India’s Slowdown Bottomed Out; Economy Needs To Be Opened Up For 10% Growth: Arvind Panagariya
India's slowdown has bottomed out and now its economy needs to be opened up if the country wants to realise the ambition of a 10 percent growth rate, former National Institute of Transforming India Aayog Vice-Chairman Arvind Panagariya has said.
In his keynote address at a discussion on India's Union Budget 2020, he said in the next fiscal year, India's gross domestic product growth is expected to be 6 percent and then it will get back to 7-8 percent which has been the case in the last 15-16 year period.
"On the slowdown, my own assessment is that we have bottomed out," Panagariya, a Professor of Economics at Columbia University, said at the discussion organised by India's Consulate General in New York in partnership with the U.S.-India Strategic Partnership Forum on Tuesday.
"In the second half of the current fiscal year, which would be ending on March 31, we should see some bit of recovery, not a big one but certainly the second half (of the fiscal year) should look better than the first half," he said. Panagariya noted that since about 2003, India has been growing at an average rate of about 7 percent and the first five years of the Modi government was characterised by 7.5 percent growth on an average.
Emphasizing that the Indian economy "can do a lot better no doubt", he said that in his assessment, the main factor which led to the slowdown has to do with the financial markets and that translated into a weakening of the balance sheets of both the banks as well as the corporates.
"I think you could criticise the government here for being a little slow in beginning the process of cleaning up of the bank Non-Performing Assets. The problem was known actually by 2013" but this particular problem of NPAs never gets solved very quickly," he said. Sounding an optimistic note, he said as the clean up happens, "we should see the growth returning".
On the Budget, Panagariya welcomed positive steps taken by the government including on fiscal consolidation, fiscal deficit, corporate tax reduction, initiation of simplification for the personal income taxation as well as privatisation. Pointing to a "negative" in the Budget, Panagariya said that one of the things that has been going on for the last 2-3 years is that India is turning more and more towards import substitution.
"Trade economists use a more aggressive term - protectionism. And I've been saying that this is something that should not only be stopped but has to be reversed. "Unfortunately, this budget goes very far in the direction of raising duties and particularly disconcerting is the fact that a lot of the items on which the duties have been raised and that too quite a bit are all labour intensive products," he said.
These are the products in which India ought to be exporting and "we should not be afraid of foreign competition. We should take on the foreign competition head on in the global markets. If we are not doing that, something is very wrong," he said.
Panagariya said that if a country with a 500 million-people strong labour force cannot compete in the labor-intensive products, it points to the fact that something is fundamentally wrong with the way some of the degradation in the system is. "So one has to go to the root cause what is causing it and remove those obstacles, hurdles and not try to give them some advantage by putting in tariffs. That only is encouraging inefficiency and small plants," he said.
He also pointed out that one of India's big problems is that there is too much preoccupation with small and micro and small enterprises. "What India lacks big time, especially in these labor-intensive sectors, are medium and large firms. But when you start raising these protections, you are only encouraging micro and small, you are not encouraging medium and large firms which ultimately are the most efficient firms, compete in the global marketplace and define the ecosystem in the domestic market.
"And this is where I unhappily come to the conclusion that unless we reverse that, the ambition of 10 percent growth or double-digit growth which can be realised for India, I think will not get realised," he said. Panagariya said that India can still achieve the 8 percent or so growth rate because of the other measures and reforms that are being undertaken.
"So we will get to 8 percent but I think if we want to get to that extra 2 percent to 10 percent, then we need an economy which is open, competes in the global marketplace," he said. Panagariya noted that he does not agree with the "noise" and "common perception" that the second term of the Modi government is ignoring the economy and is only focusing on social issues such as the abrogation of Article 370 and the Citizenship Amendment Act. "This is not true," he said, adding that reforms have continued.
He highlighted the "major reforms" undertaken by the Modi government including the Insolvency and Bankruptcy Code, the Goods and Service Tax, Direct Benefit Transfer and the corporate profit tax.