We would be lucky if we can grow at 7-7.5%: EY India chief economic advisor DK Srivastava

In a sea of optimism on India, EY India chief economic advisor D K Srivastava's cautiously optimistic views temper down the outlook for the Indian economy. Srivastava tells Praveena Sharma that the benefits of a lot supply-side initiatives being taken by the government would be fully derived when, some years down the line, the world demand picks up. Today, he believes India's immediate worry is demand deficiency from global and, to some extent, domestic sources.

Q. One peculiar aspect of the current economic growth is that it seems to be a jobless one. Employment creation has remained more or less stagnant in recent times and now the government has also decided to cut Mahatma Gandhi Rural Employment Guarantee Scheme (MNREGS) labour budget. This certainly doesn't look good for demand that has been an area of concern for us for some time now. How do you view this situation?

A. This represents a combination of factors. One is that most of the new jobs are in the sectors that require specialised skills like information technology (IT), managerial and consulting. Most of the conventional jobs are vanishing. In a way, there is a structural problem in the economy. The relatively high growth sectors are relatively low employment creators. So, most the job opportunities are in the metropolitan cities, and to some extent in the Class A cities. Most of the rural, hinterland and smaller towns and cities are therefore facing a tremendous lack of employment opportunities. Agriculture has been doing rather badly in the last couple of years, leading to spurt in migration to the urban metropolitan cities and high demand for MNREGS. It is a problem that this transformation appears to be happening at a time when our share of young and employable population is heading towards high percentage, close to the expected peak by 2020. It could be in the range of 64-65% now and the peak will be 68% or so. This situation has come when actually the overall fiscal situation in terms of available resources, particularly with the central government that finances the MNREGS, is largely limited because of the fact its government borrowings are constrained by the fiscal deficit limit. Also, our revenue growth has been limited because of oil prices falling. This year, we were able to manage through excise revenues, but next year is going to be a challenge when prices of crude petroleum stabilise at a lower level.

Q. Do you think the current job scenario could pull down demand?

A. Yes, domestic demand will be adversely affected. And when we view that situation in combination with the very weak global demand, then it gets even worse. As the incomes go down in the hands of people, who are until now earning, then obviously demand would be affected. Besides, there is also an inward migration from Middle Eastern (West Asian) countries, where lots of Indians were earlier employed, but are now coming back because job opportunities have dried up in those countries and their remittances have also gone down. On the whole, there would be an adverse impact on demand. There is no doubt about that.

Q. How much of the adverse impact on demand would be offset by the positive affect of implementation of the Seventh Pay Commission in the current fiscal?

A.It will be partially offset. The salary hikes recommended by the Pay Commission affects, at least directly, only the central government employees in the first round. Within that structure also, we are hearing payments may be delayed. So, that effect will be happening, but it will happen in a staggered way and by the time the state also join this initiative, possibly one-and-a-half or two years would have lapsed.

Q. The sentiment around the Indian economy is very positive. The International Monetary Fund (IMF) chief, Reserve Bank of India (RBI) governor and a host of others are very bullish on India. Are you as bullish as them?

A. When we evaluate the position of Indian economy in comparison to many other emerging economies, India does appear to be a bright star. Many of the initiatives that the Indian government has so far undertaken are mostly supply-side initiatives – like their emphasis on road and rail infrastructure, on smart cities, digital economy and so on. These are kind of supply-side initiatives which would have a positive effect but with a considerable lag because supply-side initiatives take quite some time before they begin to show positive multiplier effects. The immediate problem is, of course, of demand deficiency both from global and domestic sources. There is considerable evidence of underutilisation of capacity not just in industry but also in the services sector. The immediate challenge of deficient demand notwithstanding one can assume an optimistic stance as far as supply-side initiatives are concerned. Down the road, when the world economy starts to look up in another two to three years possibly, they (supply-side initiatives) would give a positive advantage (to the Indian economy).

Q. With most part of the global economy not being in such a good place, how insulated or exposed is India to the external risks?

A. Our degree of insulation has progressively come down. Our inter-linkages with the global economy have hardened. As a result, we have seen in the last 15-16 months, Indian exports are negative. They are negative in terms of growth compared with either Chinese exports growth, which is also negative, or world export growth which is also negative. So, we have really borne the brunt of adverse headwinds. We also face difficulty on account of pressure on exchange rate because as the rest of the world enters into a deeper financial crisis, a lot of dollar and foreign exchanges are going back to the US and other developed countries, away from India and other emerging markets. These are very strong linkages. The only advantage from the global developments that we have and many others don't have is that crude prices are settling down at a lower price will benefit us in the long run far more than other economies.

Q. The Nikkei India Composite Purchase Manager's Index (PMI) output index reveals that the improving business activity in manufacturing and services sector fuelled marginal inflation in March. How much of a bad news is that in terms of demand slowing down?

