasive expansion of the state into areas that should not be there.

Praket Arya: Speaking of the so-called shift in the governance approach, do you think it’s possible to reconcile inequality and growth in the Indian context, more so after this pandemic?

Sanjeev Sanyal: I think this dichotomy is a false one. It’s probably false everywhere, but it certainly is false in India. At the end of the day, we are a poor country and if we only focus on inequality, we are simply redistributing poverty, as we have done for years on end. Clearly, that is not a great model. We changed that model in 1991 and we have clearly succeeded. We have to generate wealth to be able to redistribute it and provide the many things that everybody benefits from, both rich and poor. Benefits come to all from good infrastructure, good health system, proper sanitation, protection of the environment and so on. In developing countries where we are dealing with absolute poverty, we have to have growth. Yes, we also have to assist some of that trickle down, but the key lies in engineering growth which will create the wealth for the rest of the things that we want to do.

Praket Arya: The fiscal deficit presently stands at 9.5% and it’s targeted at 6.8% for the next fiscal. This is way higher than what any rating agency or international organisation may advocate. It is of course understood that the economy needed the impetus in the form of various stimuli that were periodically offered in the lockdown. But, can a counter cyclical and expansionary fiscal policy be prudent for maintaining a healthy debt to GDP ratio?

Sanjeev Sanyal: These are extremely unusual circumstances. This government is otherwise fiscally conservative, and has oft been accused of being too conservative, but there are circumstances where you have to be willing to absorb the need for a stimulus. Of the 9.5% fiscal deficit, some of it is obviously a stimulus, but some is a loss of revenue. And some of it is just the denominator shrinking. Going forward, we are confident that the denominator will expand quite fast. In nominal terms, we expect a 14% GDP growth rate in the budget, but I’m quite certain that it’s too conservative. In the economic survey, we have talked of 15.3% growth. The IMF expects almost 16%. So, I think we will do quite well in terms of getting the denominator going again, and that will feed through to some recovery in the revenue side, which has already been seen in GST and other collections.

The question is, do we want to then try and close the gap as quickly as possible? The answer is no. There are points in history where keeping some momentum going on the fiscal side is a good idea, and this is one of those moments. In the economic survey, we make the case that in fact, even from a fiscal consolidation perspective, going for growth at this juncture may be a good thing to do. The question then is, what do we spend that extra space on? And here we have made a very clear choice. We have gone for spending on infrastructure, which in its wider definition includes sectors like health. The debt we are creating are being left to future generations to pay, so it is also important to leave to the future generations, the assets to match the debts. Creating debt without assets is not a particularly useful approach. Such an approach leads to the balance sheet going awry and is unlikely to lead to higher growth. That is why the focus is now on spending the money directly on infrastructure, as we know from experience that this creates jobs and a demand for all kinds of products such as steel, cement and so on. And after a period of time, it also helps the supply side by creating infrastructure on the supply side.

Praket Arya: Will the fiscal deficit in the short term impact negatively on interest rates and inflation?

Sanjeev Sanyal: This is something that we have to manage. Inflation depends on a large number of things, including international interest rates. Our judgment is that at this juncture, at least for some time, international interest rates will not rise. So that gives us some space. With respect to demand driven inflation, I do not believe it will be driven up too quickly. There is enough slack in the system, not to mention we have done all the supply side measures, which have also probably hopefully opened up the gates on the supply side. So, I think sustained inflation, driven by demand, is unlikely. This is a judgment call, but we can adjust it along the way. If the economy grows so well and creates so many jobs that drive up inflation, then the stimulus given would not be required and it can be scaled down. Adjustments may be done based on the situation, but there is no point in adjusting for inflation at the point in the cycle we are in right now.

Praket Arya: You have stated that we are looking at a better than 10% recovery in the next fiscal. One of the biggest determinants of growth going forward, however, will be the sentiment of both businesses and consumers. The businesses are not going to make fresh investments unless they believe that the economy is going to do better. This could impact on employment and output. In the absence of a strong consumer sentiment, aggregate demand will not rise, which will eventually bog investment. After the budget, we see that in a certain section of the economy, there is exuberance about its future prospects, which is reflected by the stock markets. However, there is a very large section that remains bogged down by low employment opportunities and reduced incomes. This is also reflected in the RBI’s consumer confidence survey. Would such a mismatch between business and consumer sentiment create economic uncertainties?

