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In conversation: Krishnamurthy Subramanian, Chief Economic Adviser to Government of India

  • 11/03/2019

What reforms does India need on an urgent basis after having done GST and banking sector?

We need to do a lot more work on banking sector reforms. The bankruptcy code needs to be combined with technology. One of the key problems in India has been that businessmen often end up playing the game of heads I win, tails you lose. The bankruptcy code has been able to stop that. It has also been able to act as a deterrence. The fear that you may end up losing your company, changes the behaviour. But arms of the law needs to operate in the same way for an average citizen and the man on the top. To a great extent the bankruptcy code has been able to do that but with technology we can do more.

Areas other than bankruptcy?

Ensuring pro-market behaviour or coming down on anti-market behaviour. Stuff like profiteering, cartels and all that comes in the purview of Competition Commission of India.

India also needs reforms on cost of capital for businesses. We need to take steps to narrow credit spread for the borrowers. That is the key deterrent in the credit spread or the spread over the risk-free rate. That is a huge function of the probability of default. That’s why, for instance, a AAA rated borrower pays a lower interest rate than a BBB rated borrower primarily because the probability of default is actually much lower for the AAA rated borrower.

What kind of technology is needed for that?

The new era technology is not just having the core banking software. It is more than that. It is using data and analytics to be able to screen borrowers and monitor them.

One of the problems is that after you give a loan to the borrower, the periodic monitoring of the financial situation of the borrower does not use as much technology. The banks need to screen borrowers and do real-time monitoring at least on a quarter-on-quarter basis. After having given the loan, one has to monitor how the cash is being used.

Reforms other than in financial sector?

We need to keep inflation at a low level. There is an improvement in inflation scenario primarily because of the inflation targeting of RBI. Prior to 2014, inflation rate was 10% plus. Imagine if those rates were carried forward today, a lot of our essential commodities would have been been 30%-35% costlier. So this reform has given a huge relief to the purchasing power of lower middle class and the poor. So we have to continuously strive towards keeping the inflation rate low. This has reduced the supply side constraints.


The three areas that you will focus on in economic survey

I cannot tell you about the survey. It is too early but money is an important factor. Land and labour are two more areas we need to do more work. There are frictions in the labour market. Labour laws are not conducive. Need more reforms to enable integration of markets across. On land reforms, we need to look at the compensation part of it when the land is purchased. The bill was brought. For various reasons it could not be pushed through. Once the necessary environment prevails again, we need to look into that. In land, technology can be used to have better land records. Many other countries have used block chain technology to be able to create better records.

Aren’t you thinking of that one catch word like ‘JAM’ trinity, which delivered a lot of good to the country?

If you are looking for some magic wand, I think that will take some time. But I would identify land, labour and financial sector reforms as the three crucial areas.

The country is facing jobless economic growth. You comments?

Across the world, a lot of economies are facing the phenomenon of jobless growth and that is partly because of technological advances. A lot of that is happening due to substitution of labour by capital and that is where a lot of jobs are being lost. So, rather than looking at net job creation, we should look at which areas are creating jobs and in which the jobs are getting lost. If you look at it in Indian context – the Swiggys and Olas are creating so many jobs. There are some sectors where possibly jobs may be getting lost.

Jobs in manufacturing?

Yes, you can say that but again the data on manufacturing is hard to come by. So let me not speculate where the jobs are being lost.

What about a soaring unemployment rate?

In India, we worry too much on unemployment rate but the bigger question is getting meaningful employment and reasonably well paying jobs. People are only looking at the supply side. That is to say, where are the jobs? But the demand side is equally important. That is, where are the skilled people to be able to take those jobs? Skilling does not happen overnight. We need to do a lot more work on skilling.