What is the present state of the economy? Is it slowing down? Is consumption and demand a problem? Is the state of manufacturing disappointing? And second, if things continue the way they are, will India become Viksit Bharat and a developed country by 2047, or are special policies necessary to achieve this ambition?
Former chief economic advisor and presently a senior fellow with the Peterson Institute for International Economics in Washington, D.C., Arvind Subramanian told Karan Thapar in an interview for The Wire that “on all fronts, the economy is not in great shape”. Further, he added that “a deeper recalibration of policy is needed… the government needs to go back to the drawing board and accept that what it’s doing hasn’t worked.”
The full text of the interview is given below.
Karan Thapar: Let’s start with the state of the economy as we await the budget before we talk about whether India can become Viksit Bharat and a developed country by 2047. GDP growth in quarter two is down to just 5.4%, the lowest for seven quarters, and the third consecutive quarter of steady decline. Is the economy slowing down?
Arvind Subramanian: The answer to that question is obviously yes, but I think the question is whether the slowdown is cyclical, maybe temporary, or is it structural? Because that’s the key diagnosis that one needs in order to think of what we need to do going forward. And the answer to that is, in my view, unambiguously, it’s not a short-term temporary slowdown.
It’s a structural slowdown. And in a sense, the Indian economy has been weak for a very long time, obscured a little bit by the recovery from COVID. And of course, also obscured by the fact that the numbers tend to be a bit high, and maybe they obscure some of the slowdown as well.
But yes, it’s slowing down, not just cyclically, but structurally, and has been weak for a very long time.
Karan Thapar: And if I recall correctly, from articles that you’ve written in the past, you also are not completely happy with the way India calculates its GDP. Yeah.
Arvind Subramanian: I mean, just the obvious point, Karan just bears emphasis. In the last few years, we’ve written a number of pieces. We’ve had growth at whatever 7%, 8%.
And yet, consumption has been at whatever 3%. Investment has been weak, exports have been weak. So how come, if all the constituents of GDP are so weak, how come GDP itself is so high? But that’s something we should just keep at the back of our mind as something that we should not forget.
But more importantly, we should talk about the long term slowdown and weakness of the Indian economy.
Karan Thapar: Absolutely. There is a view that one of the problems is depressed demand and consumption.
Do you agree with that view? And what’s the cause of this poor demand?
Arvind Subramanian: So actually, Karan, your second question presumes that the answer is yes. And unfortunately, my answer is no, that the diagnosis has almost got it exactly backwards. You see, because if you say that the problem is structural, and has been there for a very long time, then it’s less likely that it’s just demand.
Something more fundamental is at work. And recall that India’s private investment has been very weak for a long time. Our share of FDI has been declining, excluding China has been declining.
So it’s not just demand that’s down, but lots of long term factors at play, which make the economy weak. Let me put it a bit starkly. I think consumption is down because growth and incomes are down, not the other way around.
And so we need a policy to address long term growth and job creation. That’s the diagnosis. And from that follows the prescription.
And therefore, another corollary of that is, we should not be thinking looking to the budget for quick fixes, like, or tax cuts, because consumption is weak, because that’s not the problem. Consumption is weak, because people have no incomes, there’s no employment creation has been weak. So we need to find long term measures that improve the economy, which boost growth, provide more jobs, then consumption will come back.
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Karan Thapar: And would I be right in assuming that poor growth and poor demand also explain the third feature of the economy that you referred to a moment ago, investment, which is that just half of what it was a year ago at 5.4%, and the lowest it’s been for six quarters, does poor demand, poor consumption, poor growth, explain poor investment as well?
Arvind Subramanian: Well, see, I have a slightly different diagnosis for why investment is weak. You know, investment, see, people focus excessively on domestic demand, when people say demand is weak, they focus on domestic demand and consumption. But the obvious question is, you know, there’s infinite foreign demand by way of exports, why aren’t we doing well on exports? And so part of the reason I think investment has been weak, is because of the broader policy environment that makes investors, domestic and foreign, less willing to invest.
So demand is, in my view, only part of the problem the reassurance to investors that they will not face excessive risks in the economy, that I think, is the core of why foreign direct investment has been declining, and private investment has been weak.
Karan Thapar: I get the feeling from your answer that we’re talking about a situation where not only is the problem structural and not cyclical, as you pointed out, but the problem is also fundamental. There are a lot of serious issues that need to be tackled before growth picks up.
