"Use This Slowdown to Open Up Services and Manufacturing"
In an exclusive interview with Business Today's Joe C Mathew, OECD Chief Economist Laurence Boone says India must look at the slowdown as an opportunity and speed up reforms
- Dec 11, 2019,
- Updated Dec 25, 2019 7:26 PM IST
Paris-based Organisation for Economic Co-operation and Development's (OECDs) Economic Survey of India 2019 report forecast 5.8 per cent GDP growth in 2019/20. The survey hinted at a positive momentum thereafter with 6.2 per cent growth in 2020/21. In an exclusive interview with Business Today's Joe C. Mathew, OECD Chief Economist Laurence Boone says India must look at the slowdown as an opportunity and speed up reforms. Edited excerpts:
The monetary policy committee of the RBI says India's GDP is likely to grow 5 per cent in 2019/20, less than your forecast. Is OECD a bit ambitious in its projection of 5.8%?
We had made this forecast before the latest quarterly GDP growth numbers were out. At the time we made the forecast, we were the most pessimistic of all international organisations. Today, we are probably more in line or slightly optimistic. If you were to take into account (the number for the June-September quarter), we might have revised it a little lower.
The government is talking about making India a $5 trillion economy by 2025. Isn't this a difficult target even if one takes your near-term projections of 6.2 per cent growth forecast for 2020/21 and 6.4 per cent for 2021/22 for granted?
What is more important is that people are converging on the diagnosis (of problems that are slowing down the Indian economy) and what can be done to improve it. A large focus is appropriately made on investment growth.
Can India alone reverse this trend?
There are some factors which are beyond the Indian authorities, for example the global disruptions in trade relationships. That is here to last. But there are things which are in the remit of Indian authorities like improving financing of investments, providing more certainty about the (investment) environment and dealing with domestic bottlenecks. On financing investments, if you look at the distance between the RBI policy rates and the lending rates, you can see that the gap has not only moved in tandem but is still very high. That is a reflection of the fact that more progress can be made by addressing the high indebtedness in the financial sector. Much progress has been made in case of banks and now the focus should be on non banking financial companies (NBFCs). As you know, recognition, resolution, recapitalisation and reform of governance are the four 'R's that made banking reforms possible. It can be applied to others (NBFCs), too.
You have highlighted the importance of multilateral agreements at a time when countries are becoming increasingly protectionist. How can India hope for export-led growth in such a situation?
We are very concerned with what is happening on the trade side. In fact, our global GDP forecast this year (2019) has been 2.9 per cent, the worst since the financial crisis, and it will not pick up. A large part of it is (triggered by) trade disruption. And there are at least two reasons to believe this will last longer. The first is that a lot of tariffs on goods have come down in the last 10 - 20 years, so it is very difficult (to get further tariff reduction to start export-led growth). The second is concerns over protection of intellectual property, technology transfer, etc, and these are not going to go away. It will take time to address these issues. Yes, it is impacting global growth, and it is affecting India, too.
If so, what is the basis of your optimism that India's growth will rebound to 6 per cent and above?
I think we should be cautious (about the growth projections) because, as I said, this forecast was made a few months ago and what we are seeing is some materialisation of the downside risks. We should use this (slowdown) as an opportunity to open up services and manufacturing sectors. It is time to look at the bottlenecks in labour markets in India. It is also an opportunity to look at public infrastructure as (growth) will be quicker if there are less impediments.
The report advocates an accommodative policy stand for the RBI. What does it want the finance minister to do as she prepares her next annual Budget?
The transparency of the public sector balance sheet is very important. Our report estimates that the public sector borrowing requirement has increased. If you want to give certainty to investors, you need to be more transparent. Something which is specific to India is that you have a fantastic democracy and the budgets are going through Parliament, but there are a lot of off-budget expenditures. So, the key issue is to bring that to the table. In terms of personal income tax, capital taxation, more can be done by broadening the base and making it more progressive. You can raise more revenue by removing tax expenditures that most benefit the rich, freezing nominal personal income tax brackets and improving compliance. The tax could then be spent on education, housing, healthcare, etc. You put the money where the social outcome is the highest.
What are the new suggestions which you think the government should prioritise?
The priority is certainty for investment; cleaner regulation and governance of the financial sector; trade liberalisation to unlock the capacity to explore new markets; reform of labour markets; better spending; education and housing. On health, there has been progress, but it is not enough, as you need more emphasis on primary and preventive healthcare.
The OECD report depends heavily, if not entirely, on Indian data. There are concerns raised by several stakeholders over the ways India generates its official data. Do you have complaints about the quality or availability of official data from India?
