This is a very special interaction we are having right here on ET Now with a gentleman who looks at macroeconomics, our own economy in the country, history very closely. And today we are going to talk about the trajectory of the economic growth India could take from here on. We are joined by Sanjeev Sanyal, who i6lls a very noted economist, a historian, and also member of Prime Minister’s Economic Advisory Council.
I read your early thoughts on it. So, we wanted to expand upon this because just a few weeks back ET Now was hosting ET Now Global Business Summit. Prime Minister told us right there that he has been working on the next generation reforms for our country, quietly and silently for almost one and a half years, taking feedback from citizens, thousands of them, and very meticulously working internally with all the members on policy.
So, I just wanted to expand upon this thought. We have seen countries, citizens, as well as the stock markets, everybody being a beneficiary for a lot of reform policy work, which has been done so far. Going forward, what are the areas where you think the government will actually progress upon? We’ve seen a lot of work happen in infrastructure, power, and many other, to start with digital infra. What could be the new areas, the next generation reform, which is being spoken about in your view?
So, these are my views. You mentioned the Prime Minister, but what will be done in his vision document later on, that is not up to me to decide. I can tell you what are the things that I would imagine as important in the next few years. Well, first of all, I think the infrastructure build out has to continue. We, at the very early stages of this build, are building out the highways, the ports, et cetera now, but there are lots of other things. Water supply, garbage clearance, there’s a lot of other infrastructure that needs to be built. We are also for the first-time seeing momentum return in private sector investment very strongly. And that has to be maintained now for years. So, this is something that we need to also curate.
So, if you are thinking in terms of growth momentum, I have argued for many, many years that sustained growth is always driven by investment, not by consumption. So, we need to have a long consumption cycle and I think we are in a position to sustain this. Investment rate is already above 32% of GDP. And I think we could, we could slowly bring that up over the next decade or so to somewhat higher level. That will mean, of course, that savings rates will also go up. So, I would argue that, this is the real driver of growth rather than you know, other people have other models of growth consumption and so on. I’m a big believer in investment led growth. So that is one big area that we need to sustain.
The second big area of reform that I would argue we need to do, which relates to the administrative reform, and I have argued this also for many, many years, that we have a bureaucracy that was inherited from the British, then through the socialist period. Essentially what happened is that it was designed essentially for control rather than to deliver service. And 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 doesn’t mean that we have improved the bureaucracy. The bureaucracy is still the same one, it is just that its ability to damage the economy is less. But we now need to flip it on its head and to build a bureaucracy that actually delivers services. And there’s no point in arguing with an individual bureaucrat. The whole system is set up for control, not service delivery. So, I think we need to shift this so that we can focus much more on service delivery rather than controlling the bureaucracy.
And so that requires a different mindset, the way we set it up and so on. And so, there’s 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, it really has to be done by the judiciary, is to get the judicial system to work faster. We have an absurd situation where 50 million cases are stuck in the legal system. The old cliche about ‘Tareeq pe Tareeq’, that has to go. We need a modernized legal system. And I’ve argued for years that, if there’s 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’s of course, other reforms to be done, but I think the last big area of reform, which is not a specific reform, but actually a type of reform, which is process reforms. So, throughout the government there are large numbers of processes that can need to be revisited. There are departments that need to be shut down, which have outlived their utility and so on. 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. And we have, over the last decade or so, done quite a lot of it. Lots of old laws have been gotten rid of and so on. But what we now need to get on to do, doing this in a systematic way inside departments, you see, cannot it, it, you know, 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. So, I think we need a big sort of 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 institutionalized way.
Mr. Sanyal, there was a time when some of the economists were looking at India in a quite derogatory manner. And saying that we’ll be lucky if we have 5% growth. And look at how the data has stacked up, especially in the last three, four quarters, the kind of the growth numbers we have achieved. To the extent that last week when we were speaking with RBI governor, he said that he’ll not be surprised if our growth for the year lands up closer to 8%. So clearly, all the policy workers trickling down to numbers in terms of GDP growth. But up till now, bulk of the heavy lifting has been done from the government side, the PSUs, do you see early signs and do you see that if we have to attain longevity of growth, not only high growth, but prolonged high growth, then the private sector needs to come in. And are you seeing early signs of that coming now?
