The Budget is getting accolades in the market. You yourself had been saying that we will push the pedal when it needs the most. What really brought about the ideological shift or stance?
Sanjeev Sanyal: It is not an ideological shift of stance at all. Right from the beginning, the Prime Minister has been talking about minimum government maximum governance and that is basically our strategy. Even in the shorter term, in terms of the demand management and the management of the Covid cycle, we have said throughout that there was no point in trying to push demand when we had a lockdown. As I said, there is no point in pushing the accelerator when you have got your foot on the brake.
As things opened up, we recognised that the economy needed support and we have been building that up but we have a very specific way of going about it. We do not think that once the lockdown was over, we should be giving out stimulus cheques and doing some indirect way of stimulating demand. We have taken a much more direct approach of going for infrastructure build out, which has two advantages; one, it directly stokes demand, creates jobs and so on. Of course, it has the other advantage that it leaves behind assets for future generations who after all will have to repay much of this debt.
Maneesh Dangi: I think there is a little bit of an ideological shift.
Sanjeev Sanyal: Well, I mean, there is no question that we have a very clear growth model and we have read the last three economic surveys which I co-authored, You will see that we have laid out exactly what we wanted to do. We talked about an investment driven growth model, if you look at two economic surveys back, the last one laid out several measures whether it is labour laws, farm laws, talked about dwarfism in our firms and we were basically going for a certain model and in this particular one, we have talked about deregulation.
If you read chapter 6 of the Economic Survey volume-1, there is clearly a framework of thinking about the world which is consistent and yes, there will be echoes of some things like what East Asia did. But you will also find echoes from our own long economic history. So, it is full of Thiruvalluvar and Chanakya as well. I also have a hat as a historian and I think it is important to understand the art of history here. Before 1991, the Indian state was basically weak but an all pervasive state.
After 1991, we opened it up but it was not because of some ideological or intellectual change. It happened because our economy went through a major crisis and we were forced to change it. But the ideological framework, by and large, remained the same. So whatever reforms happened, happened in a very apologetic sort of way, whatever needed to be done. It is only during the period of Prime Minister Vajpayee, it saw a bit of a fillip and then again there were no reforms at all although we did get the benefits of that in the subsequent decades.
But the opening up that did happen ultimately built out a new entrepreneurial class, but it did not have the architecture needed for it. We continued with the old public sector on one hand and opened up the private sector on the other. It very quickly morphed into a sort of a crony capitalist system. So, we had gone from crony socialism to crony capitalism but the cronies had still remained.
What really happened between 2014 and 2019 was that part of the system had to be fixed and was fixed. That is the context in which the Insolvency And Bankruptcy Code was put in, the banks were cleaned up, a lot of effort was put into essentially imposing some sort of an order in the system because before you go in for minimum government, you need some sort of governance in place. So that governance was put in place. Now you can do the minimum government part and open things up and that is the phase we are now going into.
It is a new phase. In the early ‘50s, we introduced a certain economic model; in 1991 we opened it up in a certain way. In 2021 effectively, — though it actually started in 2020 because many of these reforms came over the last one year — we have moved on to a new model of investment driven growth which in turn is driven by entrepreneurship from the private sector and the government providing infrastructure and the necessary conditions.
Maneesh Dangi: How is it different from something that Korea or Japan had done? Is this idea different or is it trying to replicate that?
Sanjeev Sanyal: Well, we have to be a little careful because the country is different, the circumstances are different and our political economy is different. We cannot have national champions in the way Korea had in Chaebols and in some ways we may not even need them. Unlike South Korea, we have a large internal market which can allow large companies to evolve organically internally even if we have to provide support of various kinds. In fact, it was more difficult for say Singapore to create a national champion because it has no internal market at all.
So our circumstances allow us to create those but even there we had to first create an internal market. That is what the GST was about. Not so long ago, it was easier for Mumbai to trade with Shanghai than for Mumbai to trade with Delhi. Whatever may have been the problems of introducing GST, it is now a relatively smooth system. It is a dramatic improvement on whatever was there before but most importantly, we now have a common market and that common market can be leveraged.
What is the government going to do to make sure that over the next 12 years this optimism is retained and we are able to walk the talk on not just reforms but announcements that have been made?
