Reforms set stage for steady 6.5-7% growth: Nageswaran

Nageswaran said prudent forecasts in the Union Budget have given the government flexibility to deal with unforeseen events like increased food and fertilizer subsidies. He said the government has prioritized helping the bottom of the income pyramid during crisis years by providing tax relief to the middle class and businesses in prosperous years.

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According to Nageswaran, India’s response to Europe’s carbon cap tax plan will depend on the specific details and regional impact of the new tariffs and could entail legal and economic measures. He said private capital formation is on the rise, and the economy is likely to grow 6.8-7% this fiscal, with the government prioritizing job creation and education outcomes. Edited excerpts:

What is your assessment of India’s economic performance in recent years and predictions for its growth?

In general, there are two developments that have been missed in the commentary on India’s economic performance before the pandemic. The economy was slowing down, and people attributed it to one-time factors like demonetisation, GST, Real Estate (Regulation and Development) Act (RERA), etc. But the truth is that we are going through a plain and simple balance sheet stress. were in the banking system, which was compounded by the collapse of IL&FS in September-October of 2018. If you look at the global experience of developed or developing countries, when you are going through financial system stress, not only in banking and non-banking balance sheets but also in non-financial corporate balance sheets, they are all de-leveraging. going through a phase. Loss of development is natural. Therefore, the explanation that financial system stress is responsible for India’s low growth and low capital formation has not been fully brought out.

The commentary still looks for one-time factors and their preferred explanation, depending on which side you stand on, to explain these things. But it is also well and truly established, with global empirical support, that financial system stress tends to occur after a large expansion – this happened between 2006 and 2012, and when it reverses and an adjustment occurs. phase and the balance sheet is being repaired, naturally, there will be less credit demand, less credit supply, and less capital formation and hence, less growth. Therefore, looking at the period, which was largely a result of the financial system and corporate balance sheet adjustment phase, as an indicator of overall performance is not correct. This is something that is not adequately reflected in the comments.

And about the prospect of growth?

The impact of many reforms undertaken in the last six years – since 2016 – including GST, IBC and privatisation, has been muted due to financial system overhaul, post-Covid, commodity price shock and simultaneous monetary policy tightening. Naturally, people ask about the evidence for the pudding in terms of growth rates. In fact, in economics we use the qualification ‘all else remaining constant’ when talking about the outcome of an action. But in reality everything else does not remain constant. Things are constantly changing, aren’t they? The government may have implemented reforms like GST, IBC and RERA, recapitalization of the banking sector, privatization and various structural reforms. But for them to deliver rapid economic growth, an unchanging set of conditions is needed. But things changed and suddenly, we were faced with a pandemic, geopolitical tensions and then a shock in commodity prices. So people don’t adequately account for the fact that economic principles or policy actions will have an effect, provided everything else remains constant. When other things change, naturally, their short-term effects outweigh the long-term structural effects (of reforms). But once these one-off factors fade away, the structural effect of these reforms will be visible in the data. This is exactly what happened between 1998 and 2002. Many reforms were done in those years. You had the Golden Quadrilateral, interest rate deregulation, privatization and telecom reform, but none of that showed up in the data until 2003, because at the same time, we had other negative shocks like sanctions, the end of the tech boom, two consecutive droughts, and 9/11. had to face. The positive impact of structural reforms taking place at that time was overshadowed by too many one-off shocks. But as those one-off shocks faded, the trickle-down effect of those reforms manifested in higher growth rates. Now we are in a similar situation. Therefore, it is completely wrong to ask why these reforms are not reflected in the data or to suggest that these measures are not helping the economy. With our balance sheet (of lenders and corporates) now in good shape, I believe the economy is resilient and will be able to achieve a steady growth rate of 6.5-7%. We’re not fully accounting for the fact that digital transformation is adding to the formality. We are also not fully acknowledging the fact that the capital formation cycle was sluggish in the last decade due to financial system stress. Now it is changing for the better. These are important points that make me optimistic about India’s growth prospects.