Sanjeev Sanyal: I think the key here is that we have to get the animal spirits going because that creates the investments. The view that investments and consumption are at some sort of loggerheads and that you have to choose one or the other may perhaps be misplaced. There is a view that consumption drives investment, but more than adequate evidence also exists, as seen from the East Asia growth story, that investment drives growth, creates employment and consequently creates consumption. So, the causality works both ways. All we are doing right now is basically taking the view that we can drive investment driven growth in India, directly, first through government spending on infrastructure. Then as you can see, animal spirit seems to be coming back. There is clearly also an increase in FDI coming into India, and this has happened even during the period of the pandemic. All these factors, we hope, will drive investment, especially as plenty of investment opportunities exist. That is the driver of growth which will create jobs and demand to fuel consumption. This, I realise, turns on the head what has been perceived as conventional wisdom in India. It also turns on the head some of the thinking that may be there in certain Western countries, but it is not an unusual model because many East Asian countries during their high growth phase used exactly this model to grow and create investment.

It is critical for India to be open to both foreign investment and private investment and we are open to both. We are also very keen to insert India into global supply chains. Here efforts are being made through Production Linked Incentive (PLI) schemes to try and target various sectors. Other reforms include removing outdated regulatory laws. Towards this end for example, we have removed outdated regulations in the telecom sector and in Business Process Outsourcing (BPO) in the IT sector. We have also freed up the cartography and geospatial sector and reformed labor laws. We have also done farm reforms despite a fair amount of political pushback. So, this is a government that believes in carrying all the reforms that need to be done.

Praket Arya: We see a phenomenal increase in the budget outlay for health and wellbeing and particularly in healthcare infrastructure. But, given the fact that health is a state subject in our federal structure, and that two-third of all health spending happen in the state, evidence suggests that not all states spend proportionate to their capacity and healthcare infrastructure. How will this be addressed? Also, as American Nobel Laureate Kenneth Arrow suggested in the 1960s that laissez-faire does not really work well for the healthcare sector, given the problem of asymmetric information, how does the government hope to regulate the private healthcare sector, which has been in the limelight for all the wrong reasons during this pandemic?

Sanjeev Sanyal: The budget that was presented was the Central Government’s budget. So, I would not like to comment on what the State Governments should do. They are all democratically elected and are responsible to their respective voters. At the national level, we made a pitch for higher allocation to health and sanitation. People forget that a significant effort on our part is on sanitation. In many ways, sanitation has a bigger impact on health than medical facilities. People sometimes forget that most of the gains in longevity since the industrial revolution, happened because of better drains and toilets than because of better doctors. This comes in the domain of preventive health care. So, this is something we need to invest in, and that is the context of the ‘Swachh Bharat’ campaign, the toilet building campaign.

With respect to regulation, two issues need consideration. The first is, what needs to be regulated and the second is what kind of regulation is required. The health sector is a peculiar sector in which the supplier decides how much demand there will be. There is thus an obvious asymmetry and that needs a certain amount of regulation, otherwise we will end up with peculiar situations such as exist in the United States, which despite spending 15% to 16% of their GDP on health, the outcomes are not proportionate to the money spent. They are extremely good with specific diseases like rare cancers et cetera, but general health provision remains comparatively pedestrian. So, in India we need to be careful that health does not become like any other product, and that is why it needs to be regulated. It also requires some public spending in medical services to provide competition, so that there is an anchor to the pricing. There has to be transparency. We have to open the gates in terms of having more doctors and medical practitioners but regulation is required to see that a certain standard is maintained in quality of doctors and that malpractices are kept in reign. So, we cannot have a free market like in cars, but I would advocate other than safety regulations and a few other features, we need to open the gates.

