Arvind Panagariya On 7% Growth, ‘Permission Raj’ & Why India Is Tough For Foreign Investors — Q&A

[00:00:00] Speaker 1: we're delighted at money control to be joined by professor arvind panagriya chairman of the 16th finance commission professor of economics and jagdish bhagwati chair at of political economy at columbia university also the chancellor of nalanda university professor panagriya delighted that you could make the time sir sir let me begin by asking you about the wider economy the rbi just put out 6.7 percent economic growth numbers up revise upward from 6.6 percent what do you make of these numbers are you um is that more or less what you expected how does we compare with other economies and how what impact what impact will this have on foreign perception of the indian [00:00:42] Speaker 2: economy at the moment um my view has remained that indian economy is robust uh it has been growing around seven percent or a little better right uh and i expect it to continue to uh perform along those lines um maybe i think rbi's estimate uh or forecast is still on the lower side i i think will uh come out at least seven percent okay um maybe better but that is where uh i have been and i think year after year i've been proven right and virtually everybody uh and revises the growth rate upward as the year comes to an end so rbi i think is being over cautious um probably okay yes i mean certainly relative to where i would be you know i would not hesitate to say that we will do seven percent for uh and then i'm very encouraged by the fact that you know uh that last quarter for which we the latest data came in we grew seven point eight percent in spite of the fact that a part of that quarter had been impacted by the uh events in the in west asia also uh but we weathered that uh quite well the economy you know uh managed uh to uh to remain on this high growth trajectory in spite of right they say [00:02:12] Speaker 1: so do you still hold the view that um the rupee will at some point go below the above the hundred dollar a hundred um dollar the hundred mark for the rupees of the dollar and um what what did the action we took on fcnrb were that enough so um look you know it's not a matter of my belief [00:02:34] Speaker 2: it is a matter of the markets uh and given the fact that our inflation rate uh generally is higher than the uh inflation rate of our uh other competitors uh and especially when you look at the u.s uh or europe um it is inevitable that rupee in nominal terms will continue to depreciate at some rate uh i think there was a lot of backlog of the depreciation that was needed because there was a period you know during which rupee uh uh even in nominal terms had actually not depreciated at all over a period of nine or ten years if you look back the uh the history from 2003-4 on till 2011-12 or so right because you know like 2003 the rupee was probably 48 rupees to 47 rupees 48 rupees to a dollar and then in nominal terms at least by one rupee it depreciated um uh and and so a lot of the depreciation that subsequently happened uh was a correction for uh lack of movement uh during those years um i think not the rbi by letting it depreciate quite substantially right over the last two or three years uh has brought the rupee in a reasonable place i think you know uh one never knows you know this is not something that because uh what is the appropriate exchange rate we really don't have a good sense of right now but uh but uh but still uh there's no doubt that there's a lot of backlog of depreciation that had to happen which has not happened so it'll not i would expect that the rupee will not depreciate as as much as it has appreciated in the last two to three years right um but you know it's inevitable at some point it'll cross the 100 rupee mark uh i mean these are uh the the power of the markets is is is is so enormous that at the end of the day no institution can uh really keep the exchange rate from uh moving in a [00:04:59] Speaker 1: certain direction so from a point of view of the um of uh foreign investments in india sir um there's been a lot of concern about net fdi there's been concerns around fii money leaving india there's been some green shoots so turn around and say july uh if you look at the numbers now um what does india need to do from where you sit to attract more fdi into india and to get fpis and fis to sort of to return to the [00:05:23] Speaker 2: indian markets yeah so this is a perennial question for us uh and uh we you know there was a time at which we had virtually no fdi and we go back to 91 92 it's like 100 million dollars or something per year uh and we uh uh that took a lot of step a lot of deregulation was done and as a result fdi became you know positive and grew at a significant significant rates um but now i think you know is we need to do a bit more uh india remains i think for the foreigners a very difficult place to do business and you can see that you know much of the foreign investment that comes in india meaning tfi direct foreign foreign investment uh it comes into pride private equity uh you you don't see foreign foreigners actually setting up companies uh uh and enterprises themselves in in india you know unlike say in the united and in china for example uh and and that is very reflective of uh the difficulty uh of doing business [00:06:35] Speaker 1: for the foreign uh entities so any specific things one or two reforms that would be your top priority if you were to suggest to the government on what we should be doing to change that scenario so so i i i [00:06:48] Speaker 2: think it's not a matter of just one or two reform which would uh i think the whole set of things our what we should be doing to change is that we have been a bit over regulated uh you know