Read the full text of outgoing CEA Arvind Subramanian’s interview

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Saying the economy had seen the worst of the bad loans crisis, outgoing chief economic adviser Arvind Subramanian said the country was making progress on the resolution of bad loan albeit at a slower pace.

He added that the recapitalisation plans of public sector banks cannot be divorced from newer reforms and added that the government has a long way to go in terms of PSU bank reforms.

Speaking about the non-performing assets of the power sector, he said these assets could not be liquidated at the moment as their valuations were too low to be acceptable.

Subramanian also added that current macroeconomic conditions had become riskier at the moment and that rising oil prices would stoke inflation. He, however, added that if the country could weather this volatility in oil prices, the economy would be in a good place by the next year.

Watch Here: Outgoing CEA Arvind Subramanian says worst of bad loans crisis is behind us

Edited Excerpt:

Q: Let me start by talking to you about this debate that has been going on about imported and exported experts versus domestic home grown experts and I think the idea of imported ideas being disconnected from Indian realities can be debunked easily. But let me leave that aside. The other criticism which may perhaps have some legitimacy is the fact that you don’t have any skin in the game. You might be sectoral experts, you come into government missionary and you end up being perhaps to quote you in your own words technocratic cogs in the vast government machinery how do you ensure that your ideas actually work?

A: The question is whether effectiveness depends upon whether you come from abroad or come from within.

Q: That argument can be debunked?

A: So we are talking about how do basically outside technocrats become effective? I think there are no simple solutions for that. Obviously, it depends very much on the person in the job itself and it also depends upon what the arrangements that the government makes to facilitate this. It depends mostly on the incumbent.

If the person who comes in can forge relationships, build trust, show that he or she is useful then it can create a virtuous dynamic where more and more people want that persons services and then this vast mission embraces you and looks to you for advice, ideas and so on.

Or you can be on a negative dynamic where you come in, you are not effective people don’t listen to you, therefore you are even more ineffective and so on. There is no kind of formula for this, but a lot depends upon who comes in.

Q: Do you feel less useful today then you did maybe three years ago?

A: It is for ours to judge how effective I have been. But I have had just fabulous working relationships with so many people in government, outside government, ministers, cabinet, chief ministers, finance ministers, so I don’t think I have had a problem of working with government machinery at all. But of course that is what others to judge how effective I have been. But I have certainly enjoyed myself.

Q: Let me talk to you about several of the ideas that you have put forward through the economic survey. Let me start by talking to you about the one that has been talked about the most which the identification of the twin balance sheet problem and then the remedy there on. Do you believe that post diagnosis, the kind of work the effort, the ideas, the elements that ought to have been put forward maybe took too long to put in place?

A: That is a good and open question. We can legitimately ask whether it took us longer than it should have and by us we mean both the government and the Reserve Bank of India (RBI) because both have had roles in this.

I think you could make the case, because remember I think it is a very fair question because the twin balance sheet challenge, I think we have had almost since about 2011 or so or maybe 2010. So, 7-8 years in counting and I would say that between then and 2014 nothing happened. So we lot about three-four years right there.

Then once 2014 happened when we started taking serious actions, there was Indradhanush, then there was asset quality review and then the IBC. So I would say maybe it took longer than it should have it is possible, but I don’t think it was because of not recognising that there was a problem.

Q: Was it a growth bet, was the hope that we are in an environment of growth and that will ride us through?

A: I think that is certainly part of the problem. There were three things that can explain why it took so long, maybe four things. One I think that remember that in 2014 -2015 and 2015-2016 the economy growth was actually accelerated so you are absolutely right, if growth is actually accelerating people say what is the problem?

If you are getting this growth there is no unlike problem and also maybe growth itself will make some of these assets look better. So, that was one reason why maybe it took longer than it should have.

Second, the IBC legislation and all the necessary ingredients that needed to be put in place only were in place by late 2016. I think the legislation was passed then so I think that a policymakers at some level perhaps realised —

Q: Underestimated the problem?

A: No, remember that I proposed the bad bank and I wanted the bad bank to be done earlier. But somewhere policy makers realised that you needed a judicial framework for this and that is why it took longer because maybe the bad bank would have been set up earlier, but you couldn’t have this unless the IBC legislation was in place and that is why it took some time.

The third reason it took some time was let us be honest about this, even though people knew that there were lots of toxic assets in the system there was never any kind of public acknowledgement of that.