Arvind Subramanian: Absolutely. And that’s why when people say, what I want to kind of caution people against, is that if you diagnose it as weak consumption, then automatically your hopes get up, or maybe the budget can do something, tax cuts, etc. And then the economy will come roaring back again.
No, I think that’s not what’s going to happen. Long term problems, long term weaknesses, weak exports, weak private investment, and weak income growth, weak employment growth.
So something much deeper is going on, which is making our economy less attractive to investors.
And unless we get private investment up, I think job creation, growth creation, and then demand and consumption will then follow automatically.
Karan Thapar: Against this background, how worried are you about the state of manufacturing in India? Has make in India yielded credible results? Is the China plus one strategy attracting sizable investments from India? My feeling from everything that I’ve read and heard from people is the answer to both those questions is a ‘no’.
Arvind Subramanian: Yeah, I would say that, let’s say that the response, the opportunities created by capital fleeing China, which we call the China plus one opportunity.
I think it’s fair to say that India has somewhat vastly underexploited that opportunity. I don’t think it’s been completely unexploited, but it’s been heavily underexploited. Just to give you one ballpark number, you know, numbers suggest that out of every say, $100 leaving China, we’ve been able to attract, let’s say, 10 to 15% of that, when in fact, we should be attracting much more.
So I think that we have underexploited, see, the reason why it’s not unambiguously negative is because current some states like Tamil Nadu, for example, have been able to take advantage of the China plus one opportunity. I wrote a piece in the Financial Times a few months ago, saying that if you look at Tamil Nadu, for example, the investments that have come in from, you know, East Asian investors, you know, domestic investors, Tata’s, for example, in response to the opening from China has been quite good. And there are lessons from that for what the rest of the country needs to do.
So bottom line, yes, we’ve not exploited it remotely as much as we should. The problems, again, are more fundamental. Our manufacturing remains weak, because our export performance remains very weak, exports of manufacturing, with one or two exceptions, like Tamil Nadu.
Karan Thapar: What did Tamil Nadu do right that the rest of the country is unable to imitate and copy?
Arvind Subramanian: So, Karan, this is what I think, is the heart of the problem. So, you know, if I get too long with it, interrupt me. So the way I assess the problem, the deeper problem is the following.
I think this government recognises that it needs to attract private investment, and that it can’t keep relying on public investment. To be fair, it’s done a good job on public investment, but that’s not enough. So the question is, why aren’t foreign and domestic investors coming? On the face of it, the government would say, look, we’ve done a lot.
We’ve cleaned up the banking system, we’re providing subsidies, we’ve cut the corporate taxes, we’re also providing protection. So we’ve done our bit, and yet investment hasn’t picked up. And the answer to that, I think, is what Josh Feldman and I wrote recently, is that while the government understands that you need to increase the returns to investors, it has kind of been unable to reduce the risks to investors, the risks.
And I think that’s where the Tamil Nadu lesson becomes very salient. Now, you will ask, what are these risks? And I will say there are three big risks, which I think are almost part of the DNA of this government, which creates this problem. The first is what we’ve been saying for a long time, that the government has chosen to promote national champions, right? Lots of regulatory favours have been given to, you know, three, four, five groups.
Now, concentration ratios have gone up. But the problem is that even if they deliver to some extent, in return for the favours that they get, it has had a pretty chilling effect on other investors. Other investors are saying, ‘if one of these national champions is in sector X, I will not invest in sector X, because the rules will be turned against me arbitrarily, without my knowing So the risks that I face are enormous’.
So that’s national champions risk, you know, very important. That’s chilling private investment. And this is something the government needs to take very seriously. The second, I think, is also kind of manifest in what the government does in various spheres, not just economic, is, you know, arbitrariness, the weaponization of the state, which, you know, in the political sphere, but also in the economic sphere, the playing field isn’t level, policies get reversed. It’s not inclusive in its decision making, which affects centre state relations.
So, and of course, the what we would use to call overzealous tax enforcement, you know, that the tax demands are being made. So the broader panoply of policies that create arbitrariness, weaponization of state to go after target particular individuals, including, business groups, that has also had a very chilling effect on investment. That’s the second thing.
