Arvind Subramanian Predicts Universal Basic Income Will Figure In Poll Manifestos
The full interview with former CEA Arvind Subramanian on his book Of Counsel.
Arvind Subramanian has a prediction: the universal basic income will become a reality in India soon.
The former chief economic adviser said in an interaction with BloombergQuint that the concept will soon figure in the manifesto of every political party. “What makes it such a tantalising and exciting prospect is that the central government doesn’t have to do it on its own.”
He said that state governments can ask the centre to finance only a part of it and say that they don’t want “new money from them”. Recounting his interactions with officials, he said that the idea was well received by some “thoughtful chief ministers”.
A chief minister who finds mention in his new book, 'Of Counsel: The Challenges of the Modi-Jaitley Economy', found the concept promising and said he’d do away with other social welfare schemes such as PDS (public distribution systems) once it’s introduced, Subramanian said. “If that dynamic takes hold… (it) can get translated into actual action over the next five years.”
Advice To Successor
Subramanian—who is being succeeded by Krishnamurthy Subramanian, an associate professor at Indian School of Business and a banking expert—said that he would urge his successor to communicate more rather than “just sit in North Block”.
He said he tried his best to engage with the public and the media. “I felt that when I can, in whatever I do, I’ll communicate and raise the level of debate on economics in public discourse. Whatever I did, I would meet the press, do presentations.” This, he said, was integral to the job.
On communicating with the government, however, Subramanian had a different view. “If you give 100 pieces of advice and if you have a 20-30 percent success rate, you will be doing great in the business,” he said. “Else, you're unaware of political realities.”
On Demonetisation And Its Effect On Economy
Subramanian said that the minimal effect demonetisation—in which over 86 percent of India’s currency was extinguished in November 2016—had on the nation’s GDP was a pointer to its resilience. “I was speaking to Paul Krugman (the American economist) around that time, who said that this should have resulted in a recession.”
The former chief economic adviser, who has devoted an entire chapter to this exercise in his book, said that the informal economy, which employs a vast majority of the Indian workforce, needs to be studied in detail.
On Goods And Services Tax
He admitted that the new indirect tax regime was one of his concerns. “GST (Goods and Services Tax) wasn't a failure, but (it) could have been more along the lines that I had recommended,” he said. “Some challenges could have been assessed.”
Concerns On New GDP Series
The new series for the GDP data that has been created raises a lot of questions and demands an explanation and rationalisation, Subramanian said. "If you look at other indicators in older period and during this period, you see a big differential and yet the growth numbers are the same."
He said that it’s a very technical subject that we should only have technical experts speaking on it to convince everyone that the nation produces reliable numbers.
Hits And Misses
Hits
- Advice on policy issues and GST.
- Building a core team of 20-25 people.
- Providing macro-economic advice daily.
- Doing an online course on Indian economy.
Misses
- Agriculture sector is still work in progress.
Watch the full interaction with Arvind Subramanian here:
Here are edited excepts from the conversation:
Where does the economy stand today?
When I wrote the first economic survey, I said that the economy was in a sweet spot because there was a combination of the political mandate and soft oil prices. This gave a window of opportunity.However, I cautioned against unreasonable expectations because I said that generally, in a country like India, there are several veto points, check and balances, not just across institutions, but also vertically between the Centre and the states. I used a phrase which Martin Wolf repeated—what we should expect is a creative imaginative incrementalism not a bold incrementalism.
Looking back, I think that the early moderation of expectations that I did was perhaps important because India is such a complicated country and things are so difficult to push through.
I think that movement of oil prices gave us cushion on the fiscal side. In the first four years, we said that macro is under control, micro reforms and structural reforms are needed and just when I was leaving, it got inverted a little bit where the macro came under pressure because of rising oil prices and interest rate hikes by the U.S. Federal Reserve. It is fair to say we had two-to-three months of genuine anxiety about our macro vulnerability. Most emerging market countries were experiencing the same and India was also not spared. There were also India-specific concerns.
