Let's focus on practical priorities, not lofty GDP goals: Arvind Subramanian

Former Chief Economic Advisor Dr Arvind Subramanian, in an exclusive interview with The Federal, delves into India's current economic trajectory. While acknowledging the nation's macroeconomic stability, he highlights positive indicators such as controlled inflation, a steady external position, and a low Budget deficit.  Edited excerpts:

The economic indicators are flashing green, with inflation under control, deficit not so bad, tax revenue at its peak, RBI’s forex reserves reaching record levels, and the dollar holding steady. But if you look at the employment numbers, household consumption data, and wage levels, you seem to find a completely opposite picture and one realises Indians are not happy. What’s your assessment of the state of the Indian economy?

The Indian economy, in terms of macroeconomic stability, is doing well. Inflation is down, the external position is quite comfortable, and the Budget deficit is also on a downward trajectory. However, the real side of the economy is middling. In my view, growth should be around 4 to 5 per cent, far below the lofty 8 per cent reported.

While some sectors are thriving, many others are struggling, leading to a narrative of a K-shaped recovery. Employment numbers and wages going down indicate the tide is not surging but middling and emphasises the fact that all boats are not being lifted.

There’s a puzzle if you say the economy is growing at 8 per cent and there’s disaffection. Therefore, the answer to the puzzle is simply that it is not an 8 per cent economy.

The Narendra Modi government’s PLI (Production Linked Incentives) initiative to scale up manufacturing in the country has witnessed a mixed response. While we see significant improvements within the electronics manufacturing and pharmaceutical sectors, the growth has remained tepid in other sectors. Do you think PLI needs a revamp rather than an expansion?

Investment remains notably weak, with FDI (foreign direct investment) also declining. The critical question to address for stimulating rapid economic growth is how to attract more private investment, particularly in manufacturing, which has the potential to generate substantial employment.

In a recent analysis, we explored the reasons for languishing investment. Our hypothesis suggests that attracting investment hinges on both increasing returns and mitigating risks. The Modi government has effectively boosted returns by cutting corporate tax rates and implementing protective tariffs, alongside cleaning up the banking system.

However, despite these efforts, investment levels have not seen a corresponding rise. This is primarily due to heightened economic risks, exacerbated by government policies. While returns have improved, the government's approach to reducing economic risks has been less effective. We identify three key risk factors: preferential treatment of "national champions," arbitrary state actions that unsettle investors, and supply chain vulnerabilities crucial for export-oriented industries.

Addressing these risks is pivotal to fostering a conducive investment climate. But is the government capable of doing it? Well, that’s an open question. We can then talk about initiatives like the PLI scheme aimed at boosting manufacturing and addressing broader economic issues.

India has opted out of the RCEP (Regional Comprehensive Economic Partnership) and is now pursuing FTAs (free trade agreements). Many believe that RCEP could have been a dynamic forum and has a lot to offer for a country like ours and is in no way comparable to an FTA. Do you think India’s FTA strategy needs a review, and should the country be opting for multilateral engagements?

It's important to recognise that multilateral engagements are either collapsing or severely strained, largely due to the ongoing US-China rivalry. (Former US President) Donald Trump's administration initiated tariff increases, a policy continued by his successor, Joe Biden.

Many developed economies are also taking steps against China, undermining the concept of multilateralism in today's geopolitical landscape. In response, India should prioritise remaining open to international engagement to maintain competitiveness. However, navigating this path is challenging, especially given the complex and tense relationship with China.

India must adopt a pragmatic approach; where feasible, it should pursue FTAs with willing countries. With China, maintaining openness while addressing security concerns is crucial. In this transformed global environment, adopting a flexible stance on trade rather than a rigidly principled approach may be necessary, recognising that protectionism is not unique to India alone.

India has pinned a lot of hope on its demographic dividend and, in fact, the country’s median age is likely to stay at 37 in 2050 as the rest of the world gets older. India seems to be in a sweet spot when compared to other economies. But when you take a closer look at the numbers, you realise that the share of educated youths among the total unemployed people stands at 65.7 per cent in 2022. Do you think India risks squandering its demographic dividend?

The demographic dividend was always an opportunity, not a certainty. While many East Asian countries thrived and China capitalised on its potential, achieving similar success required proactive measures. Key among these are providing quality education and ensuring access to employment opportunities, areas where India has fallen short. Without these foundational steps, it's unsurprising that we may miss out on reaping the demographic dividend.

A fundamental challenge persists: How to create sufficient jobs? India historically neglected labor-intensive manufacturing in favor of services, which, while high-skilled, offer limited job opportunities due to their nature. High-skill services drive growth but do not provide broad employment. Now, however, the "China-plus-one" strategy presents a real opportunity as global investment diversifies away from China. Some of this investment is already flowing into India, particularly states like Tamil Nadu. Yet, concerted efforts are necessary to attract more investments, particularly in labor-intensive sectors.

Despite growing interest in semiconductors and high-tech industries, the imperative remains to attract investments in labour-intensive manufacturing. The window of opportunity for securing these investments is narrow and time-sensitive. Realistically, India may never achieve the manufacturing dominance China once did; even reaching a 10 per cent share of global exports in labour-intensive sectors would be significant given current constraints.

While debates focus on weak consumption, exports could potentially drive significant demand growth. To achieve this, we must create a supportive environment for exports. If I were the Prime Minister, I would convene with leaders from states known for competitive labour costs. Together, we would strategise to attract investments in labour-intensive sectors, ensuring policy stability and minimising risks for investors. Consistency in policy and fostering investor confidence are crucial to successfully attracting and retaining investments in these critical sectors.

In conclusion, a concerted effort by both the Central and state governments is essential to stimulate investments in small-scale manufacturing. This initiative is pivotal to leveraging India's demographic potential, creating jobs, and boosting export-driven economic growth.

Modi has been talking about his vision of Viksit Bharat on every occasion. Do you think India becoming a high-income country by 2047 is a plausible, feasible, and realistic dream at a time when the external environment remains tricky?

I find the implied numbers just so optimistic. Instead of fixating on lofty numerical targets like reaching a certain GDP or income level, I believe our focus should be on practical priorities: generating employment, fostering economic growth, and improving the skills and health of our population.

By addressing these fundamental aspects, other metrics may naturally improve. Personally, I'm less concerned with specific numbers or ambitious goals like doubling farmers' incomes or tripling GDP. While these targets may capture attention, they do not address the core challenges facing our nation.

It’s been seven years since the GST was implemented. How do you see it evolving in the coming years and why do you oppose GST on petrol and electricity?

After seven years, our revenue has finally returned to pre-GST levels, despite numerous rate cuts along the way. This recovery underscores the gradual implementation and increasing efficiency of the GST system.

However, to fulfill its original promise of being a good and simple tax, further steps are needed to simplify and rationalize the rate structure. When GST was introduced in 2017, I supported including petroleum and electricity for both technical and economic reasons. Yet, GST itself was a compromise between the central and state governments.

States relinquished some sovereignty in exchange for benefits like a unified market and increased revenue. However, today's political landscape in India is more contentious compared to 2017. Centre-state relations are strained, making decisions on such matters highly political.

Many states may hesitate to further relinquish sovereignty, not just regarding GST but for broader political reasons. This shift in political context implies that states may be less willing now to cooperate compared to when GST was originally implemented.

The budget is around the corner. Is there any expectation or suggestion for the finance minister?

No expectations. No suggestions.

Raghuram Rajan has made it official that he’s not interested in the business of kissing babies. We still see a lot of bureaucrats diving into politics lately, how interested are you?

I’m a technical economist and happy to give advice, but I’m not a politician.