I think it's fair to say that there have been delays (in publishing data). At OECD, we say we need good data to do good policies. So, for us, it is not just about the quality of data (that matters), but also its frequency. That should be the objective of the government.
Paris-based Organisation for Economic Co-operation and Development's (OECDs) Economic Survey of India 2019 report forecast 5.8 per cent GDP growth in 2019/20. The survey hinted at a positive momentum thereafter with 6.2 per cent growth in 2020/21. In an exclusive interview with Business Today's Joe C. Mathew, OECD Chief Economist Laurence Boone says India must look at the slowdown as an opportunity and speed up reforms. Edited excerpts:
The monetary policy committee of the RBI says India's GDP is likely to grow 5 per cent in 2019/20, less than your forecast. Is OECD a bit ambitious in its projection of 5.8%?
We had made this forecast before the latest quarterly GDP growth numbers were out. At the time we made the forecast, we were the most pessimistic of all international organisations. Today, we are probably more in line or slightly optimistic. If you were to take into account (the number for the June-September quarter), we might have revised it a little lower.
The government is talking about making India a $5 trillion economy by 2025. Isn't this a difficult target even if one takes your near-term projections of 6.2 per cent growth forecast for 2020/21 and 6.4 per cent for 2021/22 for granted?
What is more important is that people are converging on the diagnosis (of problems that are slowing down the Indian economy) and what can be done to improve it. A large focus is appropriately made on investment growth.
Can India alone reverse this trend?
There are some factors which are beyond the Indian authorities, for example the global disruptions in trade relationships. That is here to last. But there are things which are in the remit of Indian authorities like improving financing of investments, providing more certainty about the (investment) environment and dealing with domestic bottlenecks. On financing investments, if you look at the distance between the RBI policy rates and the lending rates, you can see that the gap has not only moved in tandem but is still very high. That is a reflection of the fact that more progress can be made by addressing the high indebtedness in the financial sector. Much progress has been made in case of banks and now the focus should be on non banking financial companies (NBFCs). As you know, recognition, resolution, recapitalisation and reform of governance are the four 'R's that made banking reforms possible. It can be applied to others (NBFCs), too.
You have highlighted the importance of multilateral agreements at a time when countries are becoming increasingly protectionist. How can India hope for export-led growth in such a situation?
We are very concerned with what is happening on the trade side. In fact, our global GDP forecast this year (2019) has been 2.9 per cent, the worst since the financial crisis, and it will not pick up. A large part of it is (triggered by) trade disruption. And there are at least two reasons to believe this will last longer. The first is that a lot of tariffs on goods have come down in the last 10 - 20 years, so it is very difficult (to get further tariff reduction to start export-led growth). The second is concerns over protection of intellectual property, technology transfer, etc, and these are not going to go away. It will take time to address these issues. Yes, it is impacting global growth, and it is affecting India, too.
If so, what is the basis of your optimism that India's growth will rebound to 6 per cent and above?
I think we should be cautious (about the growth projections) because, as I said, this forecast was made a few months ago and what we are seeing is some materialisation of the downside risks. We should use this (slowdown) as an opportunity to open up services and manufacturing sectors. It is time to look at the bottlenecks in labour markets in India. It is also an opportunity to look at public infrastructure as (growth) will be quicker if there are less impediments.
The report advocates an accommodative policy stand for the RBI. What does it want the finance minister to do as she prepares her next annual Budget?
The transparency of the public sector balance sheet is very important. Our report estimates that the public sector borrowing requirement has increased. If you want to give certainty to investors, you need to be more transparent. Something which is specific to India is that you have a fantastic democracy and the budgets are going through Parliament, but there are a lot of off-budget expenditures. So, the key issue is to bring that to the table. In terms of personal income tax, capital taxation, more can be done by broadening the base and making it more progressive. You can raise more revenue by removing tax expenditures that most benefit the rich, freezing nominal personal income tax brackets and improving compliance. The tax could then be spent on education, housing, healthcare, etc. You put the money where the social outcome is the highest.
What are the new suggestions which you think the government should prioritise?
The priority is certainty for investment; cleaner regulation and governance of the financial sector; trade liberalisation to unlock the capacity to explore new markets; reform of labour markets; better spending; education and housing. On health, there has been progress, but it is not enough, as you need more emphasis on primary and preventive healthcare.
The OECD report depends heavily, if not entirely, on Indian data. There are concerns raised by several stakeholders over the ways India generates its official data. Do you have complaints about the quality or availability of official data from India?
I think it's fair to say that there have been delays (in publishing data). At OECD, we say we need good data to do good policies. So, for us, it is not just about the quality of data (that matters), but also its frequency. That should be the objective of the government.