Luckily, we have gotten over that. Inflation has come down and macro seems to be a little less vulnerable than that time. Again, at present, the focus is shifting back to growth where we have seen a slowdown. My own view is that I think we have to brace ourselves for a slowdown in some time and I say that for a combination of reasons:
The financial condition is under stress and are very tight. This is not conducive to rapid growth because we need financing.
Agricultural sector remains under stress which is something that I did work on with my team for about three-to-four years.
The international environment is getting much softer. There is a global growth slowdown. The yield curve has inverted so we think that there could be a further slowdown. While the vulnerability of oil may be in check, our growth and exports will also be soft.
We should also be honest in acknowledging that we have political calendars and few things are easy to do at some moments of the calendar.
Therefore, it is ambitious to expect huge reforms that will perk up the economy at this stage of the cycle. We should brace for slow growth with the combination of the above factors. Further we need to wait and watch to see on how policy actions are taken and how the external environment changes to think about perking up the economy again.
What Does A CEA Do?
What does a chief economic adviser do? In your book you say there is no clear job description. You also say “there is no real obligation on anyone, anywhere in government, to consult the CEA on any policy issue”.
I hope for all the criticism that I should get, being unemployed is not a criticism.
Apart from writing a survey and providing some inputs to the budget process, the CEA is not someone who is entitled to be consulted on matters and in some ways I think that’s how it should be. CEAs should prove themselves to be worthy of consultation and they must earn that right to be consulted.
A lot depends upon what the CEA does, what kind of team he builds, what kind of relationship he forges, and how he acquires credibility and legitimacy in the system.
The role also varies depending on the government in power, the structure of decision -making and more. These all gave me freedom to make my own way to the system. I found it an absolute joy and delight to have the freedom to do the things that I wanted to do.
How effective were you in influencing government policy? Your key successes and key failures?
Someone I respect a lot asked me this morning on why didn’t I write about what I did and my successes. What I really recall is the great honor in offering advice on the policy issues, being involved in the GST and the GST journey, building a team, the economic surveys and providing macroeconomic policy inputs daily to both the Finance Minister and the Prime Minister.
Besides, I did an online course during the period on the Indian economy, which was a great experience.
On failures, the agricultural sector remains a work in progress. I also think that to some extent the GST, which was not a failure, could have been more along the lines of what I had initially recommended. Maybe some of the challenges may have been diminished because of that.
The fact is that if you give hundred pieces of advice, you are doing very well if you have a success rate of about 20-30 percent. One should also have the humility to recognise that as a realistic expectation. To think that 70-80 percent of your expectations will get heeded is simply fooling oneself and being unaware of the political realities of decision making in government.
I felt when I came here - that whatever I do, I will communicate it and try and raise the level of public debate on economics in India. I probably didn’t succeed but every piece of work that I did, I would meet the press, explain things and have presentations on the surveys.
What Pratap (Bhanu) Mehta calls the “need for public reason” in democratic politics especially for policy decisions - and to work towards that, and to try and build that.
I would also urge my successor to do the same and not to be just an arrow sitting in the North block and talking to few people. It’s much bigger than that.
Your Silence On Demonetisation
I wasn’t going to discuss demonetisation. But in your book you’ve included a chapter —Speaking Truth To Power. So I’m asking you to do the same. Why have you stuck to asking questions on the impact of demonetisation and not offered any conclusion?
In 2016, Raghuram Rajan and I wrote a paper on foreign capital flows, and we were on the flight back with Kenneth Rogoff, who had been a CEA to the International Monetary Fund. I remember then Rogoff telling Rajan that being a former CEA of IMF is much better than being a CEA of IMF because you can say whatever you want.
I found this to be so untrue. I think that if you are a CEA, you never become a former CEA. There are some responsibilities and maintenance of trust that comes with being a CEA. A former CEA is more CEA than former.
