Thank you very much ladies and gentlemen,
for taking time off on a very wet Saturday afternoon.
The idea was to speak about, new economics
for a new India.
And the idea basically is to give you a sense
of what on earth we are attempting to do,
and what has been achieved over the last 5
years.
The reason I wanted to give this talk specifically
is that, usually when I give a talk, especially
when I am in a press meeting or something,
I am talking specifically about a certain specific policy.
The idea here is to kind of give you a flavor,
of the kinds of things we are actually attempting
to do from a broad perspective, so that you
get a sense of what is being attempted.
This will allow you then to judge, what was
being attempted, whether or not it succeeded,
or we did a good job of it.
That is for you obviously the people of India
to decide.
But at least, I hope that you will judge it,
based on what was being attempted in the first place.
So, the most important thing to realize is
that, the new India that Prime Minister Modi
speaks about very often, is a vision which
is not just a general vision of, let’s have
an India that is more developed and so on.
It is actually a fairly specific vision of
an India, based on a very specific view of
how economics should function.
Now, the idea of this new India is basically,
at a very simple level, to move India from
a political economy based on patronage, rent
seeking, and perpetuation of certain social
groups, to one that is based on social churn,
on innovation, risk taking, and most importantly
on a framework that is based on the application
and imposition of rules.
So, it is a rules-based system, and consequently
as you will see from my talk, a lot of what
was being tried to do is really impose order,
and to create a framework for governance.
If you remember the old term – ‘minimum
government, maximum governance’, somehow
some people tended to interpret it that this
was some sort of a libertarian vision of moving
into a world, where there is minimum government.
But they didn’t remember the second part
which was about ‘maximum governance’.
And really a lot of what we have done in the
last few years, particularly in the last two
years is to introduce these frameworks of
governance.
Because if you do not introduce the frameworks
of governance, and attempt to do minimum government,
then you will end up with what Russia looked
like after the collapse of the Soviet Union.
So, it is important, in order to have this
minimum government problem, to first introduce
the frameworks of governance.
So let us go back to a few years ago, or in
fact even better, relook at the last 25 years.
What has been the last 25 years of reforms
been all about.
It has really been about unwinding a certain
vision of crony socialism which was based
on a top-down vision, which was based on a
vision of government imposition, but largely
very much one where there is continuous intervention
in day-to-day life.
That vision of India basically fell apart
around about 1991.
But what we didn’t do was replace it with
anything else.
Instead what we did was to keep unwinding
that old vision.
So, the last 25 years is about unwinding whatever
existed, the Nehruvian socialist system.
It was not about articulating a brand-new
way of thinking.
So, what I am going to do is spend a few minutes
explaining what is it that we were attempting to do.
Now the growth that you saw in the immediate
last decade or saw has made us one of the
fastest growing economies in the world.
And in fact, right now, as you know, we claim
to be the fastest growing major economy in the world.
That is actually true.
Now the immediate five years prior to when
this government came to power, we did have,
of course, many shocks to the system. Particularly the global financial crisis.
Despite that, the growth performance of that
government, if you really take into account,
wasn’t terribly bad.
I know there is a lot of debate about it.
But in the end, if you look at it, actually
the real problem within that period was not growth.
And especially given the international context,
the growth was actually quite good.
The real problem of that period was, the lack
of stability and order.
That was the real problem.
The problem was while we were growing reasonably
well, we had massive spike in inflation, sometimes
double-digit inflation.
We had a massive spike in our fiscal deficit
which went out of control.
There was a huge amount of unregulated lending.
Much of which we are now unwinding.
So, really what was the first and the most
important thing that needed to be done when
this government came to power in 2014, was
to impose some sort of an order on the system.
So, what was the first reform that this government
attempted to do was to introduce something
called the “monetary policy committee”,
with very very strict targets for inflation control.
Why this was because, until you have anchored
inflation, nothing else can work.
