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Krishnamurthy V Subramanian, Executive Director, IMF, in conversation with Mihir Bhatt of Times Now at the Times Now Summit 2024. Subramanian says: if India can redouble the good policies that we have implemented over the last 10 years and accelerate the reforms, then India can grow at 8% from here on till 2047. And if India grows at 8%, India can be a $55 trillion economy.”

There is a new book that you are coming up with and it is titled very aptly India@100, envisioning tomorrow’s economic powerhouse. So, first of all, congratulations for that. Please give us a preview about why you believe India will be the economic powerhouse and second, what is your vision about India@100?
Krishnamurthy V Subramanian: Thanks for providing me the opportunity to talk about this book, India@100, it should be forthcoming in a couple of months. So, the basic idea is that with the kind of growth that India has registered in the last 10 years, if we can redouble the good policies that we have implemented over the last 10 years and accelerate the reforms, then India can grow at 8% from here on till 2047. And if India grows at 8%, India can be a $55 trillion economy. Now that sounds quite audacious, especially if you take into account the fact that E&Y predicts India to be a $26 trillion economy by 2047, that is less than half. So, viewers would wonder where the differences are? So, let me explain. If we assume 7% growth in real terms, 5% inflation is what has been there ever since the inflation targeting framework has been implemented and 3% depreciation of the rupee, that translates into 9% growth in dollar terms, 7 plus 5 minus 3. Why minus 3? It is because depreciation of the rupee actually subtracts from growth in dollar terms. So, at 9%, using the rule of 70, which is typically what we all use for calculating the number of years it takes to double our money, at 9%, 9 times 8 is 72, so approximately in eight years the GDP will double from 2023 onwards, that is 24 years.

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In 24 years, doubling every eight years means three times doubling, that is eight times essentially the GDP multiplying. So, if we take the GDP number for 2023, approximately $3.25 trillion and I am using approximate numbers, eight times multiplication will mean from 3.25 to 6.5, from 6.5 to 13, and from 13 to 26. So, you can see what the $26 trillion GDP prediction by E&Y rests on; I believe it is an important but incorrect assumption of depreciation at 3%, which is what has historically been the case. In my assessment, there are two key trends that are on in the economy which we need to recognise, which will lead to much lower depreciation.

One, as I mentioned, the inflation targeting framework has been implemented, as a result of which inflation has to be between 2% and 6%, with 4% as the median. In the last few years, inflation has been 5%. But historically, inflation has been 7% plus on an average. So, going forward, we can actually say, inflation will be at least 2% lower compared to what has been historically the case. And we know, economists understand this very well, that when inflation is higher, then the depreciation of the currency is also higher.

So, compared to 3% depreciation, it is likely that it will be about 1%. Now let us do the numbers again actually. If we take 8% growth which I said is possible, 5% inflation, 8 plus 5 is 13, subtract 1% depreciation which is what is likely to prevail because of the lower inflation, then that means 12% growth. Now again, using the rule of 70, 12% is actually doubling every six years, 12 times 6 is 72. So, in a 24-year period that means four doublings, that is 16 times as much. So, as you can see from 26, add one more doubling that becomes 52 trillion based on 8% growth and 5% inflation and 1% depreciation because of the lower inflation.

If you look at the Penn World tables, which look at the drivers of growth, the productivity growth in India from 2014 onwards has been 2.7%. In contrast, productivity growth from 2002 to 2013 was 1.3%. In other words, productivity growth has more than doubled and this is not any government data, some critics might actually argue, this is Penn World tables, which means productivity has increased, which will also lead to real appreciation of the currency. So, I believe that 3% depreciation which has prevailed will not be the case. It will be 1% and thereby we can look at a $55 trillion economy if we can grow at 8%.
That is very interesting because most of the estimates are in the range of $25 to $30 trillion and you did give a very good reasoning for that. But what will it take to sustain this kind of growth momentum?Yesterday I was in conversation with Mr Arvind Panagariya and he made a very important point that today we are not on a very small base. It is a $3.6-trillion economy and will continue to grow at more than 7% or 8% for a very long time. That takes a lot of effort from all quarters. What will it take to sustain that growth momentum?
Krishnamurthy V Subramanian: Historically, from 1990 onwards, average growth has been slightly more than 7%. So, clearly 8% is ambitious because India has not grown consistently at 8% before, but it is achievable. Now, it is achievable through good policies. If we look at where this growth will manifest and here we have to account for the fact that there are three primary sources through which the 8% growth can manifest.

One is the reforms that can be done leading to the formalisation of the economy. We know very well that formal sector firms are far more productive than informal sector firms. The formalisation in the economy will lead to higher productivity. Second, even if we take our formal sector firms, they themselves are actually not at the cutting edge when compared to some of the global firms. So, even our formal sector firms will grow their productivity as we do more reforms. So, these are two key sources and we know very well that when the informal sector starts becoming formal, that also leads to higher GDP because what is not counted in GDP will also add up.