That is why when the asset quality review in March 2016 gave the first results everyone generally accepted that the scale of the problem is quite large. It is not going to be solved just through growth alone and we need to take more actions.

So, I think a combination of the growth bet as you said the fact that the IBC was not yet in place the fact that there was no public acceptance until the asset quality was done. That there are all these bad assets. Combination of these things then explain why the actions came when they did.

Q: Do you feel confident now in light of whether it is the IBC or the various measures that have been announced by the government that the worst is behind us and that we are now on the path to being able to clean up so to speak the banking system and how long do you believe that will take? If you talk to bankers they will tell you the worst is behind us but then the next quarter you look at the numbers. What do you feel at this point in time?

A: The IBC was a major reform, absolutely transformational in terms of debtor-creditor relations exit and we have seen some early successes under that. I think we have done very well and I think the worst is behind us on the recognition side. However there is always what I call the Subramanian law of non-recognition that at any point in time the scale of bad assets is 20 percent greater than what anyone is telling you at that point of time.

Q: So, you are saying it could be worse than what we currently are dealing with?

A: There I think we have made great progress. A little bit more may be can come out but I think there we have made a lot of progress on recognition. Now I think we probably are close to understanding and acknowledging the true scale of the problem.

Resolution – IBC fantastic, great work but we have to be honest and have a constant review of are we making progress as fast as we should? We are making progress but it is not as fast as we require.

Q: Why?

A: I think partly the NCLT process is overburdened, partly I think the necessary process of getting every verdict approved by Supreme Court which was unavoidable, is unavoidable because when you have stigmatised capital you need this judicial imprimatur on all these things because that is what the public accepts as legitimate.

So, some delay is in avoidable. However I think some NCLT maybe overburdened, we need to find ways of unburdening NCLT.

Q: Is the AMC the way to unburden the NCLT?

A: I don’t know, I haven’t studied enough but I certainly think greater thought may need to be given for example to seeing whether some sectors require sui generis treatment or not.

Q: Like power?

A: Like power for example. I have ideas but I have not thought them through yet but we need to think collectively because there is something quite distinctive about the power sector. There are three things that are distinctive about the power sector, first these are good assets, they can’t just be liquidated.

Second, if given government policy today you get bidding on these assets then the valuations will probably be too low to be acceptable. Third, I think is the most import point, that extracting more value from these assets relies on government policy and government action.

So, this is a sector that actually the government can take a number of actions to kind of increase the valuation and how much value can be extracted. For example tariff, for example NTPC, lots of things that the government can do. So, for these reasons we need to have a discussion on whether we need a kind of sui generis treatment, so that is on the recognition, we have to be candid about that.

On recapitalisation and reform I think there is still some way to go because recapitalisation we don’t know what the valuations are going to emerge, we don’t know what is going to happen to the power sector and banks own ability to raise capital at this stage is limited.

Moreover the most important reform part of it, recapitalisation should not be done divorced from reform and on reform we need to make a lot more progress.

Q: Does that disappoint you because that certainly disappoints members in the RBI who have spoken out saying that governance reforms within the banking sector have taken a backseat, would you agree?

A: I don’t want to assign blame.

Q: It is not about assigning blame, if you are being candid to say that the recognition problem has been addressed but the resolution problem still has some distance to cover then would you say that the reform problem has even more distance to cover?

A: I would agree. I think reform has a long way to go. I would say though that there are two sets of reforms, reforms for two sets of banks. One is the banks that are may be not viable fundamentally in the long run under the PCA.

“The RBI deserves credit for the way they have handled the whole PCA thing.”

In the long run we do want these banks to become narrow banks, shrink their balance sheet but do it in a gradual fashion.

It is the other banks – governance reforms may be one but the whole question of whether we need more private sector participation, I think that is still an open question and what kind of regulation we will need going forward because while the public sector banks have been the big part of the challenge, recently we are discovering that these problems also occurred in private sector banks as well.

So, we need to make a lot more progress on the reform side and on the regulations side.

Q: Since you are talking about reforms and regulations in the banking you were talking about private sector participation in the banking sector how do you then explain the government’s decision to try and get LIC to pick up IDBI Bank?

A: I haven’t studied this very closely, what LIC and IDBI are involved. Certainly it is more in the nature of the merger than privatisation. But if it is possible why are this route to actually get majority private sector participation in IDBI eventually that is one possibility. If we could then this would be a price worth paying for that outcome.