So, the RBI act was amended, a monetary policy
committee was formed, with very clear target
of an average of 4%, a midpoint of 4% with
a range of 2% points on either side.
So, a range of 2-6% for inflation. And this has been hugely successful.
So, nobody imagined that we would manage to
lower our inflation rate which used to run
historically in the 8-10% range.
In fact, very often was it double digits,
to one where we are very comfortably managing
to control inflation.
So much, so, some people would argue we have
been too successful in fact the only time
inflation has actually hit the edges of the
target range is actually to the down side.
It went out of it in 2017, and we are actually
hitting it as we speak right now.
The inflation as we speak is around 2%.
And there is some argument, to say, it may
even be overstating the number.
So, this is a huge huge achievement.
Any other country that was attempting to do
structurally lower inflation by 500 basis
points or thereabouts of what we were attempting
to do, would have gone in to a complete recession.
And yet we have done it. It’s not something we are claiming to do. We have done it.
Yes, it was very painful.
Because when you suddenly lower inflation
in this way, real interest rates go spiraling out.
And of course, it causes pain, particularly
to the business community.
But generally, even to the government, because
obviously the real interest rate it was paying
on government debt went spiraling out as well.
So, what we ended up with of course was painful.
For example, even today a small business pays
12% on its debt.
With inflation running at just 2% you can
imagine the thousand basis point real interest
rate is being paid by the business community.
Very very painful.
And I will come back to this issue a little
bit later.
But, the first step in terms of radically
lowering inflation rates has already been achieved.
Now, why is this such a great and important
achievement.
Because, you see, until you have anchored
inflation on a long-term basis, on a structural
basis, you cannot bring down the cost of capital.
And why do we need to bring down the cost
of capital?
Well because if you don’t bring down the
cost of capital, then all the other problems
that we try to solve will not get solved. So, for example, we talk about the fiscal deficit.
Now, the primary deficit, i.e., the deficit
of the central government excluding the amount
that we pay on existing debt is only 0.2%
of GDP.
In other words, for all the things that the
finance minister actually has control over
is actually doing a very good job.
We only have a primary deficit of 0.2% of
the GDP.
So where does 3.4% of GDP deficit come from?
Well all of the rest is, interest payments
on past accumulation of debt.
So really we are all running very very fast,
just to stay at the same place.
And until you can structurally lower the cost
of capital, you cannot fix the fiscal deficit.
Same thing is true of our corporate sector,
or the competitiveness of our exports.
There is a committee that I am a part of,
which is headed by Dr. Surjit Bhalla on export
competitiveness, and we interviewed a large
number of people as a part of that to ask
them – okay, what is it that we need to
do in order to get our economy competitive
in exports, particularly in manufacturing,
where we have been not very successful.
And over and over again, the thing that came
through to us was, sure we can do a little
bit of improvement in our physical infrastructure,
roads etc., but frankly unlike in the past,
these things are not the binding constraints.
The real binding constraint to many many exporters
is a very simple one – the cost of capital.
How can we, when we are borrowing at 12%,
compete with a competitor who is borrowing at 6%?
In fact, the exchange rate was the least important
thing that most of these exporters wanted to discuss.
It was therefore the cost of capital.
Again, if we do not structurally lower it, lower inflation, we cannot bring down the cost of capital.
So, there are many many things that I can
go on about this.
But until we had anchored this and stabilized
it, we could not take the next step.
Of course, we now have to carry on and begin
to take the next step, and I have been arguing
for the last year and a half that the reserve
bank needs to get on with the act of taking
step 2, which is to begin to structural lower
our interest rates.
Because if you do not structurally lower our
interest rates, oddly enough, unlike what
many mainstream economists think, that always
keeping interest rates high leads to lower
inflation, that’s not true.
If you structurally keep interest rates high,
when inflation is low, what will happen is
that many capacities that you would have otherwise
built, won’t come on board, may infrastructure
projects that you would have otherwise built
won’t happen.
