Transcription
Hello and welcome to the Core Reports weekend edition. Economist Dr. Sujujit Bala wrote an article in the Indian Express a day ago saying that the government is winning elections but losing the economy. That statement has predictably created, uh, a lot of furor and evoked many reactions, many emotional as well. But let's try and understand what lies behind that and what are really some of the issues that we should be looking at.
What are the issues that he's raising? How many of them are to do with longer-term structural responses to some of the challenges we are facing, including the energy shock, and what could be some of the more short-term responses? So, Dr. Bala, just to give you a background, is a former part-time member of the Prime Minister's Economic Advisory Council. He's also worked as an economic adviser to the 15th Finance Commission and also has been a contributing editor for the Indian Express and also has worked as a fund manager of sorts as founder chairman of the Oxers Research and Investments. Dr. Bala, thank you so much for joining me.
Dr. Bala, thank you so much for joining me. So, I'm picking up on, uh, your recent article where you talked about, uh, the government winning the elections but losing the economy. So, let me place that aside because I'm assuming what it suggests is that, uh, the government is not giving enough bandwidth to some of the economic issues at hand. If I were to, uh, go further down that path, uh, would you say that the government is not responding adequately to the crisis that we are facing right now, which is the energy shock and the resultant, uh, let's say, accelerated depreciation in the rupee, or are you referring to a more longer-term time frame?
Yeah, so I am referring very definitely to a longer-term time frame. Uh, we can talk about, you know, the West Asia crisis, oil prices going up, that's happening to every country around the world, and I don't think, uh, it's very useful, uh, to, uh, discuss, uh, as to what is, uh, happening right now around the world. I mean, nobody really knows. We thought the war would end three weeks ago, it's still going on, etc. So, we can speculate absolutely, but my analysis to which you're referring to is very much long-term, and if you will, it ends in '24 or '25, so much before this. So, everything that I've tried to point out has to do with a longer term, if you will, uh, which means that the present term, uh, the the downswing or the the angst has been exaggerated by what was already happening. Um, so in that sense, uh, I am very definitely interested in the short, medium, and long run, but not the immediate short one.
Okay. So, let me, uh, sort of ask you a counterfactual. The, the rupee is hovering around 96 to a dollar, and therefore, there are, we are at panic stations. If the rupee was, let's say, at 84 to the dollar, which it was, uh, not too long ago, or even stronger than that, do you think we would have been responding similarly, or would we have been even looking at all the issues that we're looking at, including long-term, medium-term, and short-term?
You know, I think, um, and I've seen, you know, some very senior economists who I respect a lot, uh, Gita Gopinat as well as, um, Arvin Panagri have pointed out, uh, as to what to do with a very immediate, uh, situation, which is, let the dollar, and both of them are arguing, uh, let the dollar, uh, be free, or let the rupee be free, and it'll automatically get back to normal once the crisis has passed. And if I can use that as a departure now, though they are two very, very senior, uh, economists, and who I know both of them, and I have a lot of respect for both of them. However, my question to you, and perhaps we can discuss, um, let us say that, you know, the war ended today, and the oil prices came down tomorrow. Okay? Now, my entire article and all the data has to do with what happened prior. So, in other words, that doesn't solve anything in my view. Nothing. It doesn't solve the FDI problem. It doesn't solve the weakness in the economy. The fact that we are not growing as per Vix Balat. We're growing much at the same rate as we've been growing for the last 30 years. So, I, I don't see that's why when you started off with a very reasonable question, which long-term or short-term you're talking about, uh, I think it is, you know, to argue, and the second part on the same dollar, and it has got a lot of press, etc., that look, this is like 2013. Now, 2013, and actually that's a useful point of departure. In 2013, '13, we had a big current account deficit. There was a real problem. We were part of the fragile five, where the economies and the exchange rate was collapsing. And remember, in 2013 came after nine years of the highest inflation rate India has ever experienced, an annual average of eight. And so, what's the inflation rate over the last four, five years? One of the lowest we've ever experienced. So, what's the