Q: Since we have talked about this business of stigmatise capitalism which is what you have been concerned about what are the implications not just for the banking sector but for the private investment, for a pick up in the economy? Today in parliament we have got a debate on the fugitive economic offender’s bill. Right down your corridor in the financial services department they are talking about revocation of passports of possible economic offenders. Is this going to make matters worse or better when it comes to de-stigmatising capitalism?

A: Firstly, stigmatise capitalism is a long standing problem. It is the result of cumulative result of all that has happened over the last many years. Now stigmatise capitalism means two or three things. One it means that private sector entry into new areas is not going to be a problem, I think that can proceed.

Like we have seen in airline, we have seen in telecom, we have seen even in new private sector banks coming in. I think entry into new sectors, new private –I think stigmatised capitalism bites most in terms of handing over public sector assets to the private sector.

Q: So strategic disinvestment is there?

A: Not there, I think it is going to be challenging, it is going to be difficult. Two it also means that because of stigmatise capitalism I think the judiciary is going to have a greater role to play in many of these decisions. That is why IBC framework probably better than bad bank idea that I was propagating. So, the judiciaries is going to have a much great role.

The third which comes to the point that you said about it is a fact that we have to accept that stigmatised capitalism means that to de- stigmatise it you have to have or show the public at large that those who did wrong are punished. That is part of de-stigmatising capitalism.

You cannot escape that. That is why under the IBC also it was necessary to exclude. So I think that is a fact of democratic politics, I have sympathy for that that you have to accept. Therefore what you are saying is also right that this enforcement can get overzealous.

Q: Is it overzealous today?

A: I don’t know this well enough to know whether it is overzealous, I think it is certainly a risk. We have had this allegations of tax terrorism, overzealous enforcement, so I think that it is a tough call to make. On the one hand you have to be seen to be punishing people, on the other hand it can get out of control.

So, I think it requires a lot of judicious both activism but also judicious restraint on the part of the enforcement agencies. I am not an expert on enforcement I don’t know how you do this. My own view is that you have to do some of this, but I think it is better if you kind of use a less heavy handed measures, uses carrots more than sticks for this, I mean that is my, for whatever it is worth my view.

But some amount of going after the buy who demonstrably did wrong things in democratic politics, how can you avoid that.

Q: Let me talk to you about the macro picture now, the government did inherit to a large extent fairly benign macros and you have worked on macro stability, you have been successful on that as well. Given where we stand today, inflation moving higher, the rupee today at 69, oil prices continue to edge closer to $70 per barrel plus sort of range, what would concern you most as far as the macro picture is concerned and specially the external environment?

A: We have to be clear about levels and changes. Inflation is not at double digit, fiscal is not where it was, current account is not where it was but the macro has become riskier relative to a few months ago, I agree, you are absolutely right on that. However to me certainly the biggest worry always for India is oil prices.

Oil prices may end up this year being 25-30 percent more than last year, that is a shock which will have an impact.

I don’t think that we can kind of pretend that if oil prices go up, the inflation will not pick up or the current account deficit will not worsen, all these things will happen. All we can do is to see how we can buffer our economy against the worst impacts of these shocks. We can control what we control, that means continuing the reform effort and holding the macro, sticking to the path of fiscal prudence, all of this do no harm.

If we end up next year having weathered this turbulence and volatility, I think we will be in good shape, the country and economy will be in good shape to accelerate the process of reform.

Q: I want to talk to you about one of the controversies during your tenure and that was fairly sort of public not spate but difference with the RBI on the issue of interest rates. You put out a statement which was quite unusual saying that the MPC ought to have cut interest rates and the governor said that they had declined the request of the finance ministry for a meeting. Where do you see interest rates headed now and do you regret what happened then?

A: Let me be very clearly in this, I think my call for lower interest rates then was completely justified and most people agreed with that as well.

Q: The government certainly did?

A: The public at large thought that for 12-18 months our real interest rates were very high and I have no regrets about having that view that interest rates were too high. Everyone accepted that the inflation forecasting framework was consistently getting it wrong and one sided and by large magnitude. For about 12-18 months our interest rates were too tight.

Now the question is should that have been expressed in public or not, people can disagree on that. I believe in a theory of change which says that you must be honest and give opinion in private, but sometimes if you think you can bring about change by expressing it in public it should be done very sparingly, very responsibly but it should be done if you think it is going to bring about the outcome so that is one.

