Waiving agricultural loans could cost 2% of GDP CEA

Chief Economic Advisor Arvind Subramanian

Chief Economic Advisor Arvind Subramanian has expressed concern over the recent waiving of farmers’ loans by state governments in India, saying it could increase the deficit by 2 per cent of the GDP if the practice is carried out nationwide.

“We’ve had a spate of announcements recently about agricultural loans being waived off. You know these could cost, if it were to spread, these could cost something like 2 per cent of GDP, adding to the deficit,” Subramanian told an audience here last week.

“If these things spreads as is possible. So I think that’s a kind of big challenge,” he said in an apparent disagreement of the recent move by Uttar Pradesh Chief Minister Yogi Adityanath to waive agricultural loans worth Rs. 36,000 crore in the State.

In an interactive session at the prestigious Peterson Institute here last week on the sidelines of the annual Spring meeting of the International Monetary Fund and the World Bank, Subramanian said actions like this pose a big challenge to the Centre’s effort towards fiscal consolidation.

If the Centre achieves success, the state undoes that, he rued.

The government is grappling with the challenge of how to waive the debt of the private sector, which is a political issue now, he said.

“There are lots of discussions on how to deal with this. But I think at the heart of the difficulty is it’s very simple. How does a political system in which concerns about you know cronyism, crony capitalism are so strong? How does that system, how is it able to forgive — is the public sector tax payer on the hook and forgive private sector debts.

“I think that’s the heart of the political problem and we are still kind of grappling with how to do that,” Subramanian said.

GST benefits

Talking about the Centre’s ambitious Goods and Services Tax (GST), he said it is a major development in India.

“It’s the most ambitious tax reform. It is something that is simply inconceivable in the United States. It’s just simply inconceivable, not just because it’s a value added tax which you know people here on the left and right hate, but also because it’s actually a tax that has to be coordinated between the Centre and the States,” he asserted.

Noting that the GST will bring a uniform taxation system across the country, Subramanian said the benefits are going to be quite substantial.

“First, creating a common market in India by eliminating barriers between states. Also, the big benefit is kind of the compliance benefits that I envisage will happen,” he said.

Responding to a question, Subramanian said the GST is going to be revenue neutral and it is unlikely to increase the prices of commodities.

India better cushioned against US Fed rate hike

He also talked about the increase in the US Federal reserve rates and said India is unlikely to be effected much by it.

“I worry less this time around for at least for India,” he added.

“India was affected last time because then oil prices were very high, inflation was double digit, fiscal deficit was getting out of control and reserves were low. I also worry less about India is because our corporate sector then had a lot of foreign currency denominated borrowing this time around it’s kind of much less. So interest rates go up, capital flows or exchange rates come down and you have these balance sheet effects,” he said.

“I think India is relatively a better cushioned against [a hike]. But as far as other emerging markets concerned I just follow what the IMF says and they’re always saying you know lots of foreign currency in other markets. India I think is relatively well cushioned on that,” he added.

Make in India

Responding to a question on Prime Minister Narendra Modi’s ‘Make in India’ scheme, Subramanian said it is an attempt to make up for missing the bus in the manufacturing sector decades ago, in which China has now taken the lead.

”…we missed the manufacturing work long ago. But what we need to do on services is to make sure that we don’t reach the Lewis turning point in services for another 25-30 years. China’s Lewis turning point came after about 25-30 years of manufacturing. Can we do the same thing in services and that means you know just increasing the supply of you know medium skilled labour, the IT sector, across the board I think that’s what we need to do,” the CEA said.