current account deficit for the last five years? One of the lowest. So, you know, I don't see the traditional application of reasoning to understand the present problem. The present problem is a crisis of confidence. So, as I said, let's remove West Asia from the discussion, okay? And let's remove the immediate present from the discussion. So, is there a problem with the Indian economy? Yes. And the problem is a crisis of confidence. Let's go a bit further. What is the immediate long-term or important indicator of the problem? It's a huge decline in foreign direct investment. Net foreign direct investment, because net means the money coming in and the money going out. Domestic money going out, foreign money coming in for investment. Investment is the biggest, uh, most important contributor to growth. So, that's the issue that we need to tackle. That's the question we need to answer. Why is that happening? And I try and answer that in my article, or the two articles. And the simple answer is that, you know, you studied economics, that around the world, when you want for a developing country to grow, the most important factor is FDI. Why? It's, it's only two, three, four percent of GDP, but why it brings in technology, technology. It brings in supply chains. It brings in global links, and that's when you become part of a globalized system. What did we do? Now, let's get to what did we do in 2015? We came up with a grand idea that, and, you know, many of us, including myself, didn't, and we should go into why we didn't catch on to it until about '22, '23. Okay, I'm happy to go to that. But basically, and, you know, a good departure point is, I was, I headed the high-level committee on on on trade, uh, HLAG for the department of commerce in 2018 and '19, and we had some very distinguished economists on the team, and and political analysts, etc. None of us talked about or even considered FDI. Why? And we were considered, okay, whether exchange rate should depreciate, whether in real terms our exchange rate was overvalued or undervalued. But we didn't discuss FDI, FDI, because, and this gets to the crux of the problem. In 2015, India decided that it was too attractive a market for international investors, that they were dying to come into India, and therefore, we could dictate terms to the foreign investor. So, and part of the dictation of terms was that once you enter in, then you can't leave. You know the song, you can check out anytime you want, but you cannot leave. So, these guys, a foreign investor was so committed in our thinking to investing in India, that if they wanted to divorce with a with a firm with a domestic partner, they had to wait five years, okay, of constant negotiation or whatever else they were supposed to do. So, that was the BITs, bilateral investment treaty model, called Model Bilateral Investment Treaty in 2015. The reason it did not appear in the foreign direct investment that was taking place, or that we are now talking about, was because these FDI, uh, treaties, or the, sorry, the FDI commitments of a foreign firm are for not for two years or three years, they're for ten years or fifteen years. So, they had come in before 2015, had committed to bringing in this much investment, and they continued to comply with that. When time came to renegotiate, they said, we are leaving. And that's why suddenly in '24 and '25, by that time, every FDI treaty had been exhausted, and they're not, no, they were not continuing at the same time. Okay, at the same time, are because of retrospective taxation, ease of non-on ease of doing business, we should call, um, you know, enforcement directorates, I mean, basically domestic investors started to leave and find greener pastures abroad. So, they said, we're not going to invest in India, I'd rather go and invest abroad. So, it's that combination, and notice none of it is affected by the exchange rate, if you will. So, it is that you don't, regardless of exchange rate, you don't want to come in.
Yeah. So, if I can, uh, you know, uh, deep dive into that, uh, now FDI is, of course, of many kinds. If I look at historical, let's say, take the case of Ford and General Motors, they restructured globally and they pulled out from India a few years ago. Of course, and Ford has been debating half a foot back into India, but still not here, definitely not to, uh, sell cars, but maybe use it as a manufacturing base. Now, uh, other companies like Hyundai and LG have done offers for sale and have taken out money, but the companies are very much here and, uh, growing and, uh, you know, contributing to the economy. Now, my question really is, uh, there is a lot of FDI which has come and has stayed, and in all probability will continue to stay, and some maybe the one the kind you're referring to wanted to leave or exit for specific reasons. So, my the larger question really is, why is that distorting the overall picture so much, even illustratively?