This is where we are at now with health regulations. I am quite clear that we need a mix of public and private healthcare facilities. There are problems with relying entirely on the public sector – the usual inefficiency problems. So, we need the private sector to show us the innovation and the efficiency, but we also need the public sector in order to provide competition and force transparency on the private sector. That basically is the context now as far as regulation is concerned.

There is another chapter in the economic survey which makes the point that it is very important that you don’t regulate passively just by creating rules and evermore rules. That is a major problem in India, in every sector, not just in the health sector. It is true also of financial markets and other institutions. The idea in my view is that you reduce and simplify the regulations, and then pay more attention to supervision. This is something, unfortunately, we don’t give enough credence to. We need more supervision rather than more tedious rules. We need somebody that keeps track of the sector and responds to its evolving needs.

Praket Arya: In this budget, we also see a lot of measures to boost manufacturing and strengthen the recoveries of MSMEs, which has actually been responding well to the various stimuli offered by the government, periodically, all through last year. However, the contact sensitive service industry has not responded and recovered as well as we had expected, particularly for sunrise sectors like hospitality, which has seen no direct relief package from the government. Do you think pent up demand and the ongoing vaccination drive will enable recovery, or will it be too little too late?

Sanjeev Sanyal: Direct contact sectors like travel and hospitality, as also some segments of the entertainment sector, have all been impacted negatively by the pandemic. While we would love to open up these sectors, we have to be cognizant of the fact that we haven’t yet come to the end of this pandemic. Yes, we have controlled it, but that’s largely by restricting certain kinds of activities. We are opening them up as fast as we can, but we will have to do it step-by-step, in a calibrated way. So, the real issue is, how do we help this sector?

Well, until the sector has been opened up, little help can be given. As I have stated many a time, there is no point in pressing the accelerator until you’ve taken your foot off the brake. So, we need to take the foot off the brake, then having done that, demand will come back naturally to some extent. That is when we need to help it. Besides providing certain financial solutions, we need to get rid of outdated regulations. Many of these however, are at the state level. For this sector too infrastructure development has been helpful as it provides easier access to these places. We should not allow the debate to get sidelined into irrelevant suggestions such as people asking for a GST holiday! I am not certain if anybody is not travelling because of GST concerns. Giving a GST holiday will lead to unnecessary complications being introduced in to the GST system, which is based on a value-added chain. So, if you suddenly remove one bit of the chain, it will create a host of other problems, but will have no tangible benefit. Knee-jerk solutions do not work. However, we can have a serious conversation on this issue, to determine the appropriate response. Perhaps there is a case for investing a lot more effort into preserving our historical sites and cleaning up certain natural areas. That will give greater resonance and payoffs, rather than doing away with GST for this sector.

Praket Arya: Let us now talk about agriculture. This was the only sector that escaped contraction in 2020-2021 and this ensured that rural demand did not collapse at a time when the economy was mired in deep crisis. High food inflation levels all through 2020 also helped in supporting this. Since December 2020, we see that there is a fall in food inflation levels, particularly with the bumper production of kharif crops and seasonal vegetables. What do you think are the prospects for rural demand with respect to agriculture and the non-farm blue collar workforce?

Sanjeev Sanyal: An important thing to remember is that agriculture was uniquely placed in terms of surviving the pandemic, because it did not require a concentration of people, so to that extent it was somewhat buffered from the pandemic. But there are certain long-term issues that we need to think about. First, we must recognise that rural India is no longer only agriculture. There are a lot of other activities happening there and thriving. Agriculture remains very important, but the other activities are also not less, some of them being driven by agriculture such as agri-business, supply chains, and so on. Some of them of course, may have nothing to do with agriculture at all. All these activities need to be encouraged. Even with agriculture, we now need to begin to think of it somewhat differently from the old idea that we need to grow ever more calories, which is essentially the green revolution. We now understand where they came from, because back in the sixties we had a food crisis. We were not growing enough food. We had to import them under somewhat difficult circumstances. Memories of the famines of the colonial era was still fresh.