Now I think the circumstances have changed completely and I actually think I would commend the RBI for the way it has handled interest rate, exchange rates, use of reserves in the latest bout of turbulence.

My views are completely consistent then, growth was slowing down, we have spare capacity, inflation was down, external environment was settled and capacity utilisation was low.

Now all of these things have turned. Growth is picking up, inflation is higher, we are under pressure from outside events so your monetary policy has to change accordingly. So, what I said then about the RBI I stick by and I would also like to commend the RBI for what is has done in the last few months.

Q: How much of a concern or a challenge is the fact that we could potentially be seeing higher interest rates from hereon and the impact on growth?

A: We turned these things into the simple trade-offs between inflation and growth. Remember that at some level we have an inflation targeting framework or rather we believe in relatively low and stable inflation because we think in the long run that is actually good for growth.

So, these trade-offs that we often possess in the short run are I think overdone. If for example, inflation is going to go to 5 or whatever, I think you have to take action to bring it down. Remember in the old days, I have heard former finance ministers express this iron law of political economy in India that if inflation goes beyond a certain threshold level the population reacts, the public reacts and that is also the political logic also for having a target of reasonably low and stable inflation.

So, if inflation is going to go up we have to take action and if that requires higher interest rates so be it but I don’t think therefore you would say therefore it is a trade off because if you bring it down you create this circumstances for more stable long run growth and higher long run growth.

Q: Since we are talking about RBI, let me ask you about an idea that you presented in the economic survey but was not taken forward and that was using the RBIs excess capital of then Rs 4,00,000 crore, is that something that you hope will be taken forward at some point?

A: Absolutely.

Q: You believe it still holds merit?

A: I have revised my opinions on a number of things for example the bad bank. I also think that I forecast oil prices not going above $60-65, I was surprised by that but on this I think I am reinforced in my view that this has to be an essential ingredient of whatever the blueprint for reform for the banking system as a whole going forward.

I have said this before, if you look at a post global financial crisis, one of the things that has been really striking is how much central banks have been bold, imaginative in bringing their balance sheets to the assistance of the economy, I think the Fed did it, the ECB did it – buying all kinds of assets which they thought at that stage were dubious marginal assets, they did that, allowed that to be used as collateral and I think therefore if you have a strong balance sheet, that should be brought to the assistance of the banking sector reform.

Q: By way of recapitalisation?

A: That is the idea we had then. The debate at that time and Raghuram Rajan and myself spared in public on this, I think it was conservative central bankers – I think the popular narrative was conservative responsible central bankers versus irresponsible finance ministry officials but if you look at where central banking is headed now, that idea of excess reserves seems boring and conservative by the modern standards of where central banking is heading.

Q: What else have you disagreed with Raghuram Rajan over?

A: We spar all the time.

Q: Let me ask you a simple yes or no question, were you consulted on demonetisation?

A: This is something that we will leave for the historians. It is not even an interesting or a relevant question any more. As I keep saying, I think at one level when people ask you about demonetisation, I think there are three possible responses to this question, one is to say like the millennials might say, “it is so yesterday.” The other would be that it is too early to tell or there is the third response which Dr YV Reddy said that you check into a hospital after giving your views on it, so all three responses are possible.

Q: Let me talk to you about an issue that is relevant today – agriculture. You have spent a lot of time talking about it in the economic survey and you have said that it is a new challenge that requires the new way of thinking. I think it would be fair to say that perhaps the government has underestimated the problem and the distress that the agriculture sector has faced. Do you believe that this is an area that has been a significant missed opportunity?

A: Agriculture has surprised me a quite a bit. I think that in the first two years of the government we had droughts and farm incomes were stressed. Then in the next two years when monsoons were relatively better and production went up I thought frankly that agriculture incomes would improve.

But that didn’t happen at least outside wheat, rice and cereals there was such downwards pressure on agricultural prices, so we had this odd paradoxically situation in India that regardless of our agriculture does in terms of output and production farm incomes remains stressed. So, we need to understand this better why this is happening, I don’t fully understand. But it also kind of little bit reinforces my view that we need fresh approaches to agriculture.

Q: Higher MSP and farm loan waivers in not going to do it any longer?

A: For example, more like direct benefit transfers, what I call quasi universal basic income. We need to think more creatively about these because all the time we try and help farmers through indirect means whatever they are, but I think the time has come to see, given that we have now more and more the JAM (Jan Dhan-Aadhaar-Mobile ) in place why not think about helping farmers directly which has lots of benefits.