No, then there is something called QCOs, quality control orders. Okay. And as I mentioned in the article, that has really jumped since 2017. Now, quality control orders are something that a domestic firm initiates to prohibit or decrease its own competition. So, therefore, I bring in a QCO. I have got the foreign investor. Okay? So, they, here the foreign investor is very much with the QCO, and I'm hurting other investors, both domestic and foreign, because for national security reasons or whatever else we cook up. So, we need to look at the, the wiring of our system, of our deep state, if you will. This is how the deep state operates. So, you know, we bring in QCOs, we require you to go to an Indian judge, and I, I literally in 2024, at a NITI Aayog meeting, in front of the Prime Minister as well as the Finance Minister, as well as leading officials from the PMO, I made this point right there, and I said, look, Indians don't want to go to an Indian judge, so why should a foreigner go to an Indian judge? And everybody knew what I was talking about. So, it's not as if we don't know what the problem is. We know what the problem is. We know what is causing it, and yet we merely go along. So, now, in 2025, last year, in February, the Finance Minister made this commitment in Parliament, saying, and in the budget speech, that listen, two committees were set up, uh, one for ease of doing business, uh, and the second one to take a revised look at the BITs, bilateral investment treaties. So, they knew that there was a problem with the BIT that had been introduced in 2015. Now, we can't find, I can't find, no one can find what the new BIT is, but there's speculation of what the new BIT is, and the speculation says, then listen, instead of five years waiting period, it'll be three years, and then it's unsure whether you have to go to an Indian judge or you can have an international arbitration judge. There's a parallel path that, again, these are rumors until the policy happens, uh, that, you know, uh, you can choose right from the word go when you sign the contract that, uh, when you come in, whether you'll go to an international judge or not. I don't know why they think anybody will go to an Indian judge, but, you know, I don't understand it. I mean, this is, you know, everywhere, China, Vietnam, Bangladesh, Ethiopia, all these countries, very successful growth economies, right? Try and encourage the foreign investor from coming for coming in, they give them tax incentives. What do we do? We tax at exorbitant rates. I mean, it just, I, I don't. No, but we need a fundamental revisit to our policies. And here's where, if I permit to say so, that I am, uh, now optimistic that, and that's what I tried to write in the article, that look, there is no downside. There's no political downside to the government. They're winning every election, and they're winning every election both because they have something to offer, and that the opposition doesn't have, is offering less and less. So, we never ever politically, that one party will be in as politically comfortable situation as the BJP is today. Never ever again, it'll happen. So, I, I'm optimistic that look, if now we don't reform, economic reform, then, you know, uh, then I don't know, very sad.
So, uh, you know, using the bilateral investment treaty both as an illustrative problem of what ails our, uh, let's say, economic, uh, environment for foreign investors, as well as a specific problem that you've pointed out, uh, linked also to the feeling that, you know, we were confident and so on. And I'll come back to that. But if, if, uh, you know, keeping that, uh, I mean, parking that aside for a moment, the, my larger question here is, do you feel that the government is devoting enough bandwidth to addressing the economic issues of today? And I think that's really my larger question for today, because I mean, if, if we devote the right bandwidth, uh, get the right people into the room at regular intervals, go out and do roadshows, a lot of this may be solved faster, including the immediate challenges that we're facing. How are you reading it?
Very good question. Now, the way I look at it, and I, I think it's what many of us look at it the same way, that you need to identify, look, politicians, prime ministers, etc., have, you know, they can't be dealing with everything. So, they have to have a set of advisors, economic advisors in this case, and then political advisors, foreign policy advisor. And it seems that the economic advisors are in the PMO, and nobody outside. And it's not clear that the PMO is very encouraging of different opinions. And we don't know whether the PMO, their individuals making the policy, designing the policy, ever appear in public. So, forget the Prime Minister not having, so why, you know, why aren't you interviewing the PMO instead of me? Who am I? You should be interviewing the PMO. Please explain why the rupee is where it is. All of these questions you have to ask. I mean, that's the problem that we don't, we don't have an open system of, you know, I'm not saying the PM should be answering questions. Okay, that's a separate ball game.
I noticed that you haven't mentioned the Ministry of Finance so far.
