Principal Economic Advisor Sanjeev Sanyal
Principal Economic Advisor Sanjeev Sanyal in an exclusive inteview with BTVI's Siddharth Zarabi talks about the Economic Survey2019 outlining a vision to achieve a $5 trillion economy, bringing down cost of capital, lists out measures to get the investment cycle going, the need for legal reforms, lays out blueprint for a longer term growth, need for high investment rate, and much more.
Excerpts from the Interview:
Siddharth Zarabi: Economic Survey has been extremely conservative and not ambitious enough, alking about only 7% GDP growth in Fy20.
Sanjeev Sanyal: As you are aware, the Prime Minister has given us a growth target by saying that India should become a $5 Trillion economy by 2024. This works out to around Rs 375,00,000 crore in rupee terms. It requires the economy to grow at 8% per annum from hereon. So, it is a stiff target. So, how does one achieve an 8% GDP growth? We went back to countries that have obtained these kinds of growth rates in a period of time. Many of these are in East Asia. Even even if you take a look at high growth rate periods in Western Europe, almost all of them have roughly the same model. And, the growth model that they use is – it is a break from the textbook that one usually thinks about. In every single case, the growth model is driven essentially by very high rates of investment. It is not that these countries went about solving all the problems that are there in the economy from skills on one hand to jobs and so on. So, which is the battle that they pick? The battle that they seem to pick and then win is investment. Basically, these economies had very high investment rates well in excess of 35% of GDP for a period of time. . We didn’t cross this mark at any period of time. And, they stayed there for a long period of time. And, this is basically savings investment dynamic, supported often by good demographic dividend phase. We have just entered this phase. It is important to get this investment cycle going. Because this cycle itself generates jobs, innovation. Many things take care of themselves.
Siddharth Zarabi: What is required to get this cycle going?
Sanjeev Sanyal: One is to lower the capital. India has very high cost of capital. We need to lower it. Typically people are of the opinion that savings rates will begin to fall if we cut interest rates. But, there is no evidence of this. Savings rates worldwide seem to be driven by demographics and by growth. There is no evidence that cutting real interest rates influences savings rate. This gives you an important degree of freedom. It means that lower the cost of capital which encourages investment and growth, but it does not affect savings rate. In fact, because investment is driving growth, it may actually feedback to higher savings rate.
Siddharth Zarabi: But, beyond the monetary policy, what would be the non-monetary options to do it?
Sanjeev Sanyal: There are whole host of things we need to do. Monetary policy is a critical part of the game. Another critical part of the game is that because you are dealing with disequilibrium system, it is highly swirling and uncertain. In that environment what provides the certainty. You cannot have prescriptive 5 year plans. So what do you do? Have a long term vision, a general blueprint and using data to continuously adjust. Many people find continous adjustment to policy disconcerting. And secondly, you need to do very good enforcement of contracts. And, therefore the legal system becomes important.
Siddharth Zarabi: Why should I be confident that there will be enforcement of contracts having heard this term for two decades?
Sanjeev Sanyal: We hae identified this as single most important hurdle in the system. And, we have gone beyond identification. So, we looked at the scale of change needed. 35 million cases are stuck in the legal system. There is an impression that this is such a large problem and it will never be solved. We found some interesting results. Most of the problem is in the lower courts. How amny judges you need to get 100% clearance rate? There are 2300 judges in the lower courts and 93 extra judges in the higher courts. For a country of our size, these are nothing. We can easily stabilize the situation. So, how can we clear the backlog.