Was Arvind Subramanian in loop on demonetisation? CEA says ‘Speak only when you can improve upon the silence’

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Subramanian also admitted that the urgency and the seriousness of the NPA problem was not signalled when it was initially recognised.

The large pile-up of non-performing assets of state-owned banks is a “very hard” problem and the government has been in some ways little behind the curve, chief economic adviser Arvind Subramanian said. The total bad debts of PSU banks was R4,76,816 crore on March 31, 2016 and is expected to rise. “It is a very hard problem which should not be underestimated. Essentially, nowhere in the world, it is easy to say that I will forgive the debts of the private sector because you create moral hazard, you say what kind of assistance is this, crony capitalism without accountability?” Subramanian was the guest at Express Adda in New Delhi on Wednesday.

According to the CEA, an essential part of solving the NPA issue “has to be to write down the debts” of many large companies but that’s easier said than done. “It’s going to require resources to get us out of this but sometimes getting the resources is the easier part of the problem. Making those hard decisions to write down debt — it’s difficult for any political system to do,” he said.

Subramanian also admitted that the urgency and the seriousness of the NPA problem was not signalled when it was initially recognised. “We were in some ways a little bit behind the curve… Probably there’s an in-built incentive in the system to not reveal the true extent of the problem. So for many years, we have had this extended pretense flowing on. Then of course, partly also we thought that if growth were to pick up, it would kind of, they say a rising tide covers all the jagged rocks, and so it would do that,” he said.

“And, of course, in India you have this overhang of the four Cs — courts, CAG, CVC and CBI — that even honest bureaucrats are fearful… I don’t want to cast aspersions on them, they are doing their job, but there’s anxiety and nervousness hanging over decision-making. So you put that together, anywhere in the world, it’s difficult to write off… It’s a hard thing and something that we need to crack,” he added.

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Subramanian steered clear from making any controversial remarks on demonetisation. When asked if he knew about the government’s decision to ban old R500 and R1,000 notes, Subramanian quoted a Buddhist saying, “Speak only when you can improve upon the silence”. However, he said that the informal sector was indeed affected in the period following the demonetisation announcement.

“The fact that we don’t have informal sector data even when we compile the national income accounts is a serious deficiency. You really have to piece together the bits and pieces that you have, and it is not based on the most careful analysis — I think that people in the informal sector have been hurt, livelihoods have been affected, employment has come down, but my sense is that because this was largely related to the lack of cash and liquidity, it therefore follows that once cash and liquidity are back in the system there should be no long-term effects from that,” he said.

Subramanian also highlighted the need to increase formalisation of the economy. Asked about the failure to create jobs, he said: “It’s that most people do find jobs, but they don’t find high-productivity, well-paying jobs. So the challenge is not necessarily in terms of creating jobs but the number that is kind of striking is that 9-10% of the country is in the formal sector and I think we need to raise that. Employment, world over, is easy to diagnose, but what are the policy levers you need to pull to achieve that are much more difficult,” he said, adding that some of those levers include private investment and low-skill manufacturing.

In the same breath, he noted that labour-intensive manufacturing, which was the “escape from under-development” for most East Asian countries, was missed by India 25-30 years ago. “Now, the question is whether we can reclaim it. The lessons of history are that it is very difficult to reclaim it… We have always favoured low-skill manufacturing less and now is the time to reclaim it. Clothing, textiles, footwear, all these things, we need to beef up,” he said.

The chief economic adviser (CEA) also made a remark on economic affairs secretary Shaktikanta Das’s tweet on Wednesday, in which he said that cash “overdrawal by some” has deprived others. Subramanian said that some people in the government make “exhortations” as opposed to “sticking to facts and care policy”. “Just to make a general remark here, I think something about being in the government that people see it as a bully pulpit and you can also make these exhortations as it were as opposed to sticking to facts and care policy. But these are styles of functioning that can vary across individuals in government. I mean I wouldn’t have tweeted this, for example,” the CEA said.

On possible protectionist measures by US President Donald Trump, Subramanian said that there was still nothing sure about what policies the US would follow. He, however, said it wouldn’t be a boon if the world went protectionist. “At the risk of disagreeing with Mr Mukesh Ambani, let me say categorically that I think his was a brave attempt to make a virtue of necessity. I hope it won’t become a necessity,” he said.

Earlier this month, Reliance Industries chairman Mukesh Ambani said the new US President is a blessing in disguise as his protectionist moves will get India’s IT industry to focus on solving local problems. “But I absolutely, from the bottom of my heart, believe that India cannot grow at 8-10% unless our exports grow at 15-20%. The notion that somehow we can grow rapidly based on our domestic markets and therefore this is an opportunity, just flies in the face of all the historical evidence. In the rapid phase of India’s exports, the notion that it would somehow be a boon if the world went protectionist is complete nonsense,” Subramanian said.

Subramanian was in conversation with national affairs editor P Vaidyanthan Iyer and national editor (rural affairs and agriculture) Harish Damodaran.

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