So keeping interest rates high for long periods
of time, is also not a good idea.
We need to take advantage of this and bring
interest rates down.
But at least, the stage is now set for being
able to do this.
Now, I will take you another step that what
we needed to do.
We had a very very complicated indirect tax
system.
It was indeed so complicated that it was more
easy for Mumbai to trade with Shanghai or
London, than it was for Mumbai to trade with
Delhi.
Now this is not a new problem that I have
just discovered.
This was clearly known to be an issue when
I was in high school.
And we kept debating this.
As many of you know I am from Kolkata, so
you can imagine we really debated it.
Now, having debated it for all these decades,
what did we do?
We arrived we everybody agreeing that some
sort of a GST thing needed to be done.
And yet, we kept debating, oh my god, we need
to change this, we need to standardize that,
we need to improve this, we need to prepare more.
But the fact of the matter is, when you are
introducing such major major changes, and
this was going to be the largest tax reform
we have ever attempted.
In fact one of the largest ever in the world.
We’ve actually never knew till we had done
it, what was going to happen.
So in fact the only way to find out what was
going to happen, was to do it.
And that is precisely what we did in July
2017.
We were very often told if only you had waited
another 6 months, and done more planning it
would have worked better.
But in fact, none of the things that the experts
told that would go wrong went wrong.
But there are many things that did go wrong.
Nobody told us that the error correction button
in the website will not work.
Nobody told us that the real problem was going
to be the refunds to the exporters.
The only way to have therefore found out,
was to have done it.
And in fact, the people who, GST council and
the others wo were implementing this, were
fully aware that when it was going to be first
introduced for the first three months there
would be lots of problems and probably wouldn’t
work at all.
And that’s precisely what happened.
Then few months later, it somewhat worked,
and then it worked a little bit better, and
now a year and a half later I can say we have
a system, that by a large works, in fact it
works reasonably well, and without doubt is a dramatic improvement on what used to be there before.
Now this does not mean that system cannot
be improved upon, we can keep improving on it.
In fact, Finance Minister himself has said
that over a period of time perhaps this middle
two rates will probably be merged into something,
so we will have fewer slabs, and so on and so forth.
But it is very very likely, that 50 years
from now, we will still be using some similar framework.
And we have shifted on to this framework,
we can keep improving it, but for all time
basically that I can see that we will be using
this unified framework. So this is done.
Another very very complex and difficult reform
that we needed to do was, cleaning up the banks.
Now, one way, the simple way of cleaning up
the banks would have been to essentially keep
evergreening the way we were, and basically
sum how keep growing out of the problem.
This was how we used to do it.
Which was that, whenever we had all these
bad loans, we used to give even more loans.
Keep the denominator expanding so that the
numerator was kept manageable.
And so, this is how we ended up where we did.
Instead, what was done, was that, in 2015
and 2016, the reserve bank governor was given
full authority to make sure that the recognition
of the NPAs was done as well as possible.
So, a huge amount of effort was put into recognizing
the problem.
Then having recognized the problem, by beginning of 2017 we recognized we have to do something about this.
Not good enough to just recognize the problem. So there was many options.
One of the options was to create a bad bank
and shift all these bad stuff there, recapitalize
the banks so that the banks can go back to
lending, and all of this was stuffed into
a bad bank where we would try and fix it.
Now, in some ways this would have been a less
painful option.
But, it would have solved nothing.
The recapitalized banks would have gone back
to doing whatever they were doing before,
all these assets would have festered in a
warehouse something similar to the BIFR, we
have done this BIFR kind of thing before,
we know it doesn’t work.
We also have seen what happens, in fact I
have personally seen, as I used to be the
chief economist for the Deutsch bank for countries
like Indonesia and various parts of Asia which
went through the Asian crisis.
They created bad banks, and the experience
was the ultimately the old promoters bought
back their old assets for 20 cents to the
dollar.