The proof of the pudding is in the eating but you can clearly see that even during very difficult times like the lockdown, we have been able to hold our nerve and do difficult things. This is a government that does not get swayed by international experts asking us to do a big stimulus package or other countries doing various things. We stick by our path, by what we believe and we have shown that we are quite capable of taking difficult decisions and standing by them. So we have a track record. We also have administrative capacity. After all, we have 1.35 billion people who were taken through the world’s biggest shock in a century and we managed it. As a country and as a society, we need to have a little more confidence in ourselves and that is what Atmanirbhar Bharat is about.
We tend to start with the assumption that whatever the Indians are doing is somehow substandard. It is not the case. Our vaccines are going to vaccinate the world, our strategies were better than most of the West. We need to begin to have some confidence in ourselves and not get swayed by whatever the rest of the world may be telling us. I am not saying we should not listen to the rest of the world, but at the end, we should use our common sense and have confidence in ourselves.
Do you think that the recent set of protests against farm laws could stall the reform process given its political cost?
I cannot answer for the political class but the privatisation effort was announced well after these protests were underway. So clearly, the political leadership has already taken this into account and is willing to go forward and I think that is quite right.
We debated over labour laws for 30 years and they finally got done. The labour laws have been discussed over and over again by every economist worth their salt. They have been written into the economic surveys over years and by the very economists who are now grumbling about them. But it is this government that got it done. Everybody agrees that privatisation of some sort needs to be given a fillip.
There are some areas where the public sector does have a role and we intend to keep them there and they have been demarked as strategic sectors. We are even willing to create new public sector enterprises or body entities like the new Development Finance Institution. So, we are practical about this but clearly there is no role for Indian government to be running hotels, airlines and those kinds of institutions or even petrol pumps for that matter. I think people will be surprised how much support there is on the ground for many of these reforms.
People underestimate this because those who oppose it tend to be very vocal and you assume that is what the support on the ground is. Speaking to young people in universities around the country, I think people are much more ready for radical change than we realise.
Maneesh Dangi: In order to contextualise the proof of success, I would imagine there are many markets. One of them would be how much external capital we are able to attract to set up factories in India and eventually export to the rest of the world. You are right that the economic survey has talked about it, two, two and a half years ago. Would it be fair to say that this is the way to judge the success over the next couple of years and then to sort of think of a small data point here? A research report by Bernstein last week says that after 75 firms left China in the last one year, 10% came to India and about one-third went to Vietnam. Now 10% is great news because in 2018, it was zero. How can a tiny country whose population is less than West Bengal and GDP is less than Karnataka can do this?
Sanjeev Sanyal: The Vietnamese government has clearly done well and it’s good for them. They did that even with the Covid response and I admire their ability to do this but that does not mean that we do not have the will or the capacity to do this. We had a more difficult task as far as managing this Covid situation was. Ours is a much bigger and more complicated country and we have done a reasonable job. Our industrial capacities and capabilities are at a different level from theirs. While I agree Vietnam has been successful and I wish them very well, they are an ally of ours. So, I always wish them well and that is also true of Bangladesh, another country with whom we have good relations.
But you will be surprised how much of FDI and other investment is now flowing into India even as we speak. The PLI scheme has been a big success although the actual bricks have not yet been laid but they will be very shortly. Even through the pandemic period, FDI flows into India were at record levels. So we are doing reasonably well and that is gathering pace but I would argue that FDI, even portfolio investment is not the only gauge of our success in putting these policies together. Ultimately, we have to have growth and we have to create jobs and the confidence that Indians have in themselves is ultimately what will drive this.
We really need to get Indian private sector’s animal spirits up and running and that is what will really be the ultimate test of this. And the Prime Minister on the floor of the House the day before yesterday, made a pitch saying that this is ultimately our growth model, we want our private sector fired up, investing and taking risks and introducing new technologies. That is something we need to see and we have full confidence that will happen. After all, we did reduce tax rates very dramatically about 18 months ago. The benefits of that got a little disrupted because of the COvid phase but the benefit will begin to flow shortly.