So, I don’t know where this idea comes that the government in infrastructure spending is the only thing driving growth that is absolutely not true. The government’s spending on infrastructure simply couldn’t generate 8% growth even if we wanted it to. So, this is actually not even true. It’s been an important contributor, but in fact, private sector investment, household investment into things like building homes and things like that they have been actually the bigger important driver of growth. And for quite some time now, private sector has been investing. So, I don’t know why this myth still persists that it’s only government spending that is driving growth. It’s not, if anything, as you know 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.
But you’re seeing that in all kinds of other areas, capital goods you’re seeing that in a lot of investment services, activities of all kinds. And look at the boom in tourism, the boom in travel. So, there’s a lot of other activities happening. But I think what is notable then is about this growth is the extent to which this is driven almost entirely domestically. Our exports haven’t been a big driver of this growth as many of our export markets are in trouble domestically. So, to have achieved 8% or near 8% growth rates under these external circumstances, I would say is very creditable.
What I meant was not purely from the government side, but enabling the policy framework by which private sector also starts coming in. That’s clearly happening. So, I wanted to get your thoughts on you know, the quality of growth that we are seeing. Do you see a higher band closer to 7% trending higher by the inputs coming together from the policy side, private sector, the way domestic economy is taking shape. Do you see that trending higher for a visible period of time? Do we have that kind of visibility?
So, when you’re looking at quality of growth, that is not the way to think about it. The way to look at quality of growth is to look at the stability indicators. So are you generating high growth without generating inflation, without causing stress to the banking system, causing stress to your external accounts and so on and so forth. And as far as quality of growth is concerned, in all of those parameters, inflation is running at about 5%, which is within the band, we are accumulating foreign exchange reserves. Our current account on the external front is well behaved. Our banking system is well capitalized and profitable. So, 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.
Sure. Fair point. So just last word I wanted to talk to you about how this growth is actually happening in various parts of income strata. There is some early research done by SBI, which shows that actually income tax data is what they have looked at very closely, that there is a lot of upliftment from poverty, lower middle classes coming towards middle class, middle classes moving higher. What is your observation around that? Because one section of the people also believe that it’s very K-shaped recovery. Only the upper band is actually seeing high growth, lower part of the K is not. But this data, where do you stand on that debate?
So, you will remember that the people who are saying K-recovery are all the people, also the people who are predicting 5% growth at max, right? So, you should go and ask them about their maths because as you yourself pointed out, not just SBI, there are lots of other indicators we have got as far as you know, whether it is consumption band. 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’s not disappeared, but the very extreme parts of it have now become very small. There’s of course lots of poverty still in India, and there is still need to maintain this momentum over a longer period of time. But I think jobs are being created, unemployment rate as far as the latest PLFS is drifting downwards.
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, in fact if you want to be a developed country. So, I think the real issue is not whether we are generating good numbers now. That we are and I get into pointless debates with people who clearly have repeatedly not been able to give the correct prognosis of the economy, but to get into the argument about why and how we could keep this going for 25 years. And in that case, right at the beginning, we discussed the reforms we need to do. We need to get our administration right, we need to keep investing in our infrastructure, we need to get our judicial system cleaned up. There are a whole bunch of process reforms we need to do. Much of this will require many years to complete.
I would like to get your view on our ‘Viksit Bharat’ by 2047 ambition. Every day we read in ET front page, some global MNC, big companies all over the world are wanting to come down, set up base, do partnerships, and basically expand business here in India. One is getting a sense that we have become an asset class on its own, in its own right and everybody wants to invest here. Either it’s a stock market part or the actual you know, brick and mortar businesses and FDI coming in, how do you see India as an emerging destination for global capital and businesses to invest here and run the businesses for next 10, 20 years and become part of this growth story?
So, there’s no doubt that India has now become a serious investment destination for foreign investors. Whether the portfolio or direct investment, whether it’s companies or mutual funds or those invested into, for example, the various global bond indices or whatever. In all of these you will see India is there and its weightage is if anything rising. So, if that is a circumstance we should expect significant resources to come. You will remember if you keep hearing this India is losing to Vietnam or some other country, Bangladesh, et cetera, no investment is coming when clearly that is not the case. You could clearly see investment coming into the stock market, but also onto the ground and you can see a lot of this inflow happening in real time. I don’t think too many people who are serious will debate that we are doing well. The real game is to sustain it over 25 years.
ABOUT
Sanjeev Sanyal is a member of Prime Minister’s Economic Advisory Council. He has worked on several editions of the Economic Survey of the Ministry of Finance. He has authored several books, including ‘Revolutionaries’, that was recently released by Home Minister Amit Shah.