Yeah. So, you know, again, Ministry of Finance is, there's a politician at the head, and I think I have a lot of respect for her. But again, you know, it's the economist policy advisor that dictate policy, that make policy. I mean, the politician has to look at various other things. But they, throughout this, is not something new. It's that in the olden days, there was a lot of discussion, back and forth, by the policy advisor. There was an open discussion. Now, Ananta is talking, but even he feels constrained. And I think we need to just, you know, have a real open discussion about policies.
You said, uh, your Chief Economic Adviser feels constrained. In what way?
No, no, I, I haven't seen. You're not interviewing him. You're not asking him the hard questions. Why aren't you doing that? No. Is, mind you, it's not just you. I don't see right, an open. I mean, he writes his columns. I've attended seminars by him, but he's the only one. And all of these are not for, you know, remember, even on your show, I mean, I have argued forever that we should not have a secret budget making. It should be open discussion. You know, this idea that for two weeks, everything is secret, this, that, and all the policies are made in secret. We, this is, is an ongoing process, and the world has changed, you know, everywhere else, this is the process, except here, because here we are wedded to an IS system which was manufactured in 1800, and we haven't changed. So, you know, it's secret. We, even I think, I don't know whether we've dispensed with the halwa, but, you know, I mean, we need to modernize decision-making. That's all. We can keep the halwa, but at least modernize decision-making, discussion, expertise. I mean, we live in the world of AI, and our IAS is still dictating, you know, whatever they dictate, which is why we are in a problem.
So, for those who are trying to understand, uh, what is the architecture then? And this is a primal question that I'm asking. What is the architecture then of our economic and financial decision-making, particularly at the political level? Because you mentioned PMO, you said that there are a lot of decisions taken within that without sufficient interaction, as you mentioned. But there's also a Ministry of Finance, and then you said that, uh, there's an economic advisor who is, uh, engaging with the world, but not interacting with the world, if I've understood you correctly. So, what is the then the architecture that we, or how do we understand the architecture of economic decision-making in India right now?
It's in secret. So, and, you know, all I'm saying is, look, there's a lot of expertise in India. Okay? And we know that this very same Indian, when he or she leaves India, they do fantastically well. They're very modern, state-of-the-art, they beat everybody. And that very same Indian in India, as a member of the IAS or the IFS, cannot deliver. That's what is story. So, it's not, we don't know. We know we have a lot of expertise, but there is no communication with, and there's no interaction, there's no criticism, there's no discussion. You know, everything is done in secret, and comes in from above. Then a crisis comes from above, oh, what should we do? And they're not asking you or me, or what they should do. They're deciding on what basis, I don't know. Take ease of doing business. Now, there's a report by Goba on ease of doing business, which has got a lot of wavy views, but nobody can see the report. So, I, you know, it's, why can't we have an open discussion? So, I, and on economic policy, we have zero. We don't see anything from the RBI. We don't see anything from there. There is the MPC that meets. Okay. And it's unclear how much influence they have, or I haven't seen them come up with any radical departures or questioning. So, we're all caught in this web. But the Monetary Policy Committee, I mean, their contributions are linked to setting of monetary policy, which is really interesting. But I, I mean, that's a separate issue. But you've been part of the government in more ways than one. You were a part-time member of the Prime Minister's Economic Advisory Council. You're still, if I'm, if I, uh, I mean, if I'm correct, chairperson of the Ministry of Commerce's High Level Advisory Group on Trade. Uh, you've been economic, or economic adviser to the 15th Finance Commission. So, you've been part of, uh, the system. So, are you saying that even when you were part of the system, you were feeling excluded?