The third thing which is something very important is that when we talk about, you know, manufacturing, the failure of manufacturing, or, as you said, the only way manufacturing grows is if you can export more, right? But then to export more, you need to have an open economy. The government, you know, beginning in about 2017-18, it reversed its policies, it’s become much more protectionist. So, you know, getting cheap inputs has become more difficult, becoming part of supply chains become more difficult.
But I think here’s the key thing, the government recognised some of this, started reducing tariffs, especially on inputs. But we’ve seen a new form of protectionism, a very obscure, non-transparent, and pernicious form of protectionism come back again, what are called quality control orders. So essentially, what this does is that in order to be able to import, the supplier outside has to be certified as meeting some quality controls.
So this is really going back to the old days of really micro, non-transparent, very occlusive, you know, quota, licence raj in the form of non-tariff barriers to trade, which is chilling trade, and therefore chilling our exploitation of export opportunities. So to sum up, three big risks, national champions risk, the whole the environment for investment via arbitrariness, reversal, non-inclusiveness, weaponisation of state machinery, number two, and number three, the kind of protectionist risk, which has come back in more pernicious forms.
Karan Thapar: But you’re suggesting that this is something that needs not just to be tackled, but it goes to the very root of this government’s economic philosophy, this government has to fundamentally change the way it’s been viewing the economy and trying to promote production and growth before it actually tackles the problems it faces.
It’s a huge challenge for this government.
Arvind Subramanian: Yeah, and I would say it’s a little bit, probably a bit more serious because, you know, Karan, people think, and you know, that to turn the economy around, that you need to pull some levers, you know, give a tax break, consumption, boost demand, etc. This is not about pulling levers.
This is about, you know, creating the conditions by acting consistently over time, or rather, not doing all the things that have been done, which has created a very risky environment. Now, we forgot about the Tamil Nadu example. Let me give you one example from Tamil Nadu that happened.
So, Ford Motor Company left Tamil Nadu three years ago, because it said our global strategy means we’re no longer competitive manufacturing out of Tamil Nadu. It decided to leave. Guess what the Tamil Nadu government did? It facilitated exit of Ford Motor Company.
It said, you see, normally the Indian mentality would be, how dare you leave my country? What do you mean? You know, we’re going to make life difficult for you. It facilitated exit for Ford Motor Company. In the spring of last year, Ford Motor Company said, ‘we’re going to re-evaluate our global plans.
We want to go back to an emerging market country’. And guess what location they chose to come back to invest in? Tamil Nadu, because they said, this is a place where they were so good when we exited, that this is a place where we want to re-enter. So, reassuring investors, even when they exit, that’s what it requires.
That’s the farsightedness and consistency of policy that you require in order to be able to create conditions for private investment.
Karan Thapar: Let me try and translate the size and enormity of the problem facing the government and the scale of change in its attitude that’s required to tackle it, in two terms that ordinary people watching this interview will be able to readily understand. I’m talking about jobs.
That’s the one thing that matters to people. It gives them money, it creates demand, it creates growth when that demand leads to expenditure. The problem is, we have an unemployment rate, according to the Center for Monitoring the Indian Economy, that for the last two, maybe three or four months has been hovering around 7.88%, which is pretty high.
Arvind Subramanian: Karan, can I just again, not to get too technical, I think unemployment rates are not a good measure of how many jobs you are creating. I think what we should look at more is how much employment is being created, not how much unemployment, which is much more difficult to measure. And then formal, decent formal sector paying jobs are very scarce in the Indian economy.
They’ve probably become scarcer than in the past. Remember, this has not been in the Indian economy over 75 years has not been good at creating good jobs ever. Maybe things have gotten worse, and it’s open to question.
Certainly, we see, for example, you know, if there’s one government job being advertised, the number of applications for that have soared so much that one gets a sense that maybe the
problem has gotten a bit worse. But job creation, employment creation has always been the Achilles heel of the economy for the last 50 years, 60 years, maybe it’s gotten worse now. And to translate it back to viewers, the only way you can boost jobs is by getting private investment is by getting growth and by getting manufacturing employment.
Karan Thapar: To take us straight back to what you were talking about, those three big challenges must be tackled. And in tackling them, the government will have to virtually, effectively rethink a lot of its present strategy.
Arvind Subramanian: Not just I think it will have to rethink its instincts and its DNA.
Karan Thapar: Yeah, and that’s not easy to do.
Arvind Subramanian: Yeah. And that is the bigger challenge, I think.