Here’s an excerpt from your book— “A CEA must be fully supportive of the government without spinning on its behalf. He must combine fidelity to the government and fealty to the larger good. In short, he must try to be both Karan and Arjun.” You’re being none right now.
In the book you criticise analysts and commentators for not speaking the truth. You’ve also commented on how critical views by government officials are in public interest.
I think in terms of being Karan and Arjun, I think that the opportunity my team and I got to do was in the economic survey. In the survey, I hadn’t spoken about demonetisation. If you want to be both Karan and Arjun, you have to point out both sides of the argument. The survey talks about on short-term costs and long-term benefits. But that one final “waiting to give one reductive number”is something that I was not willing to do and partly because I think that these are decisions taken for whatever reason. What I wanted to do in the book is to say all that is water under the bridge.
On political phenomenon, I do want people to think about why do voters apparently vote against their self interest? Implicitly, I think we all recognise that the huge short-term cost imposed, especially on the informal sector and yet soon after in a very salient way I think people certainly didn’t go against that and if anything they did, they validated that action. (Referring to BJP’s Uttar Pradesh win)
A genuinely important thing is we know that the growth was decelerating, aggravated by the demonetisation and GST. We will never be able to say on how much demonetisation led to the slowdown in growth and how much the GST did.
I think that people should try to put, in orders of magnitude less puzzling and less important, the fact that you cut 86 percent of the cash in circulation, which I call “draconian”, and yet you see the impact measure on GDP was fairly minimal.
When I met American economist Paul Krugman, he said, what any reasonable economist would have said, that there has to be a massive recession in the economy and not just slower growth, which did not happen.
The question is what does it say about the whole phenomenon? Is it (data) completely not capturing informal sector in our GDP, is it that we don’t understand how cash works in the economy? Is it that we have a resilient economy?
I think that I would certainly like to understand these things better.
What Is Modi’s Economic Policy?
Can you demystify this government’s economic policy? Is it just a bunch of dots? Is there something that connects them?
I would respond by saying that somethings you do responding to the pressing challenges you have. The two big achievements were responses to that. I think the GST and the Insolvency and Bankruptcy Code—which was a response to twin balance sheet festering.
These, however, are not part of some overall vision. But I think if there is an overall vision for for this, I would say It is the kind of prime minister’s welfarist vision, which is a different kind of welfarism. We had been living in the old Congress socialist vision prior. The alternative welfarist vision is that the state, especially the Centre is going to use the latest technology component in order to deliver essential private goods and services to people, especially the poor. This is the animating vision of the Prime Minister - providing funds for building toilets, housing, bank accounts, power and medical insurance. This animates a lot of the vision.
It is not a model in practice in which the provision of health, education, especially primary education and health, have necessarily been privileged.
You have called it an “alternative model of social welfarism” in the book. As a financial journalist, I’d like to understand if there was a predetermined architecture, strategy? Or is it just you connecting the dots?
Some of these things become clearer overtime. But I think that there is enough going on here which is part of a pattern that it would be unfair to rule out the possibility that there was something behind this.
The first thing that the government did was the JAN Dhan bank accounts, which I thought was interesting and over time, it happened sequentially. The concept of JAM (Jan Dhan, Aadhaar, Mobile) is really about harnessing technology, where the Prime Minister is very keen on and very comfortable with, however, in the service of something which is really concrete and providing these essential goods and services.
There is some pattern to say that there is an underlying vision.
JAM and other schemes were started by previous governments, even if this one did a better job at execution. Also, when you call this an alternative model of social welfarism, how is it welfarism to not give adequate attention to primary healthcare, and primary education? How is it welfarism to demonetise and hurt the informal sector, that is 40 percent of the economy, just ahead of introducing something as disruptive as GST?
There are two separate parts to this question. The first is the critique on healthcare and education. I think, though I don’t know enough about this whole Ayushman scheme, I think some of that may be addressed there.