So, unlike some of the other economies that we used to benchmark, advanced economies where the economies were primarily formal and therefore all the productivity growth had to come from what we economists call the intrinsic margin; in other words formal sector firms growing their productivity. In the Indian case, growth can come from both the intrinsic and the extrinsic margin. The extrinsic margin is basically the formalisation of a large part of the economy as well. Now, it is important to recognise that 8% is ambitious but achievable. India has grown at 7%. We can grow at 8%, but for that, continuation of the good policies that we have had over the last decade is important.

We cannot afford a lost decade like we had from 2004 to 2014 and we also need to double down on reforms and Dr Panagariya might have mentioned, for instance the labour reforms, the bill has been passed. I think it would behoove the new government when it comes in to pass subordinate legislation so that labour laws are made more amenable for manufacturing growth and overall growth itself.

I definitely think the next government or the next administration will have to focus on reforms. We did see a bit of a slowdown in reforms, especially in the agriculture sector. We saw what happened to farm laws. There are reforms which are still expected and required in land acquisition because that is going to form the launch pad for the next wave of growth which we refer to as India’s Amrit Kaal. What is your recommendation for that?
Krishnamurthy V Subramanian: In the book, I cover a wide swath of areas where reforms are required. If we look at the need for manufacturing sector to be encouraged so that job creation happens, it means reforms are needed in land, labour, capital and logistics. A lot of good work already has been done through infrastructure creation, power sector, and scale as well because economies of scale reduce the cost for firms.

These are reforms that are required in the manufacturing sector. But at the same time, we also need reforms, especially in the banking sector, for the manufacturing sector to be able to grow by taking credit and investing. We also need reforms in the judiciary and in the bureaucracy as well. Apart from that, of course, agriculture, education, healthcare all are very important.

On agriculture, reforms are required so that the small farmer can really be empowered. If you look at over the last 10 years, the concept of labharthi, the Honourable Prime Minister has introduced that and thereby actually has shown that good economics can be good politics as well by making those that have hitherto not benefited from reforms as the labharthi of reforms.

In my opinion, in agriculture, it is really critical that the small farmer is made the labharthi of reforms. I will explain this using an anecdote. Many of us, when we were young, would have travelled in third class compartments in railway trains. Now, if you take, for instance, say the Kalka Mail from Delhi. In Delhi itself, the third class compartment gets filled up. By the time one would want to board the third class compartment in Kanpur, maybe Allahabad or Mughal Sarai, nobody can get in.

If you look at reforms, I think those that are benefiting from status quo are the ones that are often blocking reforms and this is where it is important to create the narrative to allow the others who want to get into the third class compartments so that they can reach their destination as well. In the case of agriculture, it is a small farmer. So, the small farmer needs to be made the real labharthi because the current status quo does not benefit the small farmer at all.

Coming to the digital infrastructure, India has been praised for the excellent work and progress that has happened in creating the digital ecosystem, the digital infrastructure. Now, there are talks about AI and its impact, but I want to touch upon the digital infrastructure part because that will play the role of a major catalyst in propelling India to whatever its target is.
Krishnamurthy V Subramanian: Yes, from the vantage point that I am able to occupy now in the board of the International Monetary Fund (IMF), this is one area where my heart swells with pride. Whenever digital infrastructure is talked about, because of the kind of digital infrastructure that India has created today is basically owner’s pride and neighbour’s envy. This is really critical because India has created this digital infrastructure as a public good. Whenever it is created by private parties, digital infrastructure or any infrastructure, it often leads to monopolies and thereby monopoly pricing, which can lead to large sections of the population not getting access to the infrastructure.

In contrast, by creating the public digital infrastructure, take for instance the Jan Dhan accounts, 500 million plus accounts and that is 1.5 times the US population! We have provided access to everybody on the public digital infrastructure, so that can lead to inclusive growth. So, let me give you a small anecdote to actually show not only will it lead to inclusivity, but also will lead to productivity improvement.

I used to work at the Indian School of Business before I came to the North Block. I used to step out of the ISB campus and get a coffee or tea from a small vendor. We would pay him cash at that time. This was before 2018. I went back after a short period when I was again at ISB. I visited that person again. Now, he is taking digital payments. So, earlier, he would take a couple of minutes to make coffee or tea, but he would also have to spend equal amount of time ferreting out change. If I gave him a Rs 50 note or a Rs 100 note, he would have to actually pick out Rs 43 or Rs 93 because the coffee cost at Rs 7 and that cost him as much time to make coffee. Now, he only makes coffee and we just pull out our phones and pay. So his productivity has increased

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