So it’s not a matter of, you know, pulling levers or offering tax breaks or subsidies or whatever. It is about, you know, doing things consistently for long periods of time in non- arbitrary ways, not weaponising the state, not favouring particular individuals, you know, not becoming not becoming more closed. These are all the things that have to change for you to create a better environment for attracting private investment.
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Karan Thapar: I take it this is why you said to Martin Wolf of the Financial Times just three days ago on the 27th of January. And I’m quoting you on all fronts. The economy is not in great shape.
You just spelt out all the reasons why you believe this economy is not in great shape.
Arvind Subramanian: Yeah, I think the economy is quite weak and it’s been weak for some considerable time. We have structural weaknesses and we need to address some of these problems and kind of really seriously look at how things need to change in order to get growth and private investment up again and exports as well.
Karan Thapar: In this context, there’s something that people would have picked up from the papers over the last few months. And I want to ask you, is it a reflection of the problem we’re talking about or is it something that’s exacerbating the problem? I’m talking about the sharp collapse that’s happened since September.
That’s just four months away in our foreign exchange reserves. They’ve fallen by 75 billion and at 623 billion, which is what they are at the moment, they’re the lowest they’ve been for 11 months. Is that a reflection of the problem or is it likely to exacerbate the problem?
Arvind Subramanian: It’s actually exacerbating the problem, Karan.
I think, you see, we’ve said that the problems are structural, clearly. But that doesn’t mean certain temporary factors, cyclical factors haven’t aggravated the problem. And in my view, Josh Feldman, Abhishek Anand, we’ve written a series of pieces recently which show that RBI policy has contributed to the problem over the last three years, last two and a half years at least.
Now, and this is something that viewers need to understand, Karan. It’s not a small problem. It’s really quite a serious problem.
For the last two and a half years, the central bank has basically maintained the rupee constant against the dollar. What that meant is that even though our inflation was higher than in partner countries, even though we were getting more uncompetitive, the exchange rate was fixed and therefore we became less and less competitive and therefore our exports suffered. Now, the question is, why would you want to do that? We’ve always followed a policy where we make sure that our exchange rate is broadly competitive vis-a-vis other economies.
But by fixing the exchange rate, we made the economy uncompetitive. One, it gets worse. But it did so, it did keep the exchange rate stable by selling our foreign exchange.
Because what happens is the exchange rate tends to weaken when investors take money out. So to prevent that from weakening the exchange rate, the central bank has been selling dollars. Now, you mentioned 70 billion.
The correct number is over two and a half years, we’ve lost about 220 billion dollars, 220 billion. And since November of last year, between November and today, it’s about 80 billion. So you’ve used up your foreign exchange to defend the rupee, which has made the economy uncompetitive.
And then it gets worse, Karan, because in doing so, in doing so, you have kept liquidity conditions too tight, interest rates are too high, at a time when the economy needed just the opposite. So you had a very uncompetitive exchange rate, which affected exports, you sold 220 billion dollars. And in doing so, you kept conditions too tight for investment to take place, for borrowing and investment takes place.
And that has aggravated the short term problem. And therefore, it was, and of course, the last thing I want to say is that the question is, why did the RBI do that? It seems that it’s done that because it wanted to encourage investment. And in order to encourage domestic, you know, both public sector and private firms to borrow from abroad.
So it became the fixed exchange rate became like a subsidy for foreign borrowing. And that’s, I think, the last piece of the puzzle. And the problem is that when now the exchange rate declines, as it has to, all that foreign borrowing is going to impose a cost on the economy, because viewers need to understand, if I borrow $10, and I’m earning 100 rupees, right, I get my 100 rupees, I convert it into dollars and repay that.
But if the exchange rate depreciates, I have to get more rupees to service my dollars. And so it becomes very, the exchange rate change becomes very costly. This is what happened in East Asia, there was too much foreign borrowing, exchange rate goes down, balance sheets are hit, investment is hit.
So we’ve got ourselves into a quagmire. By keeping the exchange rate fixed, we’ve encouraged this foreign borrowing, which is going to make the problem worse when the exchange rate declines, as it inevitably has to. This is the lesson we’ve learned from 50 years of emerging market crisis, that no countries should not get into these unsustainable fixed exchange rate regimes, because they become a cropper.
And that’s what we’ve got into.
Karan Thapar: You know, hearing you, a question came to my mind, was the RBI unaware of what it was letting itself into? Or was it ill-advised? Or has it been ideological in its behaviour?
Arvind Subramanian: Karan, it’s a great question. I don’t have a good answer to that.
All I can say is that it was a policy that should have been much more carefully and widely discussed. The costs and benefits should have been discussed within government. And they should have come to the conclusion based on many, many decades of experience of other countries, that it’s not a wise policy to do that.
What the motivations were, I don’t know. But clearly, it seemed to have been to encourage investment in foreign borrowing. That’s a kind of, you know, benign interpretation of what it did.
But it was not a very sensible policy, because that very thing is going to aggravate the problem. So I don’t know, see, my thinking, my kind of understanding or my speculation is that the central bank got into this policy, because it thought it had $700 billion in reserves. And so it could defend the currency.
It thought that it had a lot of firepower to defend the currency. But in modern times, this, you know, compared to the size of global markets, $700 billion is nothing. The Chinese in 2015 authorities lost $1 trillion like this.
So in this day and age, you know, the fact that you have a lot of reserves doesn’t guarantee you comfort. And that’s a lesson. And this is something that should have been anticipated, thought about.
And, you know, we should have had much more much, much more considered policymaking on this. It’s been, I think, quite an imprudent and unwise policy shift on the part of the Reserve Bank of India over the last few years.
Karan Thapar: Let’s go back, Dr Subramanian, to the bigger, wider, more challenging problem facing the economy, which is much more than just the problem of the RBI that we’ve been discussing, although the RBI is part of that problem and will exacerbate it.
Does the government recognise the bigger, wider, deeper problem as you explained it? Or is it in denial?
Arvind Subramanian: See, Karan, I would say this that to be fair to the government, it had a vision when it came into power, that economic vision, the vision was Make in India, the vision was, you know, welfare building the welfare state, you know, providing all these goods and services, building public investment, using digital technologies. So I think it had a kind of there. But then over time, it’s become a bit stale, bereft of ideas, and unable to kind of come to grips with the fact that whatever it’s been doing has not worked in terms of job creation, and growth, exports, and so on.
So does it recognise it? I think deep down, it must, because everyone is saying so. Everyone is saying that, you know, of course, the diagnosis is very, some people are saying, or just a matter of the budget, and doing a few things. Our diagnosis is that much deeper.
Does the government recognise that this is the problem? Is it willing to change some of its instincts? Those, I think, are the bigger questions.
Karan Thapar: You know, you said the government has become stale. You said it’s become bereft of ideas.
In an interview that you gave the New York Times earlier this month, you said, what is missing now is ideas for long-term growth and boosting employment. Does that mean, taken all together, that the government doesn’t have an adequate strategy for tackling the problem facing the economy, that it’s feeling its way along, but it doesn’t have a well-thought-out, adequate strategy?
Arvind Subramanian: I would say, on balance, I think it needs to go back to the drawing board and realize that what it’s been doing so far has not worked. And the numbers are showing that. See, Karan, I think that she has, I think, one way of thinking about it, right? In some ways, I think maybe the government does recognize that.
Because think about it. We’ve kind of have an economy now where the kind of welfare state has become the kind of cushion or the kind of, you know, Marx used to say religion is the opiate of the masses. I mean, this welfare state has become the kind of opiate that’s keeping disaffection down, restiveness down.
And so maybe because of that, the pressures for change from below are not as acute or urgent as they would have been. So that’s taken away some of the sting from some of the disappointments of the economy. So but the government needs to recognize that, you know, you cannot run an economy based on a welfare state and cash transfers and so on, especially it’s becoming fiscal situations are deteriorating because of this competitive populism.
So really, it needs to go back and say the current model isn’t working. Maybe we don’t see the pressures as much as we should, because of this welfare state that we’ve created. But in order to make, you know, to create jobs and create growth, you need to really rethink strategy much deeply, including how it should maybe change some of its deeper instincts on what it should do.
Karan Thapar: This is the key. The government needs to change its deeper instincts. Earlier, you said the government needs to change its DNA, which is fundamental to the government, by the way.
And you said a moment ago that the current model of handling the economy is not working. That means that the budget is not going to supply the answers to the problems you’re talking about. It’s a much bigger, deeper exercise that needs to be done.
And as yet, the government shows no sign that it’s willing to undertake that deeper exercise of rethinking.
Arvind Subramanian: Yeah, we haven’t seen signs yet of, you know, that deeper recalibration of policy, as it were. I mean, to be fair, I think it’s not an easy task.
I think governments around the world are finding providing jobs and creating growth much more difficult. But I think we should at least recognise that we’re not succeeding and that addressing some of the things that I identified, not the national champion risk, the weaponisation of the state, etc., you know, the protectionism, the rise of protectionism, all of these things, the government needs to take a much harder look at and see how it’s going to change in order to create more jobs and attract more investment.
Karan Thapar: Against this background, Dr Subramanian, let’s come to the second issue I raised in my introduction.
Can India become Viksit Bharat and a developed country by 2047? That’s just 22 years away. In your interview to Martin Wolf of Financial Times, you said, and I’m quoting you, it does not seem plausible. That’s going to come as bad news to a lot of people because they’ve set their hearts and their hopes on becoming a developed country in 22 years.
Why do you think so firmly that it doesn’t seem plausible?
Arvind Subramanian: You know, Karan, you can’t escape the tyranny of arithmetic. And the arithmetic is very simple. Today, our per capita GDP is about $2,500, roughly in market exchange rate terms.
To become a developed economy, a conservative Bharat, it needs to become $12,500, a fivefold increase in per capita GDP over 22 years. I mean, that requires growth rates of magnitudes that we have never seen historically in India for that period of time. We’ve had one bout of similar rates of growth.
So I’m talking about something like seven to 8% growth consistently for the next 25 years to reach that Viksit Bharat, maybe a little bit more. And we’ve never been able to do that. Looking back over 40 years, we’ve done about 6%.
And that too, because two things were important to get that 6%. One was, when we broke out of the socialist, Dirigence licence quota raj, we did a lot of reforms, which gave us a boost. And then in the 2000s, when we were growing at close to 10%, for about seven, eight years, the world economy did very well.
So the tyranny of arithmetic, plus the fact that what you need to do, you’ve never done before. And what you did before, you probably cannot replicate again. So putting it in a more forward looking sense, we need to have the kind of reforms of the economy of the scale that we did in the 90s.
And we need to have a favourable global economic environment, both of which are now looking very uncertain for India today. So if you combine the two, the tyranny of arithmetic, our inability to do these reforms, the global environment, I think this is not a very plausible calculation to think that India will, you know, become a $12,500 per capita GDP economy in 22 years.
Karan Thapar: Once again, as I hear you, it seems you’re saying, unless this government can change its instincts, unless it can change its DNA, unless it can change radically and fundamentally its entire approach to the economy, we’re not going to become Viksit Bharat.
So the answer to the question I intended to ask, what does the government need to do to make it plausible that we do become Viksit Bharat by 2047? The answer is change the fundamental way this government handles the economy.
Arvind Subramanian: To some extent, yes. I think the deeper challenges of creating the conditions, minimizing risks for investors, becoming a competitive economy, being able to export, being able to create jobs requires, because we cannot create jobs based on public investment.
We cannot create jobs by the government, you know, providing more jobs. It has to be based on private investment and export growth. And those require a pretty different policy and institutional environment than what we’ve had at least in the last five to seven years.
Karan Thapar: I know I’m repeating myself, but I’m doing it on purpose because what we’ve established is that the government’s approach to the economy is the problem. The government needs to rethink the way it handles the economy. Unless it’s able to do that, that problem will continue.
And we will continue as we are. We will not become Viksit Bharat. We will not even tackle the slowing growth that we’re talking about earlier.
The government’s attitude to the economy is the problem.
Arvind Subramanian: The attitude, the vision, you know, what it needs to do, the instincts, all of those things, I think, need a serious recalibration.
Karan Thapar: One more question. Beyond the government’s economic thinking, does the government’s political stance, I’m not just talking about the weaponization of the state that you’ve already mentioned, I’m talking about the illiberalism in the way we function as a country, the majoritarianism, the authoritarianism, maybe even the Hindutva stance, is all of that contributing to the slowing down and the problem?
Arvind Subramanian: You know, Karan, I think that we know from all the evidence around the world, that, it’s not that authoritarian and illiberal governments cannot generate growth. You know, we’ve seen that famously in China. We’ve seen that in South Korea, Vietnam, etc.
So, I think in principle, you can do that. But I think in practice in India, it’s going to be quite difficult to do that. Not least because I think we have a federal democracy that needs kind of inclusive modes of governance, even in order to do the reforms that we need to do.
