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Prime Minister Modi on Saturday warned that the West Asia war could undo the gains achieved in poverty alleviation over the past few decades.
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00:00The big question now is what will impact is this having on the economy?
00:04Will, as the Prime Minister says, the energy crisis lead to mass poverty, as he fears?
00:10Will inequalities deepen in India?
00:12What should the Modi government be doing to cushion global shocks?
00:16Does it have any real options left?
00:18And has the reform process failed at the moment?
00:23So plenty of questions to raise.
00:26Joining me now are two very special guests.
00:28I'm joined by Dr. Surjit Bhalla, who till not long ago was India's Executive Director at the International Monetary Fund.
00:36And I'm also joined by Pranap Sen, who was till recently the Chairman of the National Statistical Commission,
00:42has also been Principal Economic Advisor at the Planning Commission.
00:46Good to have two fine minds joining us.
00:49Let's turn, Surjit Bhalla, to exactly what the Prime Minister said,
00:54which has created some kind of ripples first.
00:56Because the Prime Minister seemed to suggest that warned of a return to mass poverty, global mass poverty,
01:03if this decade of disasters continued.
01:06Do you believe that's an imaginary fear or a real fear in the current economic situation,
01:11what's happening in West Asia, in Ukraine, the Strait of Hormuz?
01:15Do you see slowdown affecting poverty levels in India and across the world?
01:21I don't, actually.
01:24And the question is, how long will the slowdown last?
01:29Now, in India's case, I think we are well above the extreme poverty level in terms of,
01:36or well below it in terms of the percentage of people that are there.
01:41But what I do think is that, in India's case, something has happened,
01:49and we can discuss that, about our growth process.
01:53Investment is not taking place.
01:56Private investment is not taking place.
02:00And, if you will, FDI has really declined into negative territory.
02:06Now, all of these things, as far as poverty is concerned,
02:11we have a too elaborate system of freebies, of food.
02:18So, I think to allude to, you know, perhaps he's pointing out that maybe we should cut
02:25the food subsidies, something I would fully support.
02:29It doesn't make any sense for 800 million people to get free food in India.
02:37May I just stop you for a moment, Dr. Bhalla?
02:40You were very optimistic about the economy just six months ago.
02:45Suddenly, Surjit Bhalla and I have read your piece suggesting we've reached a new low with
02:48our economy, even as the BJP government is dominant politically, you're saying,
02:54economically, conditions couldn't be worse.
02:56So, something's gone wrong.
02:58What's changed in the last six months for you, Dr. Bhalla, to suddenly be pessimistic?
03:02Well, you know, when facts change, I change my mind.
03:05What do you do, sir?
03:07Now, what has specifically, now to specifically answer your question, what has bothered me
03:12for quite some time is what's happening to investment.
03:18And in particular, foreign direct investment.
03:22We've got strange rules, which no other country has, in terms of FDI.
03:29So, the investment climate in India has really gone negative.
03:34And that is well known.
03:36So, I think that is what, and the foreigners are not interested in investing in India.
03:42Indians are not invested in investing in India.
03:46So, what's going on?
03:47So, why?
03:48Why?
03:48Answer why?
03:49Why do you think things have gone south?
03:51What has gone wrong?
03:52I think it's the investment climate, stupid, as that person in the U.S. would say.
04:00The investment climate in India is very bad.
04:05And that is what has gone wrong.
04:07On the other side, you've got the political climate.
04:10So, I think what is happening is that the government is in a great comfort zone, because it's winning
04:18all the elections.
04:19So, it doesn't see any urgency or need to do reforms, especially on the growth side.
04:28And, you know, sometime, six months ago or so, I gave a talk, a keynote speech, as to why we
04:37are
04:38the Viksit Bhadat slogan should now be changed, just like I think the slogan that we are the
04:46fastest growing economy, major economy in the world, should be changed.
04:51We are not.
04:51So, let's get our facts right.
04:53And then, so, to conclude, I will say poverty is the least of our problems.