A. PMI, we know reflects a very short-term influence. Therefore, unless it's confirmed on a trend basis, one should not read too much in the uptick in demand reflected in it. Inflation may be under pressure marginally. There would be some upward pressure on inflation, but once again we have to see whether that is going to last or not. It may depend much on how our agriculture performs in the coming monsoon.

Q. If this upward trend in inflation continues, how much will it threaten demand and real GDP growth?

A. If real inflation increases, there would be a reduction in real disposable income and to that extent there would be an adverse impact on demand. But, I think we may need to look at the structure of inflation more generally and given that overall demand is still very deficient and Indian economy is performing below its potential growth level, I think that the upward pressure on inflation would probably not last long.

Q. Are you satisfied with pace of government reforms? Do you think the government needs to undertake more far-reaching structural reforms?

A. We have to really understand the structure of reforms that the government needs to look at. Most of the reforms discussion revolve around some milestones like Goods and Services Tax, labour laws and so on. But, there is a lot of reforms that government has to undertake, in terms of managing its own expenditure structure and tax structure. Overall, our tax-GDP ratio remains three to four percentage points below where it should be. That our tax-GDP ratio has been stagnating in the range 16%-17 % for a long time is a major concern and one does not see much happening on that. Similarly, as far as expenditure structure is concerned, the central government, although it is now transferring far more to the state governments, has not really downsized many of the central ministries dealing with state subjects. And, there is no concern or talks going on about how to restructure the central government bureaucracy and so on. That is one kind of reform they have progressed very slowly on. The second kind of reform is the administrative reforms – GST, labour law and so on. They have now decentralised land laws, and therefore, it has become much less restrictive. The GST implementation, even if the government succeeds on the central legislation, it will take at least two to three years after that because a lot of enabling legislations at the state level would also be required. So, these reforms are obviously time consuming and are going to take at least two to three years. In terms of overall governance, probably there is an improvement. In terms of individual initiatives taking by the ministries, there is an improvement where ministers are dynamic and have a vision or a foresight. Overall, in terms of overarching reforms like public-private partnership (PPP) management, expenditure side government reforms, legislative reforms, we are far slower than what is needed.

Q. What are the downside risks to the economy in the current fiscal?

A. Most of the risks are emanating from global deficient demand, which also translates into deficient income generation in all sectors that are export-linked. It is going to take quite some time for the economy to come out of it. The only upside is the low crude oil prices and benefit of that has already been taken last year. That advantage would now stabilise. Very clearly, the net export and the investment engines, particularly private investment engine, are switched off. The government investment engine is not able to increase effectively because of the limit on the government borrowing. So, the only driver is private consumption expenses. It has to be seen how it supports the economy and that would depend on how the individual disposable incomes grow. The government consumption is also virtually switched off. In the context of a jobless growth, there would be some demand stimulation through the central government pay revision.

Q. Is the current public spending adequate?

A. What is budgeted in this year's Budget shows that as a percentage of GDP, the government expenditure goes down and the capital expenditure goes down even more. All the expenditure programmes announced in the Budget are going to be financed through specialised initiatives on funds outside the Budget like infrastructure funds and so on. These funds and activities related to both government and capital expenditures will not be bound by budgetary calendar. It may take relatively longer time for these expenditures to streamline income. So, public spending is much less than desirable. But you can't have it (desirable level of public spending) as long as we have budgetary constraint.

Q. The Confederation of Indian Industry (CII) has pegged the GDP growth at 8% against the RBI's 7.6%. What is your bet?

A. I would say that 8% growth is close to our potential growth but we are quite some distance away from that number. Looking at achievability of 8% growth in the current and next year would be optimistic. We would be lucky if we can show growth rate of between 7% and 7.5%. Unless the world economy really improves, there isn't enough domestic push that can take us to 8% growth (soon).

Q. How about the fiscal deficit target of 3.5% of the GDP in the current fiscal; how achievable is that?

A. It is achievable in the sense in which the budgeting has been currently done. Most of the expenditure stimuli are coming from outside the Budget through specialised funds. It is something that is justifiable because we can't have both – we can't maintain our fiscal consolidation and still stimulate the economy.

Q. Which you think is a good way...

A. Which is justifiable, but I would not say good. We should have a counter-cyclical fiscal responsibility Act, which distinguishes the years in which the economy in expanding and years in which it is contracting. As we have a fixed borrowing target and because the instrument of counter-cyclical stimulus is not available to the policy makers, these difficulties arise. One good thing is the government has talked about setting up a committee that would examine how to reform our Fiscal Responsibility and Budget Management Act (FRBMA). If that gets reformed then counter-cyclical fiscal responsibility instrument can stimulate the economy and exceed the borrowing limit beyond 3% in phases when demand deficiency is clearly identified.