No, no. I, look, I, look, let's take when I was, as I said, right at the beginning, I headed the HLAG. I've been, look, I've never been a paid member of the government, uh, unless you consider the IMF. These are all appointed, you know, I was part of the RBI capital account convertibility, I think that's when we first met, or something, in 1998. So, there were advisory bodies, and I remember writing a dissent note in almost every comm. But yes, there was, but you didn't make, I didn't make, the advisors don't make the decisions. It was always very opaque as to how the decision, uh, was. But, you know, we've had, um, some very good, you know, we've, they formed, I mean, take, I think the best way to look at it is, take the '91 reform, okay, which we all admire. Okay, and were breakthrough in India. Now, there were a lot of pieces that individuals and economists, uh, had written about, what also, you know, Bhagwati had, that Bhagwati Desai had that book, or so, you know, there was a lot of communication, even though they were not part of the government, but, and then the decisions were made, and I think right decisions were made. At some time, we should discuss why agriculture was not reformed by the '91 reforms. But even the fact that that was not reformed, it was a mega breakthrough over time. Okay. And I would date it somewhere from the second term of Manmohan, uh, so 2010, 2011, continuing that. I think communication, policy communication has become more and more difficult, and and it's the time when we have become more and more globalized. And that is where, and And I started off by saying, in how in 2010, you know, we thought that we would be China plus one, and it turned out it was Bangladesh and Vietnam. Now, I've never had a satisfactory explanation of why we didn't open up. Every time, every every academic seminar or quasi-academic seminar I go to, um, is, you know, we have to increase the share of manufacturing in GDP. And Ananta has a very good paper, and he's written, we have to. I want to ask, I've been hearing that we need to increase the share of manufacturing to GDP for the last 30 years. Hasn't happened. So, different governments, it hasn't happened. Hence, I'm propelled, and I have been propelled, to think of the deep state. Why is it every government comes out with that ambitious goal, not super ambitious, but just, we have to increase it, and it doesn't go up. So, we all sit around and say, we must increase it, and we all nod our heads, absolutely right, we must increase it. Why don't we put the policies in place to increase it?
So, I mean, if I can pick up, I mean, on that specific illustration. So, let's say, a couple of things that the government has been doing or has done. One, of course, is an extensive investment in hard infrastructure. The second is, let's say, production-linked initiatives or PLIs, which have been offered to manufacturing firms. So, there is an intent, and there is definitely some action, because PLIs are effectively grants. And then we are doing bigger grants for setting up, for example, semiconductor complexes. Now, let's say, or let's assume for a moment that the government is doing as much as it could or should, despite, as you say, there's a deep state and so on. But let's look at the other side, which is the private sector. Uh, is, I mean, one is that the private sector is not investing enough, and that's well-documented now. But is there, are there some soft issues that we are perhaps ignoring in all of this? Because we either, we're looking at data, or we're looking at the hard facts. But are there, is there something softer when it comes to intent, desire, motivation, confidence, which we are perhaps overlooking?
No, I'll categorically reject any criticism of the private sector. Of, I know the PM, I know the FM, they were all saying, I know Ananta has been earnestly asking why and writing articles that at least like in Commodore, that why isn't the private sector investing? Does it happen anywhere else in the world? The reason individuals, firms react to incentives. We know that. They don't act to humanity or please, or please invest here. No, you do the policies, and you then find out whether they will invest more or not. So, it's the policy, stupid. It has nothing to do with anything else. And the point is, the sad part is that the government and the makers of policies know what policies will drive. So, don't blame the private sector. Don't blame anybody except yourself. That is to say, and that's in every country in the world. Communist, not communist, free, not free, democratic, not democratic, one-party rule, multi-party rule. It's the policy is stupid. And you know, why is that so difficult for us to absorb? So, the guys like you say, "Oh, you know, these guys are not doing enough." I'm right on. They are doing what they should be doing, which is reacting to incentives. If they didn't react to incentives, they're not rational. And you know, I believe in the market. I believe that human beings are rational, and therefore doing exactly the rational thing to do. They're not investing because it's rational for them not to invest in India. So, one incentive for, uh, corporate India to invest or expand, and therefore put more money on ground, is obviously if they perceive that the market is growing. If they're all working at, let's say, less than 75% capacity, or many of them are, then the incentive to to grow. So, I, I mean, is this a specific question? I mean, is there a more nuanced demand issue that corporate India or India Inc. is dealing with right now, which is why investment has slowed down? That's one. But on the other hand, since you said policies, what would be, let's say, one or two policies that could change minds immediately? So, at one time, it would it appeared that by reducing corporate tax, that could have been a big incentive, and the government did reduce corporate tax. We reduced goods and services taxes in September last year. That's also an incentive, and it's worked for, to some extent, at least for the automobile sector, and some of, to some extent for the consumer goods sector. So, maybe it's not all coming together, but there are a bunch of things here and there which are happening. But what is the big ticket one that you're looking at?