what has happened is that the license raj kind of is gone but it some of it has been replaced by what i have been calling permission raj we require simply too many permissions and then you know for any of the things that you fail to comply the the regulators can get to you uh i think that really needs to needs to change i mean it is something now that requires a lot more detailed work uh compared to what uh my comparative advantage is you know i i sort of write much more you think you made the argument earlier [00:07:42] Speaker 1: that there's been a lot of a creeping sort of protectionism which is increasing oh yeah certainly on [00:07:47] Speaker 2: the trade side i mean trade side i can speak to more more more definitively in terms of the details yeah you know the the the kind of you know non-tariff barriers that existed have been resurrected now you know through all kinds of permissions there also uh and then you have these quality control orders which have been which have multiplied uh not to mention the fact that uh uh the kind of anti-dumping we do uh there is no equal of india there you know we have got about less than three percent share in the import in the global imports and we are the largest user of anti-dumping uh almost anything you know the the the uh and and and and it really seems to be in dynamic seems to be far more effective in sectors where you got one or two domestic producers so these large producers were incredibly inefficient uh uh uh effectively go in make their uh case to the ministry of commerce and the ministry of commerce [00:08:56] Speaker 1: um in terms of blighters so um in terms of um in terms of indian or the bilateral trade treaties that we've been doing um there has been an argument which has been made that maybe we need to change the way we do our bilateral there have been a few of bilateral trade treaties uk and many others while the indo-us trade deal is still being negotiated um do you think we need to change the way uh do you [00:09:18] Speaker 2: you think we need to get more out of these treaties see uh uh look i mean the the among the bilaterals two of these that we have done one with uk and with the european union i'm much more hopeful you know because these are large players right uh and and they they can exercise some bit of for their own strengths to to to get market access into india that i think is a good thing because to me ultimately uh it is a great thing to be able to get access to the these large markets particularly the european union uh for our exporters but uh much more so it is also the fact that it opens our own markets uh and and that i think is a big plus so it's not that issue i think the bigger issue is our general structure and levels of tariffs our general tariff levels are still high they ought to come down where do you think [00:10:14] Speaker 1: we're getting stuck on the india u.s trade deal sir i mean um what's our sort of bottom line and do [00:10:19] Speaker 2: you see that getting resolved soon so i don't think i mean i certainly don't have the information exactly what it is that has held up that agreement for how important is the deal for us for that long oh yeah again i i i see it it it is very important from the viewpoint of opening our own markets you know we need competition within our own market that's essential uh and now you know once we have signed the agreement with the european union uh it is all the more essential that we sign one with the united states because in effect what you are doing is you're creating competition for the european union within our market right you see so so right now the way if there is an agreement with european union and not one with the us then in effect you have yielded the market but even in the commodities and the exports that united states is more efficient at manufacturing than the europeans the market will go to the europeans [00:11:19] Speaker 1: so in terms of uh foreign fii and all of that there's been along with this debate around long-term capital gains taxed that there's a debate around whether we should remove it and all of those things like like market like sagapo what is your position on things so these are levels of [00:11:33] Speaker 2: details at which i don't operate uh you know these are complex tax issues unless you've looked at the details what the regime is uh i mean there are there's also a connect then to personal income taxation etc so [00:11:47] Speaker 1: so one needs to look sure so at a larger at a larger level um given the we started off by talking about the latest economic numbers and you said you were much more optimistic about those numbers than um than what we have now uh there has been a narrative in the last few months about uh of negativity around the india's story right that things are moving down all of that do you think that that that that how when where you sit in new york uh how do you see the narrative playing out and do you think that that narrative is overblown it is overblown because what happened i mean they were [00:12:21] Speaker 2: saying that things are collapsing etc etc uh and they were piggybacking i think on the west asian oil crisis uh as soon as the crisis went away uh suddenly all the critics also disappeared so i was actually saying on social media that what happened to all the indian economy is in crisis wallace i mean [00:12:42] Speaker 1: suddenly they disappeared so two uh final questions are at a larger structural level uh you've looked at the you've been studying the economy at multiple levels for a very long time um there is now a lot of debate in this country about or a lot of nostalgia or reminiscencing about the 1991 economic reforms and how what that opened up for the indian economy um if you were to compare those that era