Economic growth by itself can't create jobs: Krishnamurthy Subramanian, Chief economic advisor

The new government needs to emphasise on enhancing productivity, especially in the corporate sector with a focus on bringing down the cost of land, labour and capital. Krishnamurthy Subramanian, chief economic advisor at the finance ministry, spoke to Anjul Tomar on the priorities for the next government and the ways to create jobs.

How do you propose to pull the economy out of a slowdown as the government looks set to return to a second term? There has been a slowdown in industrial growth, consumption and private investment, mainly towards the end of 2018-19.

We have to be a little careful that we don't oscillate between excessive optimism and excessive pessimism when we assess some of the economic outputs. If you look at consumption, it is the core consumption growth one needs to be looking at, leaving the impact of discounts or income hikes by the Pay Commission. Core consumption growth has happened. The investment by the private sector had slowed down as excess capacity was created. The winding up of corporate leverage happened over a period of 6-7 years. Winding down can't happen immediately. Investment by private sector slowed down since 2015 and the impact of the investment on the growth was felt with a lag. However, in the recent 2-3 quarters that the Gross Fixed Capital Formation (GFCF) (a measure for investments) has started turning around. With these two aspects we must keep in mind that we are assessing the current economic situation. We have to emphasise on enhancing productivity, going forward. Focus has to be on three main factors of production – land, labour and capital – making sure that the cost of those are brought down. We also need to focus on the identification of shell companies to reduce cronyism from the economy. Already 3.5 lakh shell firms have been struck off. The enactment of Insolvency and Bankruptcy Code (IBC) and the use of direct benefit transfer are also reducing cronyism from the economy. These are 2-3 key aspects we are trying to enforce. On the agriculture front, if you look at the measures that have been taken, there is an improvement in productivity also.

Recently Prime Minister's Economic Advisory Council Member Rathin Roy raised concern over India heading towards the middle-income trap over the next five years due to a slowdown in consumption and called for a long-term strategy to avoid it. Do you agree with him?

There has been this conversation that only 10 crore people are basically leading the consumption. But there are reports by Deloitte and several other agencies that have put this number at 44 crore, which accounts for 34% of the population. Moreover, there are well educated younger people who are going to be driving consumption significantly. So the fear of the consumption being restricted to a small elite at the top is not as big a concern. Secondly, over the last five years, there has been an emphasis on reducing inflation and putting purchasing power in the hands of the middle class and the poor. Schemes like insurance and direct benefit transfer for those at the bottom of the pyramid also put purchasing power in their hands. Therefore, I don't foresee this particular concern. The other important thing is the fact that we have been working on the key structural reforms like IBC as a result of which Rs 3 lakh crore of non-performing assets (NPAs) have been re-allocated. As long as the economy is increasing its productivity and a third of the population is consuming, this concern doesn't remain very significant.

A survey by National Sample Survey Organisation (NSSO) showing a 45-year high unemployment rate of 6.1% points towards jobless growth in India. How does the government propose to reverse it?

Some of this characterisation is misinformed. Not just India but the world over there is a significant decoupling of job creation and economic growth because of the technological reasons. If you look at the elasticity of employment creation to economic growth, it has gone down worldwide and even in India. Economic growth by itself can't create jobs. There has to be an emphasis on job creation separately. That is important because due to technological reasons there are sectors which are creating jobs and there are sectors where jobs are being destroyed. We have to provide impetus to sectors which are basically creating the jobs.

Banker Uday Kotak has warned of more liquidity crisis impacting the financial sector for the next couple of quarters. What is the solution in your opinion?

What is being talked about as the liquidity crisis is related to asset-liability mismatches in the non-banking financial company (NBFC) sector. NBFCs, which have long-dated assets and short-term liabilities, can roll over their short-term liabilities when things are fine. But when some concerns start emerging like in case of Infrastructure Leasing & Finance Company (IL&FS), then rollover becomes difficult for NBFCs. The other important part is that the large proportion of the liability of NBFCs is in short-term maturity instruments. And if you look at the ratings of commercial papers (CP), over 90% are the same rating category, although there are significant differences in the long-term rating which is reflected in the CP spreads themselves. There is not enough of market information that is coming in via the ratings. These two are the aspects we need to be working on to ensure that the right amount of market discipline is brought.

There has been a big question mark on the authenticity of the government data. Recently, over 100 economists accused the government of interfering with the data. Earlier this month, an NSSO survey showed that 38% of the firms in the MCA-21 database used in GDP calculations are non-existent. How do propose to change this impression?

In a democracy it is hard to create a narrative that is different from the truth. In the earlier series we were using a set of 2,500-3,000 companies to estimate the GDP numbers. Now we are using the MCA 21 data which is closer to the population. The second thing is that as a result of moving towards MCA if you change the blow up factor, it is only 12-15%. Third point is that even if some companies are not available at that point in time, it affects the level of GDP. The growth rate of GDP doesn't change. And even if there is an over or under estimation of the level of GDP, it does not necessarily imply that the growth itself is affected, especially when the blow up factor is not very large. The last point to remember is that if a company is found not to be in the service sector, it is still in the economy. Overall, the changes have been towards becoming more consistent with the international system of statistics, to better proxies being used and to use as much sample as possible.

Do you agree that it's time for tightening of purse strings for strict adherence to Fiscal Responsibility and Budget Management (FRBM) Act?

We are very much on the line with following the target set. Projections for the current year have been made based on the revised estimates (RE). If you look at the direct tax, the buoyancy is 1.5. These projections are realistic and should not be a concern.