05:00Our problem is growth.
05:02Okay.
05:03If growth continues this way, then poverty will also become our problem.
05:08Okay.
05:09So, you're saying the real problem is not poverty, it's growth.
05:11Pranam Sen, there would be those who will argue exactly the opposite of what Dr. Bhalla is saying,
05:16that in the economic condition that we are in at the moment, inequalities can only grow.
05:24livelihoods will be affected, jobs will be affected, and if growth slows down, that only
05:31gets further accentuated.
05:33Do you believe that this fear that the Prime Minister has expressed of mass poverty increasing
05:37if this decade of disasters continues is real, and inequalities in particular in a country
05:42like India will only grow further?
05:44So, you're absolutely right.
05:48I mean, I think that there is a terminological issue out here.
05:54Sourjit is interpreting the term poverty as being absolute poverty, which are people below the poverty line.
06:02I think what the Prime Minister was trying to say is that the lower-income groups in India are going
06:09to suffer.
06:11And when I say lower-income groups, I'm talking about, let's say, the lowest 70% to 80%.
06:17And they are low-income.
06:19They might not be in absolute poverty as defined by the World Bank, but nevertheless, they are not well-off
06:27by any measure.
06:29So, I don't think the Prime Minister is wrong.
06:32It is the way we are interpreting his words.
06:35And the reason for that, presumably, is high food prices, high energy prices, all of which are coming together
06:42to create, dare one say, the perfect storm that we will have to face in the months ahead.
06:48Well, food in and of itself, we don't have to have high food prices.
06:53Food-wise, we are pretty much self-sufficient.
06:56But the point that Sourjit was making is valid, which is that the inequality in the country is increasing
07:06and is continuing to increase.
07:08The growth momentum is slowing down.
07:12Investments are not happening.
07:14And just to add to what he said, so we had a period post-COVID when the investments by the
07:25small and medium enterprises
07:27had collapsed.
07:30They started to come back from 23 onwards.
07:34And they started, and that was most of the investment growth we saw in India was there.
07:40Now, what's going to happen with this particular crisis is that precisely the MSME sector is going to get hammered.
07:49They are going to be hammered simply because their ability to face these kinds of pressures.
07:57And it's not just the price pressure.
08:00It is really the fact that their ability to pass on cost increases is severely restricted.
08:09And so, the problem is going to be in the MSME side, which is going to affect employment in the
08:17country.
08:18And if employment is affected, although you will have no dramatic increases in absolute poverty,
08:24but what you will see is that the lower tiers of our society are facing economic distress.
08:29So, both of you have set the problems out very, very clearly, very starkly.
08:35So, Surjit Bhalla, how much responsibility does the Modi government take?
08:39As you say, they are politically dominant.
08:41They've been in power 12 years.
08:43They've won majority of elections.
08:45Now, suddenly, from Goldilocks moment six months ago, everyone was talking up the economy.
08:50We're talking of a dire situation.
08:52And this is not just the West Asia conflict.
08:54Many of these challenges even predate that.
08:56So, you tell me, what is the Modi government doing wrong, Surjit Bhalla, that they need to get right now?
09:02Okay.
09:03So, I've been saying, at least since we are doing this timing business, for two years now,
09:08about the investment problem, in particular about the foreign direct investment problem.
09:14It is now negative.
09:16In other words, foreign direct investment in India is now negative.
09:22That is to say, more money, investor money, is going out of India than is coming in.
09:30Second, as I've also pointed out, is that what has happened over the last 10 years,
09:37we have substituted government investment, that is public infrastructure investment, for private investment.
09:47So, our total investment to GDP ratio has stayed almost exactly the same as 32%.
09:54So, while we all welcome the need for government investment, that is to say, infrastructure,
10:02we also know that private investment and foreign direct investment is a lot more productive for the economy than government
10:12investment.
10:13That is a well-known fact.