So, the idea then became, that look, rather
than do this, we shall use a completely brand-new
tool, called the Insolvency and Bankruptcy
Code (IBC), to try and resolve this.
So what was done?
Now, remember, this is a very risky thing
to do.
Just like with GST, we didn’t quite know
exactly what will happen when we try to do
this because, none of the institutions of
the IBC were in place in the beginning of 2017.
The courts NCLT, NCLAT didn’t exist, the
procedures didn’t exist, the insolvency
professionals did not exist, and nobody knew
how any of these things would hold up when
challenged in the supreme court or the high
court and so on.
But the risk was again taken, and in order
to get going, 12 of the largest cases were identified.
12 of the largest cases were important because,
the idea was, oh my god, how will these new
institutions deal with so many thousands of cases.
Now one of the good things about elite capture
is there are actually very very few cases
to deal with, in fact 50 cases accounted for
basically 2/3rds of the bad loan problem.
So since it was so concentrated, we said look,
we don’t want to solve every case, and any
case the size of the case is not correlated
to its complicatedness.
So lets identify the very largest cases.
We started with 12 cases and broadened it
to 50.
The earliest set of 12, went through their
180 days, plus 90 days etc., by July-August
of last year, began to come on stream. One by one they are getting resolved.
And some very very large cases like Bhushan
steel have gotten done.
Some very large cases are almost done like
SR steel which is I think in the last edges.
And these are not small cases.
Bhushan steel we recovered 35,000 crores,
plus another 5,000 crores in equity. So, 40,000 crores.
In the case of SR steel if it gets through,
the bid that is, the worst bid that we could
possibly get it is probably the one that ArcelorMittal
is got.
I think it is something like 42,000 crores.
But if one of the others gets it, it will
be even more.
But at least 42,000 crores will come back. But this is not even the big gain from this.
These large amounts of money.
What has happened as a result of this, is
that people have begun to believe that, creditor
rights will be imposed.
There has been a major change in business
culture, that old culture of impunity has been broken.
As a result some of the largest businessmen
in the country, with very powerful connections
now do not assume that they can take large
loans from the public sector banking system
and not have to repay, or for that matter
have to repay their operational creditors and so on.
And you have seen some of the biggest names,
in this country, being hauled up in front
of the courts and being forced to pay. That is a very very big deal.
And, as a result of this business culture,
we have had literally lakhs of crores of money
is being voluntarily paid back to the banking
system by those who had earlier been reluctant.
So, combining the actual cases that went through
the NCLT system, plus those who have just
voluntarily come back and behaved better,
something like 3 lakh crores of money has
come back into the banking system which we
thought we had lost to NPAs.
No this is a big big change.
I have just given you three examples – GST,
the IBC process, the NPC, as three examples
of frameworks of governance. Other frameworks of governance have also been tried.
One other one, big problem that we had in
India was, the problem with real estate developers
generally behaving badly.
So, a framework law called RERA has been introduced.
Somewhere it may have succeeded, may not have
succeeded.
But you can clearly see what is being done.
We have similarly tried to improve things
like, economic offenders, fugitives bill, and so on.
Various kinds of laws and frameworks have
been created, in order to create the kind
of economic order and culture that is very
important for us to take to the next stage.
Now it is fully understood that imposition
of this kind of rule based system, when it
was first done, was going to be painful, it
was also understood that when many of these
frameworks would be imposed there would be
all kinds of unintended consequences, because
obviously the institutions didn’t know,
did not in some cases exist, those who were
trying to impose these rules didn’t know
exactly what would happen when done, the general
population on whom these things were being
imposed did not know what was expected of them.
So it was a big risk to do it, but, I am pleased
to say that thanks to the cooperation of all
of you, who willingly took on what I would
argue is a fairly painful set of reforms,
and in a country where, for the most silliest
of things we end up having large crowds agitating,
rioting etc., we went through so many painful
reforms, and while many many people grumbled,
they in the end took it.