But the fact of the matter is we now have the opposite problem and the problem is this: we want the sector to grow at least 3 to 4 percent a year, but at the same time, our population growth rate is slowing down. It is already below 1 percent and it is declining. In fact, in some ways, food consumption must be already at zero because frankly, even the population growth we are getting now is having, because older people are living longer and many of them are living in the cities. So their food consumption per capita is also anyway declining. Under those circumstances, there is no way we can sustain consumption of food. Now there is at the margin, some people who are not eating enough and yes, you know, some supplier food needs to be put through to them. But frankly, this is not a long-term trajectory of growing more grains. In fact, even where there is a problem with malnutrition, the causative factors that need to be dealt with are diseases and diarrhea. This is one part of the problem which growing more rice and wheat does not solve, but the other is that they need other kinds of crops such as vegetables or pulses or fish et cetera. The problem here is that our entire agricultural policy is tuned towards doing one thing, growing more calories. So, we have got to begin to create avenues for other things to grow now because the agriculture sector is dependent on a certain framework.

MSP should be kept because it provides some sort of a cushion for the time being. But the fact of the matter is you do need, if you want high growth and particularly if you begin to think of the farm sector like any other business, a certain level of innovation will be required. Lack of innovation is bad for the sector itself. So that is the context in which we need to open up other avenues for farmers to think about their activity as business, to begin to grow things that have other uses—whether it is flowers and orchids for export, or growing certain kinds of fibers that can be used in new kinds of fabrics, etcetera. This requires a dynamic that these new farm laws allow. If you continue with a monopoly of government control, mandis, Agricultural Produce Market Committee (APMCs), the Essential Commodities Act, then this modernization simply will not happen. That is why we have taken the step knowing fully well that there would be difficulties and opposition to it, because in the long run, that is the only path that we can take. Otherwise, what we are doing is growing more and more calories, ironically which we do not need, and in the process, we are running down groundwater levels and also poisoning the earth with excessive amounts of fertilizer and pesticides. And so, this is a strange situation where we are actually mortgaging the future to grow crops that we don’t actually need. We are then spending a large amount of money trying to store food that we don’t need. So, this is a game that we have to get out of.

Praket Arya: Last year, we saw the Prime Minister launch a INR 1 trillion agriculture infrastructure development fund to boost post-harvest management infrastructure and various community farming assets. With this budget we see the introduction of the Agriculture Infrastructure and Development Cess (AIDC). Although this is a welcome move, as it does not put an additional burden on consumers for most items and promotes state financing, the state governments cannot really be too happy about it as it puts an additional burden on their already falling revenues.

Sanjeev Sanyal: I think that has been misrepresented if what you are meaning is the cess on fuel. This is really an accounting issue for the central government, wherein an existing surcharge gets converted into an agricultural cess wallet. The earlier additional surcharge was anyway not going to the state governments. What is happening now is simply the central government’s accounting issue and has nothing do with the state governments.

Why is this being done? Well, if we wish to have a next generation agriculture, we need to move away from growing fixed products and diversifying into other fields such as growing millets, health foods, high end cereals, etcetera. This can happen only if we have the infrastructure to do so. Otherwise, we will have to go for this via the bulk type effort that we currently have through the Food Corporation of India. That is why a certain amount of infrastructure is required that can be built up through these resources.

Author Brief Bios:

Sanjeev Sanyal: Sanjeev Sanyal is the Principal Economic Advisor to the Government of India.  An internationally acclaimed economist and best-selling author, he spent two decades in the financial sector and was Global Strategist & Managing Director at Deutsche Bank till 2015. He was named Young Global Leader by the World Economic Forum in 2010. He is also a well-known environmentalist and urban theorist. In 2007, he was awarded the Eisenhower Fellowship for his work on urban dynamics. He has been a Visiting Scholar at Oxford University, Adjunct Fellow at the Institute of Policy Studies, Singapore and a Senior Fellow of the World-Wide Fund for Nature. He has also served on the Future City Sub-Committee of the Singapore government tasked with building a long-term vision for the city-state.

Praket Arya: Praket Arya is an economist by education. He is an alumnus of The University of Edinburgh, Scotland, and St. Xavier’s College, Mumbai. His research interests include Development Economics and the International Political Economy of the European Union and the Greater Eurasian Space.


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