10:15So, therefore, our growth drivers have been reduced, and I'm offering the explanation that the reason the government hasn't seemed
10:27to be too worried until now is,
10:30and maybe I hope they do get worried, but they are winning elections, and therefore, they don't see a need,
10:40a pressing need to do economic reforms.
10:44Now, give me a specific reform that you believe this government has failed to do,
10:50which has brought us to this past, for you to say today that you are very, very worried.
10:55Yeah.
10:56So, this specifically, I can name one, and then we can go on to the others,
11:03is that in 2015, we passed what was called the new bilateral investment treaty.
11:11Now, according to that treaty, which came into being in 2015, and we didn't seem to see any effects of
11:20it because long-term investments were still part of the old treaty.
11:25According to the new treaty, and we've talked about this, according to the new treaty that if a foreigner and
11:33a domestic investor wanted to go for a divorce,
11:37the government would not allow it and would say, stay put for five years before you do anything.
11:45So, in other words, no other place on planet Earth is that rule there.
11:52The two partners decide to divorce, and they happen.
11:56The second stipulation in the investment treaty of 2015 was, and mind you, this was unique, this was just India.
12:04No other country has done this, was that after the five years have elapsed, you will go before an Indian
12:13judge in order to get your problems resolved.
12:17So, what happens?
12:18The foreign investment is not taking place.
12:21Right.
12:21The investment climate, which I keep referring to, is bad.
12:26So, domestic investors are going outside, and we are chugging along at 6%.
12:32Mind you, for 31 years, GDP growth in India has averaged 6%.
12:39It didn't go up, hasn't gone down, but we should be increasing our average growth rate rather than maintaining it
12:50at a 6% per capita, 6% aggregate level.
12:53So, I take your point.
12:55I mean, you've given us one example, but really, Dr. Sen, is it just about foreign direct investment and this
13:01restrictive climate, effectively, that Dr. Bhalla speaks about, where ease of doing business is being, in a sense, being hampered
13:09by court orders and this climate of fear that some talk about.
13:15Do you believe that's the problem?
13:17Even domestic investors aren't seemingly investing in India.
13:21So, the problem goes beyond just what is happening with FDI.
13:24Something more fundamental seems to be happening.
13:27Can you tell me what it is and what's the solution?
13:30No, I think, you know, the FDI is a part of the problem.
13:34But the much bigger part of the problem is the slowdown in domestic investment.
13:41And, you know, the fact is that Sadiq talked about, you know, the increase in public investments that has taken
13:49place.
13:49Now, this is textbook economics.
13:52One of the ways to spur private investment in theory is for public investments to happen, which crowds in private
14:02investment.
14:03The government tried that and it had, as Sadiq very rightly said, absolutely zero effect.
14:11And that's absolutely correct.
14:12So, the part of the question is, why are Indians not willing to invest in India?
14:20If Indians are not willing to invest, you can hardly expect foreigners to come rushing in.
14:27So, that's the core question.
14:29No, so why are they not?
14:30Give me the answer to that.
14:31Why are Indians not investing in India?
14:34And as I said, this predates this crisis, this fuel crisis.
14:38No, it predates the fuel crisis, but not by a lot.
14:43But, you know, you have to really separate effects going into this.
14:49Because what we have experienced is that 2016, you get demonetization.
14:57There's a hammering that happens to MSMEs.
15:03Investment gets affected.
15:05We start climbing out of it.
15:07We get COVID, another hammer blow, and so on and so on.
15:12Now, we've had a series of hammer blows.
15:15The question is that has this experience of the last 10 years, the last decade, has it just made the
15:26Indian investor that much more risk averse?
15:32Because as a country, we've had a lot of entrepreneurial spirit.
15:37That seems to be waning.
15:40And, you know, economists don't really have an answer to this.
15:45Why investors do what they do, what motivates them, what demotivates them, is one of the big unanswered questions in
15:54economics.
15:58So, we've had demonetization, we've had GST, we've had COVID.
16:03Now, we've had global conflicts to deal with, one whammy after the other.
16:09MSME is taking the biggest hit.