You can decouple production from income. You can reduce this distortions by way of subsidies and so on. We need to think more creatively about and the help should be more direct so that farm incomes can be directly boosted. We need to think much more about that and we need it as I have said and Mr. Arun Jaitley have also said we need to do it in a cooperative federalism framework because it can’t be done by anyone Centre or the state. We have to do it together.

Q: Since we are talking about cooperative federalism, let me talk to you about the GST and that is something you have spent fair amount of your time on and even though the rate structure that you had designed was not finally taken forward, but we are talking about meeting on the July 21st and I was just taking a look at what the Fitment Committee is actually going to be looking at. Reduction or exemption for marble and stone deities, bamboo flooring, sandstone, brass kerosene, pressure cookers, I get why we need or why the government feels why we need five rates but make it has complex and complicated as it is today do you believe that this was not necessary?

A: What you are saying is absolutely right. I think the way I would put it is the following. There has been too much debate on whether there should be one rate or not one rate.

We can’t have one rate, we have to accept that. We should have a debate on why can’t be limit it to just three rates. That is where the debate should be and that is where we should be headed. We have one standard rate, one for all the de-merits goods and one for all the other goods.

Q: But now we are talking about the possibility of another cess. I mean sugar cess has been discussed, finally no decision has been taken just yet and states are opposing it because today you have bring in a sugar cess tomorrow Kerala will ask for a jute cess or rubber cess or whatever the case may be, so where do you draw the line?

A: GST council should get credit for not making things worse with another cess. I think at least give them that credit. I think the 28 percent slab will be pared down over time. But overtime as the revenue stabilise, we should be having this discussion of how soon can we get to see three rates. We should be having that debate.

Q: Of all the ideas that you have out forward, which one do you feel has been the most effective, outside of GST because we have just finished discussing that which one you disappointed that it didn’t get taken forward.

A: It is like asking to choose between your children. You have many children they are all very valuable. I just want and I do feel that what is important for someone like a Chief Economic Adviser obviously what gets taken up and implemented is immediately satisfying. But I don’t think that should be the yardstick.

I would like to go back and many years later reflect and did we, my team and I and all those we worked with did we infuse the intellectual ecosphere with a bunch of ideas which permeated system and which became the reference point for discussion. I would say twin balance sheet now everyone talks twin balance sheet, JAM it has become whatever, universal basic income, in some form or the other is doing, stigmatise capitalism is becoming part and of course the surveys and so on.

I think I do think that many things we try to do as long as these form part of the discussion of ideas going forward, I would feel extremely gratified. I think there were also areas where we were not successful for example fertiliser sector, I wish we could have done more, agriculture also I wish we could have done more but overall the job of chief economic adviser is just analysis, ideas, elevating the discourse and if we have been even remotely successful on that I would be most gratified.

Q: I will end by asking you about the government’s move on lateral entry. I remember you said at an event few days ago that you and Raghuram Rajan would might want to set up a club to advice people on how they can potentially work with the government? What would that advice be or did I get that wrong?

A: No, I didn’t say that. I said that very simply that I am all in favour of lateral entry. I think Indian government needs all the talent and skill and expertise it can get, doesn’t matter where it comes from internally in government, private sector, public sector, internationally I think we need all the talent we can get and therefore it is a great idea having lateral entries. After all I am a lateral entrant myself and I can’t kind of not support this idea of lateral entry as well.

What I was remarking on is the notion that has somehow Raghu and I needed to embellish our CVs and view this has some kind of we come here to embellish our CVs.

I probably will never have a job as exciting as this one. Maybe for my next job I will have to de-embellish my CV because it can never be as good as this and people might think me over qualified for anything else that I apply for.

Q: P Chidamabaram the day that you put in your papers did an interview by with me and he said that he had offered you the Chief economic advisor’s job but then the UPA was almost at the end of its tenure and he realized it perhaps wasn’t the best thing to do. But he said that I hope he gets an opportunity with the future government. Would you consider one if it did come your way?

A: This is not a matter of government. As I have told the minister, all my colleagues in government that if they want policy advise I will be only to happy to provide it.

I will probably provide policy advice even if I am not asked to provide policy advice so I will always be thinking about India and Indian policy no matter where I am. So I may be physically leaving India but India is not going to leave me.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow