00:00The big story on the state of the economy in the backdrop of the continuing crisis in West Asia
00:07that shows no signs yet of a resolution. A day after petrol and diesel prices were hiked for
00:13a fifth time in a fortnight, CNG prices have been increased by two rupees today. This is the fourth
00:20hike in CNG prices in less than two weeks. One kilo of CNG now costs 83.09 rupees in Delhi.
00:28CNG
00:28prices were earlier hiked by two rupees on May 15th, one rupee each on May 18th and 23rd. The price
00:36therefore has gone up by six rupees per kilo within two weeks. So CNG also now affected. All of this
00:44of course is putting the focus squarely on the economy which is why as part of our stellar panel
00:51of guests that we've been getting today I'm joined by Dr. Arvind Panagriya, Chairman 16th Finance
00:56Commission. Appreciate you joining us Dr. Panagriya. Yesterday the finance minister said there were
01:04three F's that the economy was having to deal with. Foreign exchange where the reserves have plummeted
01:11by nearly 40 billion since February 2026. Fertilizer subsidies that are likely to surge beyond three
01:18like lacrosse and the third F being fuel prices that have been hiked four times in 11 days. Your sense,
01:26Dr. Panagriya, how serious is the situation that the country is facing at the moment?
01:33Well, there is an external shock here and it is a reasonably severe one. Now, the question is how
01:42long-lasting will it be? But all the three F's are in front of us to see. Foreign exchange reserves
01:50have declined while rupee has been depreciating as well simultaneously and fertilizer subsidies
02:00have risen and fuel prices have risen. So I think there is a bit of a challenge from the external
02:10front to deal with. And I think the steps so far that the government has taken are all in the
02:17right
02:17direction. We may have to go further in that direction on all of these fronts actually.
02:26But on the other hand, I personally think that the economy is quite robust.
02:31In this sense, I don't see that there is a crisis in the economy as some are saying.
02:37You know, if you want to look at some characteristics, you know, growth has been robust for the last
02:42three years, averaging 7.3%. Fixed investment or what we call the gross fixed investment has been
02:51very steady for the last three to four years. I have seen the figures between 31% and 32%
02:57of the GDP.
02:59Inflation has averaged about 4.3% during the last three years. Current account deficit has stayed
03:06within 1% of the GDP. So, you know, all in all, I think the economy is starting at least,
03:14you know,
03:15when you look at February 27th when the crisis began. It has been quite robust. And that, I think,
03:23is a big, big question. Sir, you're saying the economy is essentially robust
03:33and that what is happening is largely due to the external shocks that have been created. But I have
03:39had guests on my show, including Dr. Surjit Bhalla, whom you know well, who went last week and came on
03:45my program and his comments went viral saying the economy is in a terrible shape. He spoke about
03:51the fact that FDI flows had declined, FII outflows were increasing. There was a sense that other
03:58economists are saying that the micro and small enterprises have suffered one hammer blow after
04:04another over the last decade that has impact on job creation. Are you saying there are no structural
04:11weaknesses that we are facing in the economy, that this is purely the result of external shocks?
04:17Yes, I think there are no new structural imbalances. You know, the old lasting structural
04:24imbalances about which I have myself spoken, meaning that we are still in a long-term kind of structural
04:30issue. We continue to have 46% of the workforce in agriculture. Urbanization is still quite low.
04:38So those are very long-term structural features of the economy which need to change over the next
04:45couple of decades. But other than that, you know, as far as the FDI part is concerned, I think,
04:53you know, there has been a lot of confusion on this, Razeeb. What we, you know, the figure that we
05:01have traditionally trekked is called the gross fixed, sorry, gross direct, gross foreign direct
05:08investment, gross FDI. That figure has stayed actually quite robust. You know, for 24-25, it was about 81
05:18billion dollars. And for 40, sorry, for 24-25, for 25-26, it has been 94 billion dollars. So that
05:30figure
05:30has been robust. What has changed is that repatriation of the past investment by the foreigners into the
05:38Indian economy has suddenly spiked. And that has kind of taken out about maybe in the last year, 24-25,
05:47about 25, about 20 billion dollars extra. And about 10 billion dollars extra has been the investment by
05:55the Indians abroad. So that and then the portfolio investment has also taken a hit. So those are the
06:02components. But, you know, the key figure that we all track, the gross FDI, that has been very robust.
06:11And to me, that is the indicator of economy's productivity. How the foreigners or foreign
06:18investors are viewing the future productivity of the economy is determined more by the gross FDI
06:25rather than these other figures. Now, these other figures, other concepts, meaning, you know,
06:31repatriation, portfolio, etc., are more sensitive to what happens outside. I mean, that is also actually
06:37resulting from what is happening outside. Yeah. But there are two concerns and you've at times also
06:46reflected this. One is the regulatory cholesterol. I know that the government has at times tried to remove
06:52that. But the regulatory cholesterol, many investors say, still remains too high. There are also,
06:58of course, concerns over the judicial system and the manner in which companies find that there is
07:04a lack of consistency in decisions that are handed over by courts. All of this makes many believe
07:10wary of just how, wary of the future. Are you not worried that investors are no longer seeing India as
07:18their preferred destination? Well, as I said, you know, there is no big change in the perceptions of
07:26the foreigners in terms of how they say the productivity of the investments in India. That being
07:33said, all the problems you mentioned, the regulatory cholesterol, judicial system not functioning in the
07:42way you would like it to function in a modern economy, those issues remain. I certainly do not
07:49deny those are areas of economic, I mean, areas of future reforms that remain. Judicial reforms in
07:57particular, I think, you know, nothing has happened on the judicial front. I have myself been skeptical that
08:04anything can change there. And as a result, you would notice that I've written about almost all
08:10subjects in the past two decades, but not on judicial reforms. But now that, you know, most of the union
08:17government's big-ticket reforms have happened, you know, other than the process reforms, which is where
08:23the regulatory cholesterol remains, I am now beginning to kind of get to the judicial reform issue also.
08:31And I think we will need in the next decade or two really, really major reforms. In fact, if you
08:38track back the history of when the Prime Minister started speaking about 2047, first thing he started off
08:44with was judicial reforms.
08:50Sir, the other question, of course, and this is because you are also the chairperson of the 16th
08:55Finance Commission, is that at one level, the Prime Minister is calling for austerity from the country,
09:00don't buy gold, be careful with your foreign travel, conserve fuel. But we have seen consistently,
09:07particularly at election time, the kind of freebies, or the kind of rave-dee, as some would call it,
09:13that are being handed over, cash benefits that are being handed over to citizens or voters just before
09:19election. And several governments are running huge revenue deficits. There's a sense that the government has
09:25not tightened its belt. You're asking we the people to tighten our belt, but governments have not
09:30tightened our belt. Do you believe that this crisis, if I may call that, needs also a change in mindset
09:37of the way the government also handles the public exchequer?
09:41So, first, I think, you know, what Prime Minister called for was moral suasion,
09:46which is in a situation of an external shock, is the duty of any good leader of a country.
09:58Now, what you're questioning is that, you know, the governments have to lead by example.
10:03I agree with that. The way I would put it is that I agree with the fact of freebies having
10:10proliferated. I think that's a matter of fact. Nobody can deny it.
10:14The way I would put it is that as far as the expenditures are concerned, generally,
10:19at least the union government and large part of the state governments have acted responsibly,
10:24meaning if you look at their fiscal deficits, they have not been overly large. There are a few
10:29states, you know, we all know it, actually, you know, you've got Punjab, Esmeral, Kerala,
10:36and a couple of others, where the deficits have been rather large, and they need to tighten the
10:44bells, and also irresponsible spending. But by and large, I would say that, you know,
10:50while these freebies have proliferated, and every single party is announcing these during the election
10:58time. The fiscal, I think, overall, if you take aggregate of the states, aggregate of the union,
11:05we have done a reasonably good job, actually, after the COVID. We were also very prudent during
11:10COVID. But also after that, we have continued to consolidate fiscally. However, that doesn't kind of
11:18take away the fact that, you know, the freebies effectively is not the most productive way to
11:25spend public resources. And therefore, some restraint on that is required. I think
11:35gradually the government, all parties will realize that freebies don't win the elections.
11:41Good delivery actually wins the elections. And I think, you know, they will themselves
11:47gradually disappear. But in a democracy, I think, you know, neither you nor I can stop that from
11:53happening. That is a part of democratic process. In conclusion, therefore, Dr. Panagriya,
12:07you seem to, therefore, disagree with Dr. Bhalla, who said, forget about Fragile 5, India is part of
12:14Fragile 2 now, India and Turkey, saying that the real problem was structural, collapsing FDI, weakening
12:19investor confidence, policy uncertainty, stalled reforms. You believe that his comments that many
12:27of these issues predate the West Asia crisis is being unduly alarmist. You're far more confident
12:33that the economy is robust. Am I correct that you believe that the economy will remain on the growth
12:40trajectory will return to a seven, eight percent growth trajectory and not get stuck at five and
12:45six percent? Am I correct? Right. So, the way I put it is that, you know, given where the situation
12:53is currently, even under the most optimistic scenario, we will probably lose half a percentage
13:00point in growth. So, you know, if the crisis ends tomorrow, let us say, it will still take time
13:06for the oil supplies to come back up on stream and all. So, I would still think that growth rate
13:12will
13:12probably be about six and a half percent. If the crisis continues through the year, then I would say
13:17we'll get to about six percent. But the view that Dr. Bhalla has presented, I must say, is alarmist.
13:25To me, really, you know, any comparison with the Fragile 5, which is the kind of
13:33analogy I thought he was trying to invoke, that's a bit laughable, you know, that's not the situation
13:39today. Given, you know, I mean, at that time, our growth was faltering. The inflation was double
13:44digit. Current account deficit was about three to four percent. So, there is no comparison between
13:49that situation and today's situation. I think we need to be, you know, even handed about
13:56reading the tea leaves of the data.
14:03Let me leave it there, Dr. Panagri. Always good to talk to you. You've presented a more optimistic
14:09picture of what lies ahead. We'll wait and see which of these various scenarios materialize as we speak
14:16to different leading economists on India. Thank you so much for joining me on the show today.
14:22Thank you, Rajdeep. Thank you. My pleasure.
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