Let me give you a couple of examples, just random examples, you know, for example, let’s say the looming problem of the southern states saying, you know, they’re getting a bad deal on the fiscal transfers, say, I’m not saying they’re right or wrong, whatever, they have a case. But in order to be able to address that, take GST, for example, in order to be able to address that, or take the improving agricultural productivity, the kind of reforms that the government tried to do, all of these things require participatory, inclusive decision making and governance. And that’s how India has always been famously; India did most of its reforms under coalition governments, right? I mean, we know that in the past.
So I think that aspect of inclusive governance and decision making is critical to get even the economy going to enact the reforms in India. And that’s something that I think is where the kind of the politics and the economics kind of one area in which they come together. And, you know, where the non-inclusiveness, the authoritarianism, centralisation in the political sphere also spills over into the economic sphere.
Karan Thapar: So the liberalism, majoritarianism, authoritarianism that I mentioned in my first question may not be the core of the problem, but it’s adding to the problem without doubt.
Arvind Subramanian: Yeah. And of course, the kind of the other observation I would have is that, you know, we just spoke about how, you know, the three reasons why, for example, you know, we spoke about those relate to the government’s DNA, but they are just another manifestation of what we’ve seen in the political sphere as well.
So in a sense, they’re kind of umbilically linked. I don’t know what is cause and what is effect, but they’re kind of manifestations of the deeper DNA as it were. So that’s why causation is more difficult to kind of pin down.
But I think the two kind of go hand in hand, which means that you’re going to have difficulties and challenges in the economic sphere as well.
Karan Thapar: One last question, and everything we’ve discussed in this interview, in a sense, leads up to that last question. McKinsey has raised the possibility, only the possibility, that India may become old before it becomes rich.
Given the way we are moving, given the nature of the problem you’ve so eloquently described, and the huge challenge in tackling that problem, is it a real danger that we could become old before we become rich?
Arvind Subramanian: I don’t want to outdo McKinsey on pessimism. But I think that statement is, if anything, far too optimistic. Remember, the question you asked about becoming Viksit Bharat and developed economy, we are at $2,500, right? I would say, even to become a middle income country, not just a rich country, even to become a middle income country, the window of opportunity is quite narrow.
So it’s possible that, you know, we become too old, even before we become a middle income country, forget about a rich country.
Karan Thapar: Good grief, that is extremely depressing. Are you also suggesting that we could get caught in what’s called the middle income trap whenever we achieve middle income status?
Arvind Subramanian: No, Karan, I know, you’ve had lots of people come on your show to talk about the middle income trap.
As a general rule, I don’t believe in the middle income trap. You know, there’s a lot of research saying that, but I don’t want to get into that. All I’m saying is that our window of opportunity, even to go from $2,500 to $5,000 is very narrow.
The middle income trap is whether we remain at $5,000, et cetera. I’m saying don’t even talk about that. The window to go from $2,500 to $5,000 is also quite narrow.
And that’s why I want to focus on that. And saying we get too old before we get rich, I mean, I think the benchmarks are far too in the distance and therefore kind of a little bit implausible. I mean, it’s a much more challenging task because we need to get first from $2,500 to $5,000.
That means if the window is narrow because our demography is changing, quite rightly, as people have observed, the southern India, for example, is already well into the demographic transition. So our window of opportunity there is quite narrow. And what I’m saying is that it’s narrow for us to even to get from $2,500 to $5,000 to become a proper middle income country.
Karan Thapar: We end on a very depressing note, Dr Subramanian. It’s not that there’s a danger that India could become old before it becomes rich. The danger could be that India could become old before it becomes a credible middle income country.
In other words, we could become old before we get to a per capita income level of just $5,000 per person. And the other big message that you sent out, and you sent it out repeatedly, forcefully, and eloquently, is the government needs to change its DNA. It needs to change its instinct, not just to become a Viksit Bharat developed country by 2047, but even to tackle the structural problem of slowing growth, which is where we began this interview.
In other words, as you agreed with me, the government’s handling of the economy is the problem that needs to change. I thank you for that message which you’ve delivered so eloquently. I think it will be extremely depressing for many as they prepare themselves for the budget because most people have convinced themselves that we’re on the high road to good fortune.
You’ve clearly shown that’s not the case. Thank you very much indeed. Take care. Stay safe.
Arvind Subramanian: Thanks, Karan.