But the broader point is that primary basic health services and primary basic health education is something that has not happened in India for 70-75 years. I think there are a lot of historical reasons for it and everyone is someway responsible for this.
There is a huge complication of many of these being a state subjects and therefore the ability of the Centre to drive these things is not negligible but its not the main driver of some of these issues. To some extent, the question on health and education we should ask is not why the central government has not done it, but why over 70-75 years of state governments who have the constitutional mandate to do this haven’t done anything. The deeper question is why doesn’t Indian politics make provision of health and education, a politically salient issue?
The point I am making is the distinction between health and education and other things. With other things, the Centre felt it had levers it could push. So, welfare vision was based on levers it could push and not levers it had less control over. I’m not saying it is justified, but that’s the kind of explanation.
On the GST- How is GST welfarist? It’s a little bit of a question that I’d like to push back on because the short-term costs of GST were hopefully always going to be temporary costs and it would be harnessed for a larger good.
Allow me to rephrase - I’m not criticising GST. I’m talking of the timing. The government intended to implement GST, which worldover has been disruptive in the first few years, and yet to do demonetisation just before that. I’m not able to understand the quick succession of demonetisation and GST marries your view of a welfare state economic policy.
It is a fair question to ask. I do say in the book that GST was partly kind of burdened by demonetisation having preceded it. They both affected the same constituency. Informal sector and so on. That’s a very valid question and, in fact, one of the wistful questions that I asked looking back- what if GST had been implemented without having had the burden of demonetisation. Let’s be honest, on GST, may be design could’ve been better and simpler. That’s a legitimate question that everyone should ask.
If only they listened to everything you said in your (GST) report?
I don’t want to say that. I don’t think you should make GST about why there isn’t one rate. But I think we should force the GST Council or governments to say no more than 3 rates going forward- one mid rate and one each for essentials and luxuries and nothing else. And even the cesses are overly complicated. We should fold all that into one rate and make the design much simpler.
Back to the issue of welfarism - the last point I’d like to make here is on the very little attention paid to agriculture in the last 4-5 years. In the book you identified agriculture as one of the big learnings in the Indian economy for you as well. It’s not very clear. What’s the policy? To be able to deal with the part where half the country lives.
Look, I think in agriculture, the fact that agriculture is where it is is a very fair question. To me, let’s begin with the analytics and I’ll answer the question.
You know, I came here knowing nothing about Indian agriculture. I’ve worked on manufacturing, trade, services, so it was a real learning experience working on agriculture. So in the first two years, in the government, there was a drought. So there was this whole thing of how do we protect the farmers from the downsides. And so we did that. But then what I think became clear to me, at least analytically, was that when we had these 4-6 seasons of good monsoon and production, why did, even in those seasons, prices agriculture go so down that farm incomes were hurt? So, we had this paradoxical situation where we have bad monsoons and the farmers are adversely affected but if you have good monsoons the farmers are still affected.
Excess supply?
Yeah. But the correlation broadly is if you have good monsoon, the prices will come down but not so down that incomes are affected. So we want good monsoon. The question is that did prices come down so much in response to supply?
My own view is that something has changed with the agriculture economy, maybe partly because of demonetisation as well because there’s not enough cash so maybe the cash cycle affects agriculture much more and we need to look into that.
But then we come to the policy response. I think the policy response has been doing the same thing over and over again, you know, back to the MSP (minimum support price) and I’ve been critical of that. It’s also people don’t realise that, even though I am critical of this, the great economist, MS Swaminathan recommended this (MSP). He said that do it and back it up with procurement.
Now the question is that why doesn’t procurement happen well in crops outside cereals. So that’s what I think is the question.
It’s not like the state isn't able to procure. In rice and wheat, we do brilliantly in procuring. But we don’t do it in the others and consistently so. So for me, therefore, there is an underlying political economy here which we need to confront.
