Interview

"We ought to be a bit more careful in attributing everything to the economy"

Edited excerpts from conversations with the chief economic advisor, Krishnamurthy Subramanian, on the state of the economy

Vishal Koul

Given the current economic scenario, is the ‘$5 trillion by 2025’ dream still alive?

We will have to grow near 8% in real GDP terms to achieve this goal. Since World War II, any country that grew over 6% has followed an investment-driven model, including India. In advanced economies, consumption is driving growth because they are at a particular stage of economic evolution. But if you compare countries that were at our stage and then grew, consumption is just a force multiplier, not a sustained driver of growth. For instance, China’s consumption as percentage of GDP has secularly declined since the ’80s. Domestically, if you are not consuming much while investing more, you have to save more. In such a case, exports become a critical driver of growth. So, in the Indian context, we argued that an economy is either in a virtuous cycle when they’re doing well, or in a vicious cycle like we saw during the financial crisis. The virtuous cycle starts from investment, and investment enhances productivity, and that’s what leads to export. So, economic growth has to come from investments.

Where will the Rs.20 trillion investment in infra come from when the government and the corporate sector balance sheets are constrained?

I think it’s important to understand why the investment slowdown happened, and what will change that. Around 2008, the investment to GDP ratio was at 38%, which has clearly gone down. History will mention 2009-2014 as a period of poor governance when we went berserk in terms of lending even as some decisions did not make commercial sense. India Inc built up a lot of capacity and ramped up leverage, impairing balance sheets of corporates and impacting the books of banks as well. Cleaning up the mess that got accumulated over a six-year period cannot happen in a jiffy. Now, through the bankruptcy code, asset quality review and capital infusion, the system is being cleaned up. But the absence of strong balance sheets has impacted corporates’ ability to invest.

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