Maneesh Dangi: I agree. I speak with NITI Aayog people and I am absolutely happy to see the red hot FDI pipeline you alluded to. Just for reference, India used to export about four, five times of Vietnam 20 years ago and it is equal today. So, in a sense, so much can be achieved by specific policies and I only hope that we get there. A large part of Vietnam’s resurgence has been because of FDI. Given that you said that in the end, the marker will be growth, if for a good 5-10-20-25 years our base growth has been 6.5% which is a great deal and had China not happened, we would have been considered a miracle economy. But in the same time, China saw double digit growth. Can you give a framework of next decade in terms of what kind of potential growth our institutions, markets should start to think of for India and lay the framework in terms of base growth of 6.5% plus, where all will be able to exploit excess growth?
Sanjeev Sanyal: What you are asking for is not the growth in the next one or two years which we expect it to be quite high. The IMF expects 11.5% GDP growth rate. That is just a short run based on bounce from last year’s downturn but if you are taking a decade or so into account, India is capable of growing at the rate of 8% or thereabouts. And there are many things in our favour; I know everybody has talked about demographics for a very, very long time but the fact is we are now into that demographic phase. We are probably into the second year or so of that, the peak phase but we will be here for 25 years.
China on the other hand is coming off it, it is already off the peak as of 2015, but still close to the peak. Before 2030, its demographics will really sharply drop as the impact of one child policy will begin to impact them. We, on the other hand, have just about entered the peak phase. This is a phase during which we should basically go for an investment driven growth which is what I have pitched for all this time. Some of this investment will come from FDI but we need our own economy to drive it and that will require our financial system to dramatically scale up.
I know you are from the capital markets. The equity market part is relatively more developed but the place where we are truly underdeveloped is our bank and nonbank sector. That is very small and ultimately the very sizable part of the push of growth will have to come from a banking system that has a scale or magnitude larger than what it is today.
One of the problems was always that we had a banking system that if we dramatically scaled up repeatedly we would have this phenomenon for a variety of reasons. We would go through a boom or in response to a downturn, we would open up the gates and then the banking system would expand for a few years but then it would stall, because all these NPAs were building up. We had one episode of that in the last decade but we have gone through this before as well. This is why the banking system never gets going.
So, one of the key things to do was to clean up the banking system and change its culture and this is basically what the Insolvency And Bankruptcy Code is about. The thought about privatisation comes from that same line of thought. We need a competitive banking system which can be five times its current size because that would be one of the legs on which the financing of this expansion will happen. So cheap capital put together with good demographics, reasonably sensible economic policies and deregulation and let the magic happen.
RBI has recently said that post Covid once we wind up the regulatory forbearance, in the worst case scenario, we may see gross NPAs of close to 16.2% for PSU banks. What will you do to fix the Indian banking system and secondly, on the privatisation end, how would you protect buyers from any kind of legal trouble later?
Sanjeev Sanyal: First of all, let me say that the media loves looking at the stress testing worst case scenarios. That is not what the RBI is forecasting. It just did a stress test and that is the worst case scenario. When they did this test back in November, our confidence in the system was different from what it is now and almost every discussion I have with the banking system suggests that while there will be some impact of the Covid, we will probably get away with it much better than virtually any country in the world. So, there will be some impact but the net impact on NPAs is going to be within manageable levels.
Manish may have a better view on this because he probably does this even more frequently than I do but my own sense is that we will come out better. Now why is it like this? It is because we spent three years cleaning up the banking system going into this crisis. So, the system was not leveraged, the NBFCs were not leveraged, much of the rubbish had already been cleared out and demarcated. Anybody who has taken a loan, genuinely wanted it and had a business that worked.
Now during the lockdown itself, we had to provide forbearance because we do not want cascades of default. But what I hear is even there, not too many people are coming up and asking for restructuring. So, by and large, there will be some impact, but not very much. The problem will really arise in the rest of the world. India will look good but once we get past this phase, once we have cleaned it up and by the end of the year, when we will be reasonably ready to get going, we will have perhaps a decade of expansion in our banking system.
How will you ensure that the buyers are protected from any kind of legal troubles at a later stage? That is going to be key to the success of not just the privatisation plan but the privatisation for the two banks and one general insurance company?
Sanjeev Sanyal: That is true for every privatisation. You want to do it as neatly as possible so that the people who buy it are not penalised because after all our purpose in selling is not just to make some money, that is the side reason why privatisation is a good thing. The real reason you want to do privatisation is that the assets can then be used more productively for the wider economy. We will take every care to make sure that these kinds of legal issues do not happen but the proof of the pudding is in the eating.