I think that we need to confront the fact that pulses farmers, other farmers, just don’t have the same political clout that cereals do. In Punjab, Haryana. And we need to be honest with that. The lecture that I gave, that we have two agricultures. One agriculture that we actually pamper, relatively speaking. And the other that we neglect. I think we need to be honest with that.
And the last two points that I’d like to say is that - one is that I think we have to go to new instruments for this and the new instrument is that we’re not going to raise agricultural productivity so quickly over such a short period of time that we’re going to double farmers’ income. We need to find direct-benefit transfers that could actually cushion farmers income on that and that’s why maybe I’m a little over-positive about the Telangana’s Rythu Bandhu scheme. I think that’s the direction we have to go.
The last point I’d like to say is a fairly important economically political point about agriculture and it applies to the other things as well. Agriculture is under stress, you want to so something right? So the centre wants to do something. So the best response has be to that the centre and the states work together because many of these are state subjects, you know, irrigation is a state subject. But then you see there’s an interesting political economy here: If you cooperate, then you don’t get the whole credit for cooperation. So the Centre then relies on instruments that it controls and saliently shows that it has done that. So I think it’s a much deeper problem of the politics of reforms, especially when we have certain types of democratic processes and certain kinds of leaders.
How do you have politically incentive compatible reforms? You do the reform but you want all the credit for the reform.
In the GST what happened was that there was a sense that this was a shared exercise and there’s also been bipartisan consensus over the years and so on and Mr Jaitley did a terrific job by bringing everyone on board, forging the consensus. But I think it’s a much deeper problem that if cooperative federalism is the way forward, how do you make it politically incentivising because you want to do it but you want all the credit for it and that is difficult and if you want all the credit you have rely on the instruments that only you control and that’s the second- or the fourth-best instrument.
Data Integrity In India
We’re a data starved country. But for GDP we have four series. We have one new current series and three versions of the old series. Which one do you believe? There was a National Statistical Commission old series that was rejected. The old series that the Central Statistics Office put up? An Indian Express article said it was apparently rejected by the government because it showed UPA growth rate higher than it was even earlier. Now NITI Aayog has put up an old series which apparently is the relevant series. Which data set do you believe?
I just don’t know enough about methodology to say.
I will say something important and strong though. As an economist, this new series that’s been created, I have to be frank and say- it raises a lot of questions.
You see other indicators in that period and this period, you see big differential and growth numbers are the same. It demands explanation and rationalisation. I cannot provide that as I don’t know enough.
This is a very technical subject and we should only have technical experts opining. It has become a matter not only of credibility of series but also data generating process and institutions in India. To convince ourselves and world—we are a nation that produces reliable numbers, this matter should be handed to experts and have expert technical view and not associate with any institutions that have no tech expertise in this issue.
But they all claim they’re technical. As does the NITI Aayog.
That’s an excessive claim.
About the fiscal deficit then because there’s an interesting comment in your book on process integrity regarding fiscal deficit. We’ve been confused about LIC bailing out IDBI Bank and then ONGC buying HPCL and more recently PFC buying REC and all such incestuous activities in the PSU space. Should we believe the fiscal deficit number at all?
I think it’s a great question. I think that this is the case where the numbers should not just be right, but also should be seen to be right.
With the deficit, all governments have flexibility on this because, you know, you have so much deficit but if you finance it by the NSSF, it shows up in the debt but not the deficit, very complicated, and I think, very opaque and non-transparent.
I have a slightly stronger view that we should become less obsessed with numbers on deficit targets. Because, you know, like in education, you do things according to the test scores, then all your teaching is put to the test rather than providing the real education. So I think all governments do have to calibrate their policies and maybe a little bit of the accounting to meet the target.