Therefore, to have wasted this point in history
and not imposed all these great changes would
have been a real waste.
So all I can say is, whether or not these
things succeed or not, I’ll let you decide.
But I wanted to make sure that you knew that,
1. What is it that we were trying to do?
2. We are entirely aware that many of these things
were done were painful to have been introduced,
not matter what their long-term gains, the
introduction of them were painful.
However, I have some very bad news for you,
which is this.
That if, this government is given another
opportunity to come and do more, we will do
even more painful things.
So, let me give you some flavor of the kinds
of painful things that will be attempted if
somebody like me is given another opportunity.
First and foremost, the most important reform
we now need to do is judicial reform.
This is now the single biggest constraint
to the growth of our economy and is not just
about the narrow business of the judiciary.
There is a whole ecosystem of things that
need to be cleaned up.
There are things that we need to do for example
with the bar councils which are probably likely
to be the biggest roadblocks to actually judicial
reform, not the judges themselves.
This has to be done to an institution that constitution-ally has been kept separate, for good reasons.
Therefore, it requires, not just the government,
but also the judiciary to cooperate together to do this.
But however, we cannot call ourselves a civilized
country with 34 million cases stuck in our legal system.
The inability to enforce contracts, if you
look at any economic issue, whether it is
infrastructure projects getting delayed, or
tax collections and refunds not coming on
time, or whatever maybe the issue.
You dig it down, you will find that the root of the problem is something to do with the judicial system.
Sometimes it is judiciary who is not keeping
up part of the bargain, sometimes bad procedures,
sometimes bad laws, whatever it is.
But this is something that has to be paid
attention to, and in fact if you gave me 10,000
crores of money to do whatever I wanted to
do with it, I wouldn’t build a highway,
I wouldn’t build an airport, in fact the
one thing that I would spend it on is building
more courts and hiring more judges, and speeding
this thing up, and giving it better infrastructure.
The best investment that this country can
make is in upgrading its judicial system.
This is something I would very strongly argue
is the best thing that we need to do.
And when we do it, it will cause all kinds
of unintended consequences and problems that
will arise from it, but it has to be done.
The second major area of reform that we need
to do, is administrative reforms, which includes,
everything from bureaucracy to the police.
We have ended up with a colonial era bureaucracy
overlaid by a socialist era bureaucracy, overlaid
by a bunch of institutions which we have created
in the last 25 years as part of our market transition.
The net result of this accumulation of institutions
and bureaucracy is, that we basically have
a bureaucracy that is completely dysfunctional.
So much so that every time I have to go abroad
for an official meeting of some sort, and
some of this is planned months in advance,
even then, every time I have to go abroad
I have to get 27 separate signatures. Now this is completely absurd.
This is something, which by the way if you
happen to be a businessman, you have to do
27 signatures for everything.
I am doing it for something very trivial,
but you set up a restaurant, or you build
a building, or you set up a factory, you will
have to get far more than 27 signatures, for
every step along the way.
And we keep by the way building more and more
institutions, as a way to somehow solve this problem.
We have to go back and relook at this whole
thing and begin to clean it up.
So this is the second big reform that we need
to think about.
There are a whole bunch of other reforms I
can talk about.
But these two I would argue would be the top
of the list of reforms that a future government
must ultimately look at.
I think I have spoken now for about half an
hour, and I figured that maybe it might be
more fun to have a Q&A.
But my purpose for giving this talk was really
the following: to give you a sense of the
kind of thinking that was being done, why
is it that a certain set of reforms were done
and not many other reforms that maybe others
would have, and also to give you a sense that,
based on this thinking, what are the kinds
of reforms that this thinking process leads
you to in the next phase.
So that you have some flavor of what is being
done, and hopefully you will judge the success
or failure of this approach based on the outline
that I gave you over the last half an hour.
Thank you very much.
