NEW DELHI: Sanjeev Sanyal, member of the Prime Minister’s Economic Advisory Council, thinks given the strengths of India’s macroeconomic fundamentals, its sovereign rating should be “at least two notches higher” than the current level (lowest investment grade). According to him, by around 2030, Indian rupee will be an international hard currency, since many steps have already been taken to take it there. In an interview with Priyansh Verma, he expressed confidence that India’s real GDP growth rate would be 6.5-7% in FY24. “Notably, we are managing this growth with little help from exports given the weak external demand,” the former principal economic adviser underlined. Excerpts:
The external environment is riddled with uncertainty — Russia-Ukraine, Israel-Hamas, oil price shocks and rupee depreciation. How strong do you think are India’s macro-fundamentals to withstand these?
Currently, India’s domestic economy is in a good shape. The growth momentum is robust as can be seen in all the high-frequency data. For instance, automobile sales are strong, both in rural and urban areas, credit growth is exceptionally strong, domestic air passenger traffic is growing. The forward-looking indicators, such as PMI, also show strong momentum.
Simultaneously, the macro-stability indicators, such as inflation and external accounts, too are in good shape. There was a temporary spike in vegetable prices recently, but inflation is otherwise well behaved. Forex reserves are also comfortable. I am reasonably confident that a GDP growth rate of 6.5-7% is achievable in FY24. Notably, we are managing this growth with little help from exports given the weak external demand.
Fitch sees India’s potential growth at 6.2% in the near term (2019-2027), but it’s lower than 7% pre-2014. How do we increase the potential growth to 7% and above?
I don’t agree with Fitch’s assessment given the reforms and supply-side investments we have done– GST, Insolvency and Bankruptcy Code, cleaning up of the banking system, massive infrastructure building. My view is that India’s economy is capable of sustaining an 8% growth rate. However, it doesn’t mean we should attempt to hit 8% every year. In an uncertain external environment, if we artificially achieve 8% growth, our external accounts, which are currently in good shape, will suddenly be under stress, because imports will bounce up at a time when we can’t export to a weak world economy. Despite the unsettled external situation, we will still outdo what they consider our “potential” this year.
Do you believe the Union government can achieve its 4.5% fiscal deficit target in FY26?
The revenues have been very strong even under difficult circumstances. We tend to hit our revenue targets, and have been restrained in expenditure. This is a macro-economically conservative government. We don’t believe in (pushing) demand to generate growth. So, we remain committed to both monetary and fiscal restraints.
Since you mentioned expenditure, recently the prime minister announced the extension of PM Garib Kalyan Anna Yojana for another five years.
We see it as an important part of our safety net, but we also understand that it comes at a fiscal cost, and we keep making adjustments to make sure that fiscal costs are retained within what is bearable. We are managing our fiscal numbers with the scheme in place today. We’ll do the same thing going ahead.
Does the government need to make a more realistic assessment of its medium-term fiscal deficit target?
I think our medium-term fiscal deficit target is realistic.
You recently spoke on the alerts sent by Apple to opposition leaders. You criticised Apple’s security system and said that it may be compromised. But do you think data of individuals is secure in India, either held by private companies or a public organisation?
Cyber-security is a serious matter We have rules and they need to evolve. All kinds of new situations will arise. Now it’s for the relevant authority to take care of this. From the government regulatory side, we’ll have to pay attention to data security, artificial intelligence and quantum computing etc. Companies have to be held accountable.
The Supreme Court has often expressed its frustration over the government not clearing names for appointment to the High Court posts despite the Collegium recommendation. Since India aims to attract investors, an independent judiciary is a necessity. In this context, how do you view these remarks by the SC?
The fact that our legal system is slow and needs to be sped up is understood by all parties. This requires a large number of steps and is not a matter of just appointing judges. I would argue that the legal system is the single biggest area of reform that we need to do over the next decade.
You have called India’s sovereign ratings by global agencies “utterly absurd”. Could you tell us why?
If you compare India to its peers, India’s macroeconomic numbers are clearly way superior to those with same/comparable ratings. This is true of our growth performance, external accounts, long-term management of shocks. We have repeatedly demonstrated that we are capable of managing risks. There is little risk of any sovereign default, given that almost all our debt is rupee denominated, and yet we are at the bottom of the sovereign-rating investment grade. This makes no sense. We should be rated at least be two notches higher.
In a recent interview, you mentioned the government aims to make rupee a “hard currency”, which is used for global transactions. How long do you think it will take for that to happen?
It will take some time. By around 2030, India’s rupee will be a hard currency. We have taken many steps already to take it there. One, we have anchored inflation. That was important, so that the rupee is not seen as a high inflation currency, and is able to hold its value. Two, we have significantly liberalised the use of the rupee for international transactions. Three, we are internationalising the UPI payment system. Thus, over time, we will put in place all the micro-structures needed to make rupee an international “hard currency”. It has to be done step-by-step; even China took many years to do this. Eventually, the Indian rupee will also be part of the IMF’s SDR (Special Drawing Rights) basket.
Some economists in HSBC recently said that China’s share in world’s investments is around 30%, while India’s share is less than 5%. How can this improve?
We can clearly see India’s importance in global supply chains, in both services and manufacturing, is growing. There is a great amount of interest in India shown by several multinational corporations. So, undoubtedly India’s share will grow in the next three to five years.
As per an RBI’s study the weighted average rate under GST is around 11% which is lower than 14.4% in the pre-GST regime/ How much significance does rate rationalization hold in this context? Should the number of slabs be reduced from four to three/two?
The purpose of the exercise is not increasing or decreasing weighted average (tax rate), but to collect tax revenues and to do it with the least amount of friction to the economy. The question is what is the rationalisation we need to do in order to continue to minimise the friction to the economy, while keeping the tax collections buoyant. In the long run, it should be made as simple as possible but it needs to be done step-by-step.
Source: The Financial Express