um what has changed between then and now and if you were to compare the manmohan sikh reforms with the modi era how would you compare the two eras the reforms that prime minister manmohan our prime minister modi has [00:13:17] Speaker 2: assured in so let me just put it this way people who are writing the history of these reforms are the ones who are involved in doing those reforms so there is a lot of kind of biases in the telling of that history so let me go back you know allow me two or three minutes here this requires explanation because there is a lot of confusion around it what were the reforms done during that period uh especially i'm talking the 91 reforms uh which is the uh uh the claim is that investment licensing ended the claim is that import licensing ended tariffs were incredibly high and there's no tariff reform in at least not in the first 91 reform there was a big exchange rate reform because there were two devaluations of the rupee which was very important uh for subsequent progress that happened but did we really end investment licensing i bet you you would say that yes it it was completely ended but it was not really completely ended because you had some 850 items on the small scale indices reservation list right not only no licenses would be uh issued on that uh for those 850 products uh you wouldn't even apply for such licenses because these are basically reserved completely for it and for for the small little enterprises so where was the large scale uh production in those industries the licensing on those products which were accounted for all the labor intensive products remained so what was the you know the the the why did they leave that out on import liberalization important licensing you did the intermediate inputs and you did the capital goods you left the consumer goods completely but the consumer goods is the most important anyway if you are thinking in terms of industries capability right i mean that's the last stage of a same kind of all kind of assembly industry industry assembly products that you could uh uh uh uh manufacture they they were still left completely uh uh completely under the imports for consumer goods or left completely under control so did they look like and of course i'm not even mentioning the labor law reform which was also a critical aspect of it it was discussed at the time but didn't happen right so there is a great overstatement of the 91 reform also i don't want to take away from it i think you know narsama rav prime minister rav really was very courageous to have done yet what was done was very important we shouldn't undermine you know we shouldn't understate that the importance of that reform because symbolically that was extremely important but it is not as it is sometimes represented that oh it was a so well conceived and they are internally consistently consistent etc etc and in comparison the sort of the the now come to come to the modi era reforms some of those are the most difficult reforms politically most challenging reforms why did it not i mean gst was written out from the very early on by the uh vijay keilkar uh so it's not like we didn't know about that reform uh but it took a very long time in the end it was it was it involved you know about two or three constitutional amendments and then legislation etc it wasn't it was the most difficult reform you've written about this for bankruptcy law bankruptcy law i've been writing i was writing and and you know i shouldn't be even taking credits actually there was a task force uh during vajpay era on unemployment appointed under whose chairmanship montexing alu alia montexing alu alia himself had actually talked about both labor law reforms and the bankruptcy law reform and said both had to be done for the exit policy to be fixed up they were too difficult political then then then for for 10 years montexing alu alia was the planning commission chief uh uh and uh we had dr mannohan singh and we had uh mr sidambaram uh what happened no bankruptcy proper kind of you know uh uh state of the art bankruptcy law was put in place finally ultimately it was the modi government that actually brought that law um so some of the you know very labor law reforms in the end we talked about it under vajpay era and then under during the 10 years of dr mannohan singh we didn't even talk about it i mean labor law there was a provision at least in the special economic zones uh draft legislation that the vajpay government had produced but did not was not able to carry it through the parliament and it expected to return and then pass that law in the end the upa government came to power and they showed that they basically rewrote the special economic zone law in which the labor law reform provision that existed in in in vajpay draft of it was taken out so when we look at [00:19:05] Speaker 1: the structural nature of the economy in the mid 90s and social nature of the economy now the nature of companies in the say the the top 100 companies has changed the sectoral input uh weightage has changed significantly but also one big thing which has changed is financial inclusion in a very significant way in terms of the building blocks of the economy what with jam and all of those things you can talk a little bit about that change what has been the the underlying change in the superstructure itself [00:19:30] Speaker 2: in the last 30 40 years yeah so on the technology side we have done wonders building it up so the whole you know the the digital platforms that have been put up they've been fantastic so on one side certainly on on on on on on this side in facilitating the life of both entrepreneurs and people uh what the prime minister calls the ease of living and ease of doing business on the technological side massive