So, I think, how do we get back to ground zero, okay? And I think these are very straightforward, simple policies which they can do tomorrow, and you will see the effect of it day after. First, we get back to FDI policy pre-2015 boom. We already know what that architecture, everything else. Second, the government commits never again to bring in any retrospective tax. Okay. Announce. I mean, S. Jaitley said, you know, he couldn't remove it then, etc. He was very apologetic about having still on the books, but that's the problem. So, no retrospective tax. FDI policy back to 2015, prior to 2015, as it is in the rest of the world. Decrease your taxation on foreign investment. Okay. And I would say, subsidize you bring it. And then for Indian, uh, corporates, and you had started on this, why can't we do what the Koreans did, and what practically every country did? You, we will, the government will subsidize if you go ahead and export. But our deep state won't allow that. We will benefit, you will benefit, India will benefit, but the ring s will go down because they will have to perform rather than, um, uh, you know, take it. So, they are comfortable. You know, we haven't talked about the fact that I think many large members of the population, and of the government, and of the corporates are very happy with the status quo. They're making their profits, right? And they keep blaming others when the solutions are straightforward. Yeah. I mean, it's just obvious what needs to be done. And that is where I am a little bit hopeful, because the political constraints are out, and maybe the government will now take the bold steps. If it doesn't take the bold steps, you and I will be having this discussion again in six months, and nine months, and 12 months, and, you know, it's business as usual. A problem in India, it's business as usual all the time. And nobody has an incentive, especially in the bureaucracy and in the in the industry. I don't, you know, that that's where the deep state comes in. QCO, think about why does a QCO happen?
I mean, it's obviously to create a layer of protection for domestic industries.
Yeah. It's the same. Nothing I've said is anything new. We protect, and we shouldn't be protecting.
Right. Uh, last question. Uh, you know, there was some debate around the currency since this is where it all started, and we are still focused on that. Uh, what's your view on whether we should let the rupee float, or, uh, should we defend and linked to that, you know, a lot of people say that, oh, you earn in rupees, you spend in rupees, so why should you bother about the dollar? So, I mean, I'm putting that as a primer question. How, how do you read, or rather, what are your views on this, and how should we be responding or looking at the statement which says that, you know, we earn and spend in rupees, so we should don't really worry?
I would say, uh, if you let the rupee float by itself and don't do anything, the others, it's stupid and suicidal and won't get us anywhere. Nothing. However, you do some of these basic policies, and there are three or four that I mentioned, and then let the rupee float. There you have a story. But you let the rupee float by itself. I mean, you know, you'll have, I don't know. I mean, I, I just think that's why I started off with that argument, this idea, let this rupee float, and somehow our problems all washed away. I don't buy that at all. But, but after you get the policies, simultaneously, okay? Simultaneously, you announce this, and you say, and actually, you won't even have to say anything about the rupee, it'll automatically appreciate. We will be away from the crisis if you just announce a few basic, common-sensical policies. So, uh, so the short answer to your question is, I don't let the rupee float by itself.
Let it float by itself, it'll drown.
Yeah. And the supplemental question, I mean, uh, you know, we earn in rupees, spend in rupees, so should we bother beyond a point about what's happening to the currency?
Yeah. No, but the other thing that you should know is that by most conventional calculations, the rupee is not overvalued. So, it shouldn't be in a crisis situation, which it is. It is because of these other factors. But the traditional factors of current account deficit, how much our reserves, I mean, you know, so, uh, yeah, to me, I would not be, if anybody asked my views, I said, I have no views on the rupee. First, do these two, three things, then let's talk.
Right. Dr. Bala, it's been a pleasure. Thank you so much for joining me on the Core Report.
Thanks.