We should have something like an independent fiscal council that many countries do, as the FRBM committee recommends, and it was one of the recommendations that I was fully in support of. I think we should have that. We do have the CAG but it comes much later. I think we need to know in real time the growth numbers, forecasting. That’s what they do in U.K., the CBO does it in the U.S. So let’s have that and become a little less obsessed with these targets because at the end of the day we have to be sure that something meaningful has been done and that’s not always easy to infer from the outcome.
You started the fire with RBI. It was your economic survey that said RBI has excess capital and the capital should be transferred. In the survey and the book you’ve put in caveats—It has to be in consensus with RBI and only for bank recapitalisation. And it should be done concomitant to governance reforms in public-sector banks. This issue has become a flash point between government and the RBI and is undermining the autonomy of an institution otherwise considered independent.
Where do you stand on this issue?
There are two issues: excess capital and prompt corrective action issues, and; broader bigger institutional issues.
Technically I believe that there are excess reserves. I published a paper in EPW. I don't want that technical thing to be anyway misconstrued or misappropriated. In terms of policy, those excess reserves should only be used for recapitalising banks and only if there are concomitant reforms from public-sector banks so that this money is well spent.
The money should categorically not be used for deficit financing or expenditure financing ahead of election. It should be cooperatively done and not unilaterally.
In Truth To Power (chapter), I’ve pointed that I’ve spoken up often against RBI. The RBI is one of India's most respected and credible institutions. This independence should be maintained. Any action or perception that it is being politicised is a line too far and it should not be crossed.
That said, There’s a lot of scope for proper cooperation, consultation, transparency. In the book, RBI has shown at least huge neglect if not failure ( in detecting the NPA problem). No one is blameless or perfect.
But I think the RBI’s independence, autonomy is sacrosanct. But, independence doesn’t mean it comes without responsibilities.
Isn’t it a bit of fudging to suggest the RBI should use excess capital only to capitalise banks and not for deficit financing. But if it frees up the government from the responsibility of having to capitalise the banks that it owns, it can then use the money for other expenditure. So that it is deficit financing one way or the other no matter how you account for it...
There is a bit of fudging but I think fudging is not fully perfect and I think in this perception it matters a lot. If people have the sense of the purpose of a dollar is used, it’s important to maintain some sanctity there and even though a little bit of fudging may be true. However, certain politically and optically, the principle is that this is something that is a balance sheet item, that you use it to finance current operations and sort of violates principles that I think we should not cross.
But when you are a dominant shareholder of banks, and you have chosen not to exit that position consciously, the responsibility to capitalise is yours. Today, if the RBI did it as a one-off for banks, tomorrow there would be a variety of different crises in financial institutions or financial systems that would prompt the government to ask for the same. I wonder if it sets the right precedent?
Since it can set a precedent it should be very tightly controlled. It’s a fair point. But you have to look at the public-sector balance sheet as a whole and say that “I will do it and and I want to find the money where it has the least return.” I think that the government is entitled to do that but not in an irresponsible and undisciplined fashion.
Universal Basic Income Scheme Coming?
Many people thought the government wants the RBI capital because it’s not going to meet its fiscal deficit target this year. The government said that they are on track and will meet it. Is the government looking for additional money to do a universal basic income scheme ahead of the 2019 elections?
Here’s the prediction I am making. Every major party’s manifesto will have some kind of universal basic income in it. I think and I hope it will happen.
Why I think I see future for UBI in India, which has still not happened is first I have spoken to a very thoughtful chief minister who really liked the idea. A chief minister, I mentioned in my book said, “I have Public Distribution System (PDS) and all other social welfares which doesn’t work and I think UBI is promising.”
Second thing is that - when I was in government, Haseeb Drabu was seriously thinking about this.
What makes it such a tantralising and exciting prospect in India is that the central government doesn’t have to do it on its own. The state governments can ask the Centre to finance only a part of it and say that they don’t want “new money from them”. If that dynamic takes hold, I think that the items in the manifesto can get translated into actual action over the next five years.