What we did between 1998 and 2002 was to lay the foundation for the next six to eight years of development, barring 2008. Similarly, we have now laid the foundation.

The Center helped the poor during the pandemic, but the message to the middle class is that tax cuts can wait. Is that correct?

It is a question of transactions. Given limited resources, the government clearly needs to support the most vulnerable. That’s what it did. For the middle class, in 2019-20, for example, the government introduced Section 87A under the Income Tax Act, which effectively increased the tax exemption limit. It also rationalized the tax slabs and gave different options to the people. I think it is not possible to expect the government to do something for all sections of the society every year. Obviously, during an extraordinary year, you need to make sure that those who don’t have other means to support themselves are supported, and when times are good, we can look at other segments .

Does a conservative approach to budgeting help create a buffer to deal with unexpected additional subsidy spending this year?

Undoubtedly, it has played a huge role. It also improves the credibility and transparency of the numbers. It also gives you wiggle room to respond to unexpected developments. More than conservatism, I would call it prudence because we were facing a lot of uncertainties. When the budget was prepared, there was no sign of conflict breaking out in Europe. But still, in the last two-three years, the government has been focusing on ensuring that the numbers reflect some sanity. Instead of presenting optimistic numbers and then leaping to make them look good, the government has made a conscious choice to present numbers that can be met comfortably or that can be met if unexpected external developments occur. There is scope.

Will there be a delay in private investment amid lack of demand in some markets?

It is difficult to say, but the data suggests that private sector capital expenditure is improving. For example, an independent estimate from Axis Bank suggests that in the first half of the financial year, 3 trillion has been invested by the private sector. so this gives you an annualized run rate 6 trillion, which is probably 20-30% higher than last fiscal’s run rate. It is difficult to tell what private capex would have been if for uncertainties driven by global monetary tightening or the conflict in Europe. But there has been an improvement in terms of actual numbers. I think this will continue because if you look at credit growth or capital goods imports, that tells me that there is a growing trend of private capital formation.

With the pandemic almost over, what are the pain points or challenges that we need to address?

Challenges are addressed on a continuous basis, be it employment generation, be it ensuring health coverage for the population or compensating for the lost years of schooling in the last two years. I wouldn’t call them pain points; These are important priorities that need to be addressed in the years ahead.

What encouraging data points do you see among the high-frequency indicators?

You have Purchasing Managers’ Index (PMI) data that is looking good, and sales trends across various categories of automobiles are looking good. Look at bank loan growth–it’s strong. Also, look at the figures for domestic airline passenger traffic and even railway freight traffic. All these point to steady and continuous improvement.

Europe is moving forward with plans to impose a carbon cap tax on carbon-intensive products at a time when concerns about protectionism are growing. How should India respond?

It is difficult to speculate and hypothesize about what kind of measures may be needed. We will have to wait and see the fine print when they happen and see whether these affect the entire economy or specific sectors and what are the options available to us. The finance minister highlighted that these are medium-term risks that could become significant risks for specific sectors, but it would be difficult at this time to elaborate more on what kind of steps could be taken.

What is your economic growth forecast for FY24?

For FY24, the Office of the DEA or CEA does not make a clear forecast. In general, our feeling is that given the balance sheet strength of the banking and corporate sectors, barring large unexpected shocks, a growth trend in the range of 6% in terms of real GDP should certainly be achieved, but I expect it to be more than that. I see an average over the next several years of a real growth trend of between 6.5-7% in real terms. In this financial year, it is expected to grow by 6.8-7%. Various forecasts are converging on this range. It looks doable to me.

Are we in a better position today to connect the dots and assess the external uncertainties that could have an impact on the fiscal, or do uncertainties still remain?

It is very difficult to be precise about these things. But qualitatively, I would say that uncertainties still remain. The conflict in Europe is about ten months old, and we do not know when it will subside or whether it will flare up. We also do not know what kind of global economic recession will be, how deep and long it will be, etc. All these things are still unknown. In this sense, different types of uncertainties can arise, if not the same. But there they are.

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