Chief Economic Adviser, Arvind Subramanian addressing a press conference after laying of the Economic Survey 2016-17 in Parliament, in New Delhi on January 31, 2017. (Photograph: PIB)

Outgoing Chief Economic Adviser Arvind Subramanian Pitches To Put RBI’s Capital To Better Use

From a revenue-neutral rate for the goods and services tax to a universal basic income—Arvind Subramanian has put a number of ideas on the table during his four year tenure as the country’s chief economic adviser. Some of these found their way into policy making; others didn’t. Among the latter was the idea to use a part of the RBI’s capital for other purposes such as recapitalisation of banks.

Days before he steps down, Subramanian says the idea makes even more sense today than it did when he first proposed it in his Economic Survey of 2016. “(I stand by that idea) even more so than I did earlier,” Subramanian told BloombergQuint in an interview.

If you see how bold and courageous central banks have been in the post global financial crisis era, that’s certainly something I stand by. I still think that’s a very viable plausible ingredient to resolve the twin balance sheet problem. I think that has to be one important component of it.
Arvind Subramanian

Subramanian, however, added that this can’t be foisted on the central bank and must be done with “conviction on both sides”.

In the Economic Survey of 2016-17, he had highlighted that the RBI holds excess capital when compared to other global central banks and argued that it would be more productive to deploy the capital elsewhere. Former RBI Governor Raghuram Rajan had opposed the idea and argued that if the RBI were to reduce its assets, its ability to absorb government borrowings by buying bonds would stand reduced.

Subramanian also pitched for a wider blueprint to reform the banking sector, which he said must also include a re-look at regulation.

I used to speak about the 4Rs but I think there should be 5Rs—recognition, resolution, recapitalisation, reform and regulation. Remember that all that has happened in the last few months shows that we also have challenges on private sector banks. So nobody can say that majority private sector participation is the panacea.
Arvind Subramanian

Subramanian highlighted that across the world, even privately owned banks have found themselves embroiled in crises and controversies. Privatisation, while part of the reform agenda, is not the full solution, argued Subramanian, adding that regulatory reforms should also be part of the blueprint.

“There have been a number of ideas. The RBI board is considering some of these but there needs to be a comprehensive blueprint of reform.”

The reforms would be essentially in addressing the twin-balancesheet problem which has plagued the Indian economy for the last few years and subdued investment.

Subramanian, in his most recent economic survey, had highlighted that India is in the midst of one of the steepest savings and investment slowdown the economy has seen. The survey had called for urgent policy attention towards reversing that slowdown.

There has been some pick-up in private investment in recent months, said Subramanian but added that a more complete revival depends on resolution of the twin-balancesheet problem.

The Indian economy is seen growing at close to 7.4 percent this year. While low capacity utilisation has kept fresh private investments at bay, recent comments from the RBI suggests that slack in the economy has reduced. GDP data, too, has shown a pick up in fixed capital formation, although most economists believe this is driven by government investment.

Need To Help Indian Farmers

The outgoing chief economic adviser said one other aspect of the Indian economy that needs attention is the agricultural sector. “I am convinced that we need to find the best ways to help farmers increase their incomes and reduce their vulnerabilities to shocks,” Subramanian said.

Signs of farm sector distress have emerged from various parts of the country, despite two years of good monsoons. Economists have blamed this on subdued prices of farm products and weak wage growth in the rural economy. “We have to find ways to decouple pricing from income,” Subramanian said.

Direct forms of support for farmers should not be ruled out, he added while pointing to a program undertaken in Telangana.

Through the Rythu Bandhu scheme, the Telangana government has promised to give all farmers, who own land, a cash support of Rs 4,000 per acre for both the kharif and the rabi crops. A highly adapted version of what telanga is trying to do could be considered, said Subramanian,

He added that agriculture is an area where reform must be initiated collectively by the center and states.

We should think of cooperative federalism as a sort of technology for reform and agriculture is a good place to start. We can think about direct benefit transfers, a quasi-universal basic income where the center and states both contribute...but we have to help farmers directly much more than we have in the past.
Arvind Subramanian

Watch CEA Arvind Subramanian in conversation with BloombergQuint’s Ira Dugal: