Using funds better issue for India, not raising money: Martin Wolf CEO, Financial Times

Martin Wolf, chief economic commentator and associate editor of Financial Times, is not in a habit of mincing words but says it like it is. So, when the author of several books on economics and financial crisis spoke to Praveena Sharma on sidelines of the International Monetary Fund (IMF) and Indian government conference early this month, he did just that. Wolf believes the issue in India is not raising more money, but using it better and that Indian government spending, historically, was "fantastically" wasteful. He is also not persuaded about India's demand problem relative to supply.

Q. India's chief economic advisor Arvind Subramanian says India would look at export for growth. However, we have seen our exports contract for 15 straight months, do you think he is misreading the global scenario?

A. Perhaps. It depends on what you mean by export-led growth. For India, you must see that the nominal GDP will grow at 10-12% a year. So exports need to grow in nominal terms by about 12% a year. You are very unlikely to succeed in development if trade ratios don't remain high and possibly rise further. In that sense, export-led growth is essential. India is not large enough to grow entirely on the basis of selling to the domestic economy. So, if India manages to have growth of trade at 12% a year in rupee terms and a little less in dollar, then it has to work even harder in a more difficult environment. It's important to run a policy which allows the exchange rate to weaken. That's one argument for having a tighter fiscal policy, which allows monetary policy to loosen. Interest rates are lower, exchange rate will go down. That's one side. The second side is you have improve your competitiveness in other ways. That is why policy reforms and improved infrastructure are so necessary. That's the way you generate lower cost of infrastructure of supply that allows exports to expand by becoming more competitive. That's the big argument for domestic reforms. Then, finally you have to find other markets – developed countries are obviously important markets, but you also have to expand with markets in the emerging world and beyond the immediate region to the wider Asian region. That's the three-pronged strategy. But I am not saying for export-led growth, fast growth is necessary. I'm saying it is going to be more difficult.

Q. We have seen many reforms stuck due to legislative and political constraints and even infrastructure building is moving at a very slow pace. Do you think the government needs to gets its act together and accelerate on these?

A. I've been here for only a couple of days, so I really don't know, but the government is talking about reforms. Somethings are happening, clearly. Is it happening quick enough? It is never quick enough. Infrastructure takes a long time. They have started on it but the whole progress required is immense. It is going to take years and years and years. But as the Chinese have shown you can build infrastructure very quickly. If you organise yourself, you can improve important sectors like finance, then a lot of things have to be done by the states, particularly labour law. Is the government doing enough quickly? There seems to be mixed views on this from the people I have spoken to, but I suppose you can always go faster.

Q. With not much help coming from global demand, is there a pressing need to depend more on investment-led growth in India?

A. I don't think they are mutually exclusive. India needs a higher investment rate. The current investment rate is too low. It should be at least 35% of the GDP. As I have said, it doesn't need a large trade surplus. The current account deficit (CAD) is fine, but it needs exports to grow too. It's one of the way you get more competition, more imports, more opportunities and grow more diversified consumption. Also, you get part of global supply chains, which is a very important source of growth. So, I don't regard investment and trade as alternatives. I regard them as complement.

Q. You spoke of the credit boom and policy desperation. Most countries have gone through it. Why do they not try to break that vicious cycle?

A. It is very difficult (to break the vicious cycle). I don't think I have got the time to go through it all but broadly speaking, the cycle tends to get worse because the underlying excess savings condition is continuing. And, over and above that, you have large debt overhangs because each past credit boom leaves a lot of debt in its trail. The debt overhangs reduces spending, reduces borrowings and increases saving. So, you need more desperate policies. It doesn't look that we are going to grow out of the debt overhangs. So, maybe, in end you are going to have a massive default, which is very destabilising. So, we are stuck with it for the present and the foreseeable future.

Q. So there's no way out of it…

A. Well, you need some very profound changes in the economic system and very profound change in policy to alter this and we are not near that.

Q. Do you think the fear of looking at fiscal policy to fix the problems is diminishing or is it still being seen as a monster?

A. No, I don't think it is diminishing. The only thing that's diminished is that in many countries in developed world the fiscal balances have improved. So they are not tightening further. Fiscal tightening has stopped, but I don't think we are going to move to aggressive fiscal policy. It doesn't seem likely except in huge crisis (scenario).

