We need to work hard to achieve double-digit growth, says the Vice-Chairman of NITI Aayog

The new RBI Governor will be much better as he is more of a team player and displays greater maturity, NITI Aayog Vice- Chairman Rajiv Kumar explains in an interview. He also, for the first time, explains why the Aayog got involved in the back series GDP calculations. Excerpts:

The RBI and the government have been in a public stand-off for almost three months...

I think that was completely unnecessary. Everybody is part of the macro management team of the country. There are always differences in the manner any two economists look at the economy and that is expected. But you resolve your differences through discussions that are kept within the team, and come to some understanding. This is where I think the new Governor will be much better. He has a lot more roundedness and a lot more maturity in him.

But where do you stand on the two issues of RBI autonomy and transferring of excess reserves to the government?

I think as a number of former Governors have pronounced, autonomy is as much as the Finance Minister wants. You are appointed by the government. But there is a space and everybody respects that space. There is autonomy to consult and the statutory authority is given to Monetary Policy Committee (MPC) on the determination of interest rates for achieving the inflation target. That is a big one. That is statutorily your single point objective.

On the funds, I think you have to agree to a benchmark or a framework that is globally accepted. I don't see a reason for which you should have a higher benchmark than the global norm. You can at best say we need slightly higher reserves because of India specific reasons. But you need to accept that there is a globally accepted norm and then define your very clear reasons for which the India specific reserve requirement should be higher than that and beyond that you should hand over to the government.

Why should prudential norms be higher for Indian banks than the Basel III norms? The Basel III norms specify 4.5% of Tier-I capital relative to your assets. Why should we have 5.5%? Given that 75% of India’s banking is explicitly sovereign guaranteed, so there is no additional risk. And the rest of it is quasi-sovereign guaranteed as came out in the 2008-09 crisis. To that extent, any argument that the capital adequacy norms should be higher needs to be carefully looked at and calibrated.

What about banking regulations and PCA norms?

All of that overlaps so much between the government and the RBI… In enforcing banking norms, RBI is the regulator but the government is the owner. How can you not consult? The State Bank of India is owned by the government of India. You can’t possibly say this is what I will do with it. Even in the UK, and the Bank of England, there is a degree of consultation between the treasury and the bank. As I said earlier, you are autonomous within a team.

Why was NITI Aayog included in the back series GDP data estimation process?

We have been waiting for the back series data since 2015. Then came the Mundle Committee report for which estimating the back series was not a part of their mandate, but they did it. The committee was on recommending the set statistics for the real sector of the economy.

They compiled a fairly simplistic econometric model where the general feeling was that it was not satisfactory and the government did not accept those findings.

That, I am assuming, brought pressure on the CSO (Central Statistics Office) to come out with their version of the ‘back series.’ They came to NITI Aayog and asked us to have a look at the output. I agreed, and said rather than just me looking at it, why don’t we ask this to be looked at by a group of statisticians, to which they agreed. We got a first meeting organised where 8-9 of the best statisticians came and there were some issues that were raised. We had already called a press conference and then, we cancelled it because we felt that the back series was not yet ready.

Then NITI Aayog organised another round table about a month later. We discussed the final results and the statisticians endorsed it. Having been involved, CSO asked NITI if the report could be released together. I agreed. I hadn’t realised the possibility of any of this political drama at the time. My thoughts were that at one point the Department of Statistics used to be a part of the Ministry of Planning, so I thought there was a normal and natural nexus here.

The story is that we were consulted to check the veracity of the data, we took the help of statisticians over two rounds, and then when asked, we agreed to release it jointly.

One of the criticisms of NITI Aayog’s involvement is that it put in doubt the method chosen for calculation of the back series

The method that was chosen, and the statisticians made sure of that, was the method recommended by the UN System of National Accounts (SNA) 2008, and that’s the standard global practice. How can anybody argue otherwise? If there were political motivations, then why would the CSO release the Q2 growth data, which showed slower growth than Q1, just three days after the back series? There is no political connection or pressure. The whole argument that this has become political has no legs.

The new data show we never grew above 9% in the last decade or so. Does this mean we have to re-evaluate our view of what the economy was like?

I strongly think so. We need to accept that we need to work much harder to get to those magic numbers of double or even near double-digit growth. It has been said several times before, including by the then Chief Statistician of India T.C.A. Anant, that there was a significant overestimation of the rate of growth of the services sector, which is why the sector’s share in the GDP and its growth had been exaggerated. There are three sub-sectors where this happened most: communications, financial services and unorganised trade.