improvement massive conveniences have been created a lot of the things for which you have to actually go to an office you don't have to go to office you can do it online now on the other side there is the regulatory side there things have become worse on the regulatory side we have simply put in too many regulations and departments that should not be involved in regulating become involved you know multiple you know you need permission so you need whatever clearances we're cutting the recording board there multiple departments so i i think you know on on that side we have uh uh done worse uh i think on net a lot of very good developments uh particularly using [00:20:40] Speaker 1: technology but can i ask you something about uh two final questions one is there's a lot of debate around the middle income trap that you know while our uh per capita income is increased and all of that that that are we in danger of getting stuck in a trap at the moment and what will be what is required to break out of that the second is you written a lot about uh education reform and about education you've co-authored papers on that with in the light of the protest recently in the gen z protest and all of those things what structural changes in the education system we need from where you sit there's a long [00:21:11] Speaker 2: discussion for which you know we probably don't have the time now but i've written quite a lot about so on higher education the broad point is that we are still operating under the 1956 university grants commission act that's a very old archaic law which needs to be replaced by a more modern one just as we did actually by the way on medical education you know also we had that problem under the old imc act the indian medical council act and there was a whole tyranny of the old medical council of india which had to be ended and uh under prime minister's uh leadership we need the ayoga actually piloted that reform similar reform is required on uh on higher education uh uh as well [00:22:02] Speaker 1: so so that has been a bit overdue right and in terms of which sectors we need to focus on to get out of [00:22:08] Speaker 2: this middle income trap a quick comment on the middle income trap i am at the moment i don't see that that i have a concern i think we are maintaining our growth rate of about seven percent so there's no reason for me to be pessimistic just right now but at the same time vigilance of course is required and what uh entrepreneurs are telling us about uh very uh kind of uh complexity of regulation and permissions that are required i think that will be required will be needed very important actually where the focus needs to shift is uh urbanization right i think this is where we are lacking action uh and this is largely a state subject states have to step up and uh uh uh the way i like to think of this uh at a broad broader level is that the cities have to be business friendly see our focus often has been on how to make life better for the people who are already living there but of course you know what you require is the expansion of the cities creation of new cities and for that you require the businesses to create jobs because in the end how will the cities expand through migration right from rural areas to urban areas from also from the the incorporation of the of the peri-urban areas uh urban outgrowths into the municipal corporations of the existing cities and and these are the ways in which uh uh urbanization kind of proceeds uh and and in india in fact much of the urbanization really has happened uh either from from you know the the natural uh organic growth of population uh urban population or through the conversion meaning these are really census towns so those have been the two but migration has played very limited role uh rural urban migrations played a very limited role most you know about 20 percent of of urbanization is accounted for by migration and that has not changed very much over the last several decades we have till data only till 2011 because that was the last census we conducted uh but uh that is where the action is very much required make cities business friendly i think you know firms that will create jobs which will then in turn encourage migration of workers out of rural into urban areas that i think is the crux of the matter to maintain the momentum because look you know ultimately if we are talking of a developed india by 2047 we have to hit that urbanization at least to 60 percent i mean i don't think of any i can't see i i don't know of any country which has become a developed country uh you know the uh south korea's taiwan's uh largely china noise also in that roughly that category um urban population has to account for at least about 60 percent of the total population i think we are on that front very far from being there and similarly there's a closely linked issue of the agricultural share of the workforce which is incredibly high in india almost 46 percent by the last uh census that i mean last plfs uh which which i remember 23 24 it was still 46 quite high 24 25 has come in i will check those numbers but uh but that you know so this is the connected issue that uh agricultural workforce has to become non-agricultural part of it uh uh you know it has to drop the share of agriculture and in in employment has to drop to close to about 25 percent urban urban population has to become over 60 percent right and and those are the frontiers on which we still need to be working vigilantly and that's where the state level reforms become extremely extremely important to which not enough attention has been paid uh professor [00:26:23] Speaker 1: paragraph thank you so much for talking to us at money control and for spending and for sparing your time thank you my pleasure