Q. What kind of coordinated policy approach would you advocate to deal with the Chinese capital problem?

A. It's not very clear to me how you can handle that in a coordinated way. I think it is basically a problem for the Chinese. There's a big debate about it, but I think you have say that the Chinese can't solve their problems through a very large depreciation. They can depreciate a bit. There are two alternatives for the Chinese. They can do managed capital exports targeted at development. Basically, policies designed to support use Chinese saving surpluses for productive investment. The Chinese are creating institutions for that but they could do more. They could be more aggressive about that. Beyond that, they can develop policies to encourage relatively efficient investment abroad in controlled way. Finally, they have to find ways of absorbing more savings at home and the best way to do that is to raise consumption, which means changing the taxes and spending system to support it.

Q. French economist Thomas Piketty has observed that India is not taxing enough. Do you go with that view too?

A. I am not convinced about this. India is still a relatively poor country. A lot of income is subsistence or near subsistence income. You can't tax subsistence or near subsistence income. You can only tax surplus income, which is not so large (in India). For these reasons, if you are a poor country and have a high spending ratio and a high tax ratio, it tends to be very distorting. Brazil has that and it doesn't seem to me a very good idea. I think Mr Piketty may not understand the difference between developing and developed countries. I think the overall spending and tax levels in India are quite reasonable for an economy of its level of development. Improving the efficiency of spending of tax revenue is the more important thing, but I accept that if you've got high return investments, which will generate growth and revenue, then you should borrow for that investment. It's perfectly reasonable to borrow for investment because it is productive. So, I wouldn't be bound by the current revenue. In fact, I would tend to separate the budget into current and capital (accounts) for this reason. But, I wouldn't think that a significant rise in the overall taxes and spending ratio is realistic in India.

Q. Indian government had to roll back its Budget proposal to tax part of the employee provident fund (EPF) corpus of private sector workforce. Do you think it is rational to tax EPF?

A. I don't know anything about employment provident fund (EPF), but it doesn't sound like a thing that I would tax. But, as I said, overall the tax ratio in India is quite reasonable. So, I'd focus more on the structure of tax spending than its overall level. Maybe, if you got a GST, you can raise the (tax) revenues from there or from carbon tax. Indian government spending, historically, and I haven't looked at it recently, was fantastically wasteful. They did a lot of inefficient things, both at the state and central government levels. Huge spending on subsidies. Spending on education that never got to the schools. Grossly inadequate spending on health, ludicrous spending on fertilisers and free power. The state and central governments have wasted an enormous amount of money. The issue is not raising more money, but using it better. Now, you should get rid of all these subsidies. They make no sense. Target welfare spending on really poor, which you are trying to do. That will release a lot resources that can be used back.

Q. Of the four engines of growth in India, private investments and exports are not doing so well. Do you think just the other two engines – public expenditure and private consumption – can sufficiently drive the growth?

A. Consumption is the most important engine in India. I would think with investment at around 30% of the GDP and consumption being the rest, you cannot get reasonably balanced growth, and still at a rate of 6-7%. In India, I would focus not so much on demand problem as on the supply problem. I'm not persuaded that India suffers from some demand problem relative to supply. The real problem is the rate of growth of supply. And that's about investment, efficiency, innovation and all these things. That's what drives supply. Demand side case for fiscal boost, given the monetary policy, doesn't seem to me fantastically strong. The case for spending more is that you've got a high productivity investment to do. That's the case, not the demand side.

Q. In the latest Budget, the government has emphasised on agriculture sector. How do you see this move?

A. India certainly has a potential as an agricultural producer. It has lots of sun. The monsoon is good. There's enough water. If they do irrigation well they can increase the produce of high value crops. They can export high value crops. You are not focusing on subsistence output. India ought to be a significant agricultural producer and exporter. Of course, it has to feed its population. Agriculture is the biggest industry in terms of employment, so it's perfectly reasonable to support it as part of development in India.

Q. In a scenario, where agriculture employs over 50% of the total workforce and generates just a little over 13% of the GDP, wouldn't that increase dependence on agriculture?

A. That's what I am saying that agriculture needs to get the same average productivity level as the rest of the economy. Then, its share in employment should fall to the share of the GDP in the long term. If you look at any other country – fast developing country – the share of the population in agriculture falls over time. So, I assume, it would be the same in India, but it will take a long time and it only works if you are generating good jobs in the rest of the economy. Otherwise, it doesn't happen. There has to be employment generation in manufacturing and services in a huge way, otherwise the reduction of labour force in agriculture just creates huge social and economic problems.