16:10I know, Surjit, you're sort of crossing your fingers.
16:15But the fact is, I'm just listing out.
16:17Some are self-inflicted.
16:18Some are obviously caused by external factors.
16:20But I ask you in conclusion, therefore, at 12 years of the Modi government, is it time for them to
16:28smell the coffee?
16:29As you say, time to wake up and smell the coffee.
16:32Is that somewhere also the realization in the kind of comments?
16:36Rather than talk of austerity, do you believe austerity and savings and asking people to save is the solution or
16:43incentivizing industry to invest in India?
16:46Look, the reason I was shaking my head is that all the things that you listed, besides demonetization, has affected
16:56every country in the world.
16:58Right.
16:59So, we have to look as to why every other country in the world is not affected.
17:05Just look at your neighbors.
17:07Bangladesh has a much higher growth rate in dollar terms than India does.
17:15So, it's not as if we are the only people.
17:18You know, I've said this so many times on your channel and everywhere else.
17:22The problem with India throughout, and Indians, is we think we are unique.
17:28This is a globalized world.
17:31Everybody is facing these problems.
17:33And mind you, the West Asian crisis, that's, what, three months old?
17:39Yes.
17:40What I'm talking about is a decade old.
17:43So, it's not as if this thing has caused any new problem.
17:48No.
17:49And the same problem is being affected…
17:50But isn't that a failure of the Modi government then?
17:53Is it not time for the Modi government to maybe cause correct?
17:56I mean, until now, everybody said,
17:58I disagree.
18:01It's not time.
18:03It's high time.
18:04Okay.
18:05For the Modi government to cause correct.
18:07And I think this is, you know, crises…
18:10We are in a crisis.
18:12And crises have been known to bring about reforms.
18:15That's my hope.
18:16Economic reforms.
18:18That's my hope.
18:19Whether it gets delivered and…
18:22You know, we thought, for example, the trade deal imbroglio with the U.S.
18:28would also need to reforms.
18:30To some extent, it has.
18:31But again, it's not had the kind of effect that we want on the ground.
18:34Final word from you then, Dr. Sen.
18:36Do you believe it's time, as I say, to wake up and smell the coffee and cause correct?
18:40It's the MSMEs, people at the bottom of the income ladder, smaller companies, informal sector
18:46that have hurt badly for a decade.
18:48This decade of disasters has been a decade of disasters, particularly for the MSMEs.
18:55Yes, it has.
18:56And, you know, there is a very, very well-defined cycle that has been emerging,
19:03which is a crisis hits.
19:05There is a period which can extend from about a year to two years,
19:11in which everything seems to be broken.
19:13Then the system starts rebuilding, and you get another crisis.
19:19And everything that you did for the previous three years goes to the dogs.
19:25Repeated hammer blows of this kind does affect investor sentiment.
19:30And in particular, it affects the MSMEs.
19:32In the middle of this, we've had a period where the banking system
19:38was simply not lending to the MSMEs.
19:41They've just restarted it.
19:44Now, the danger of the West Asia war is that it's come at the point
19:49in which the recovery was beginning.
19:53And with this hammer blow, you're going to see a lot of MSMEs going under.
20:00What's the solution?
20:02The solution is, you know, the government at one point had done something about loans
20:09to MSMEs, guaranteeing working capital loans.
20:13I think it's something that we need to think about quite seriously.
20:17Now, how you provide that guarantee, I would suggest that it should be done
20:22in the form of an insurance, but that is something that you have to do
20:29because once the banks lose their confidence in the MSMEs,
20:33investment is not going to come back.
20:35You know, I've heard over the last 20...
20:37In the last 20 minutes, I've heard two fine voices raise several red flags.
20:43I hope someone out there is listening.
20:46To listen today to Dr. Surjit Bhalla and Dr. Pranap Sen
20:49is in effect a wake-up call to those in our economic policy making in this country.
20:57I appreciate both of you joining me here on the show tonight.
21:00Thank you very much.
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