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Arvind Subramanian

Manmohan as FM is more symbolic, says Peterson Institute economist Arvind Subramanian

09 July, 2012

Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics and the Center for Global Development, a US-based non-profit, research institution focusing on international economic policy, is one of the world’s foremost experts on India and development. He was named by the Foreign Policy magazine as one of the top 100 global thinkers last year. His book Eclipse: Living in the Shadow of China’s Economic Dominance, was published last year. Subramanian spoke to Global India Newswire on a broad range of issues related to the Indian economy. Excerpts:

What do you make of Prime Minister Manmohan Singh taking over as finance minister? Do you expect any major changes on the reform front?

A: I think the more realistic reading is not a whole lot of difference. The reason change wasn’t happening so far was not necessarily because the government as a whole was not trying to push through reforms, or at least some parts of it. The problem was the politics. Some very senior people in the existing coalition maybe didn’t want change for whatever reason. That fundamental fact hasn’t changed because of (Singh taking over the finance ministry). This seems like more or less a cosmetic change. After all the Prime Minister was still the Prime Minister even before. If he wouldn’t push through reforms (as prime minister), suddenly he becomes finance minister, why should that give any additional impetus for reforms? I don’t think the politics fundamentally changes.

But why would the PM put his credibility on the line by taking over the finance portfolio, if he doesn’t want to change things?

I think maybe there’ll be a small change. But that’s a bit like saying his credibility was not on the line when he was the prime minister! Fundamentally, we have all known what needs to be done. The prime minister knew it; the finance minister knew it. They were pushing for it, to some extent half-heartedly. Every time they tried to do something. There was always opposition from some quarter or the other. That opposition doesn’t seem to have changed. And I think that’s the reason one has to be a little sceptical about all these sudden feeling that maybe things are going to change substantially.

Was it a symbolic move on the part of the PM?

It is a symbolic move and there is no question. And it is a good faith effort on his part, but, you know, we have gone way past the time for symbolism and we have actually got to do things. This is where the rubber hits the road, unless we deliver by way of concrete policy, no amount of symbolism can help.

How have the foreign investors received the move?

Foreigners always want to be hopeful. They want things to change and certainly the early indications — you know he said… he has tried to say that the whole retroactive taxation business of Vodofone and other companies will change. So I think they are hopeful. IKEA has just gone (to India). In the last few days there have been some improvement, some small reason to be optimistic. But whether it is going to fundamentally alter the landscape, I don’t know. This is by no means worse than before. Whether it is going to be significantly better is the outstanding question.

Elections are likely to be held in less than two years. Many people expect a lot of social spending, which was seen as the reason the UPA government got re-elected. At the same time, there is pressure from outside to increase the pace of the reform. How do you think the government is going to balance the two?

You are absolutely right. The problem has been, for this government, they interpreted the 2009 victory as having been due to spending social schemes. So what that has implied is that this government has been, what I call, a fiscal populist, spending more and more. So they haven’t addressed the subsidy question. Now the point is that our macroeconomics doesn’t allow our fiscal situation — the external situation has gotten worse — they don’t allow for any more spending. If anything, we need strong reforms to get the budget and the fiscal position on a more sustainable footing. So leading up to the elections, we can’t afford to spend any more. What I thought the government should decide, or come away with the conclusion is that if you deliver faster growth, that will actually help them in the election. So the reforms that they do now should be motivated by that understanding and realisation that if you don’t provide growth, things will go bad. I don’t know what calculation this government is making. If it makes the calculation that you need to spend more, I think the economy will get worse.

What would you tell the Keynesians that we need to spend more to grow the economy in troubled times?

Our problem is that the supply capacity of the economy needs to be boosted. That means you need fundamental reform, structural reform. It means making India a better place to invest, increasing investment, doing the GST reform. So we need real substantive reform, not temporary measures to boost spending. If you spend more, our inflation will be higher, our current account deficit will get worse. Investors will flee even faster. The rupee will go down even further. So we need some real old-fashioned structural reform to improve India’s growth prospect.

Is India’s credit rating in real danger of going down a notch or two?

I think if the current macroeconomic situation continues, if we continue to see more spending and less reform — I don’t think we are in crisis territory yet — but all the indicators are going in the wrong direction. Luckily for us, what is going to help us is the fact that the oil and commodity prices are actually kind of coming down. And that helps the macroeconomic situation to some extent. The import bill goes down. The inflationary pressures from outside come down a little bit. I think that is going to be a welcome respite for the economy. But if you leave that aside, unless policies change, I don’t think we are going to seriously improve our performance.

How big of a drag Europe is on India?

Europe is a drag on everyone. Whatever is happening to Europe affects all emerging market countries. To varying extents, it depends upon how exposed you are to Europe. But in India, things have actually gotten worse than in other emerging market countries. So that’s what we have to try and reflect on and understand. Some amount of deterioration in performance is because of Europe, but our higher inflation is not because of Europe. Our current account deficit is worse not because of Europe. Our fiscal populism is not because of Europe. The fact that we have so much corruption [has] nothing to do with Europe.

(In partnership with Global India Newswire)

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Manmohan as FM is more symbolic, says Peterson Institute economist Arvind Subramanian

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