Some of it you can see very clearly.

For example, telecom. First the growth in the number of subscribers was taken as a proxy for the growth of value-added in the sector. It was not value-added. Instead, what should have been done was looking at either revenue receipts or at least the number of data or voice minutes used for estimating growth. This is what they are doing now in the new series. So that showed a sudden drop.

Then, the RBI was being treated as a market entity. The SNA 2008 says that the RBI should not be treated as a market entity so that only the costs should enter the accounting and not all the profits that they make.

Earlier, all the dividends that they paid to the government came into the calculation. This change also led to a huge drop in the new estimates of service sector growth.

Similarly for the unorganised trade sector. Based on a 1999-2000 survey, the CSO used a general trade index (GTI) for estimating trade growth.

Having done that survey in 1999-2000, on how trade was related to the real economy and having got that coefficient, they kept extrapolating on that basis. Now, for the 2014-15 data onwards, they used the sales tax data. The sales tax data gives you the collection and growth of sales tax, and this is a percentage of the total trade taking place. So from there you can approximate the trade growth much better. Having done that, you find that the number has dropped dramatically.

Then there is this whole argument about the ‘smell test’ and how the numbers don’t feel right. One of the points being made was to do with investment. That 38% of GDP was invested, and it’s only producing 8% GDP growth whereas now investment is only 28-29%, so how are you producing 7% GDP growth.

As all economists know, there is the capital-output ratio. If that 38% of investment share has in it a lot of investment from the banks to the power plants, and let us assume as an exaggeration that all of them are currently stranded, then they are not producing any output. Or if they are investments in highways that are not completed. So, the capital-output ratio can become very high. You can have huge investments, but they don’t have to necessarily show up in output. If investments are being converted into NPAs, then they are not going to produce the output, and so to link the two is incorrect. By casting aspersions on these estimates, you are questioning the very professional integrity of the CSO, which is a highly professional and competent organisation.

Some ratings agencies have downgraded their estimates of India's growth for the rest of the financial year. Do you think there is a case to be made for slower growth over the course of the year?

I think we will keep to what the RBI and IMF estimates are, which are more like 7.3-7.4% for the whole year. We will achieve that.

What is your reading of the extreme volatility in the stock markets?

I honestly think it is not all domestic. There is a lot of uncertainty going around in the world. It is that sort of a time. For instance, if the Huawei issue doesn't settle, a US-China trade stand-off is imminent. There is also turbulence in the global markets. The global drivers of volatility get reinforced in India a bit because of political uncertainty. In India, one-one and a half months before the elections, you get in the mood of who will come, what will happen. That is one part of it.

I think another real issue is the thinness of the market. It is not deep enough. There are some big investors, especially the FIIs, they move in one direction or the other this brings about a huge change. That is what I think causes the real problem.

It is not any macro fundamentals that are driving the market. Market is being driven by factors other than fundamentals. One is global, the other is political, and I think there could also possibly be investor sentiment. People are still not sure whether the investment cycle, which seems to have picked up with the rise in the commercial bank credit offtake rising to 15%... whether it will sustain or not. If everybody is sure about that then they will invest money and you will get a bull run.

The market is not yet sure and the reason for that is the state of NBFCs. After October, NBFC credit to the regular eight or nine segments of consumption demand has gone down by around Rs 10,000 crore compared to October last year. Post IL&FS, commercial banks are not extending credit, so NBFC balance sheets have shrunk. That is why we have been asking for higher liquidity.

There are reports of the government mulling a farm loan waiver...

If there is genuine farmer distress, it has to be addressed.

Given that this is not the first time this will be done, and some State governments have already done it, I think the government will be unresponsive if it did not take steps to address farmers’ distress. I have never been a fiscal hawk. I have always said that fiscal deficit target is there, yes.

But you can’t have a fiscal fetishism. If there is a need, you cannot tell me don’t do it because it will breach the fiscal deficit. If some real concerns of the people have to be addressed, public expenditures have to expand.

Everywhere in the world, including the US and also Europe… they have shown that fiscal deficit target numbers are there as a guide. It is not something that prevents you from taking the necessary steps for removing farmers’ distress or addressing people’s genuine issues.

What is happening on the electric vehicles front? Many different statements have come from the government on the need for a EV policy.

We need a policy framework surely. Niti Aayog has put together a comprehensive policy framework paper, which is being submitted to the government for its consideration. The focus will be very sharply on shifting public transport decisively away from hydrocarbons towards electric mobility.