Krishnamurthy Subramanian says the Insolvency and Bankruptcy Code is a big reform that is changing credit behaviour and calls for incentives for young businesses rather than small businesses. Edited excerpts from an interaction with the Economic Times:
What’s your assessment of the Indian economy?
There has been a slowdown in last two quarters but overall 7.5% average growth over the last five years is something which clearly shows we have done very well. In fact, inflation has been quite low compared to double-digit inflation in 2014 — now it is an average 4.5%. We all know inflation is a pernicious tax on the poor. Low inflation, therefore, has put more purchasing power in the hands of the poor. To sum it up, the Indian economy is witnessing high growth, low inflation and is doing pretty okay on the external Sector and fiscal prudence part.
Why has the economy slowed down sharply?
We all know that the effect of investment on growth is felt with a lag. And we’ve had a significant slowdown in capital formation since 2014. So, some of that, the effects on growth will show up and show up with a lag. So today, what we are seeing – some of the slowdown – is because of the slowdown in capital formation, which itself traces back to the dual balancesheet problem and other aspects.
NBFC segment is again facing crisis…
After credit from the banking sector shrank, the NBFC sector had sort of moved in. There is one good part to that, which is that showed substitution. But some of this is collateral effect… a lot of the NBFCs – this is actually characteristic of problems in the financial sector everywhere where you have assets which are much long-dated and liabilities that are much more short-term. Even for instance, the global financial crisis, what happened, that you have a huge asset-liability mismatch. That all works very well when things are good, you can roll over your liabilities. But when things start going a little bit south, it is actually that solvency that affects liquidity. So, we need to be focussing on the solvency aspects. That’s something that the RBI is working on and my overall comment on this is that we need to be monitoring in general the asset-liability mismatch in the financial sector very, very carefully. Across countries, this has been the case.
There is call for special liquidity window for NBFCs…
This is the territory of the RBI and I would not want to comment on that. As for special concessions, it is not about NBFCs in general. What happened in the global financial crisis, when some institutions in distress got saved — it has two effects. One, you’re using taxpayer money for private profits and socialised losses, which possibly create a moral hazard as well. This is a fundamental question: if in a capitalist economy, one should be really intervening unless there is huge systemic risk and contagion effects that are being created.
So, you are not in favour of a special dispensation?
I am making a general point. The only time this was done was during the global financial crisis when Satyam failed. It was not systemic but it was the software sector and important for exports, the government intervened and took over the board. Then it happened in the case of IL&FS. Here, there was clearly a case where there was possible contagion. It was a good move to firewall it. It is eventually our money, taxpayers’ money, that will have to be used. I worry about a situation where profits are private but losses are socialised.
How effective has been the bankruptcy code ?
Things like the bankruptcy code take time to settle down. There is a credit culture which prevails before the code is enacted because the threat of losing the company is not there. After the code is enacted, there is slow but sure movement towards a different credit culture. It is inevitable that those who are affected will try to act in their self-interest. That is something we need to keep in mind as policymakers. The fact is that we cannot have a super equity, which is when you make profits, you keep all the profits and when you make losses, the banks take a haircut. I think that regime is basically what a lot of cronyism is.
What is your view on unemployment? Where do you stand on jobs data?
There has been this sort of narrative that Unemployment Rate is at its highest. I have two points to make here. Number one, that between what was the earlier, employment-unemployment survey and what is now the Periodic Labour Force Survey (PLFS), the two numbers are basically not comparable. They are apples and oranges. The employment-unemployment survey, the sampling was based on household expenditure. In contrast, the PLFS sampling is based on households’ education and number of individuals who actually have passed class 10 or more. The weight that the PLFS puts on households with at least one member who has passed class 10 is 75% and it puts 25% weight on the people (households) who actually have no members in the household who have class 10 education. Now keep that and also consider the other thing, that if somebody has passed class 10, that person will not be willing to go and work as a daily wage labourer. Therefore, when you compare households with actually at least one member having passed class 10 in the census data itself, the unemployment rate is higher for these households than for the households which have actually no members with class 10 education.
Now if you go and put a 75% weight on the higher number and a 25% weight on the lower number, you will get a higher number but that is not reflective of the fundamentals which are actually happening. It is the sampling which is actually delivering it to you. So, this entire conversation that we’ve had basically that the unemployment rate has increased is, in my opinion, misinformed.
Do you think it is a good idea for the government not to release data?
As an economist, I would say that data is something which is important. If you look at the elasticity of jobs to growth, that has been coming down significantly, not only in India but all over the world. Because of technology, growth has been happening by basically enhancements in productivity and by replacing labour with capital. As a result, job creation has not been happening. The overall unemployment rate or hidden unemployment (rate) etc., is not informative. You have to open the hood and start looking at which are those sectors which are creating jobs and which are the sectors which are losing jobs because of the technological changes. To be able to do that, you have to have data. That is something which I would actually (say) doing it more periodically is a good thing.
There is a trend of PM Kisan and NYAY by Congress. Are you worried for the economy in terms of productivity, competitiveness and fiscal pressure?
Overall, if you look historically, in India we have focused a lot on production because of the effect of famines, etc. As a result, now we have our food production growing at more than 3.5% and population growing at about 1% or so. So, you have basically surplus and economics tells you that therefore food prices will go down. So, the big thing that we need to be doing in general for our agriculture sector is we need to be focusing on the marketing aspect. If you look at agriculture, we financial economists think about risk and return… I think if you specifically look at the PM KISAN scheme, look at the effect on risk because it is Rs 2,000 every four months.
What about the fiscal cost of that?
There will be some impact for sure, but I think if you can rationalise supporting corporates when they are in distress, why not actually something that feeds? And it is a sector that is indeed very, very distressed.
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