Singapore: In its coming budget, the Indian government needs to step up and deliver on its promise of “minimum government, maximum governance”, said Sanjeev Sanyal, a Singapore-based international economist.

Sanyal is also an urban theorist, environmentalist and best-selling author.

Despite harbouring reservations about the accuracy of India’s gross domestic product (GDP) data using a new way of calculating economic output, Sanyal said in an interview that his reading of the situation was that India is still the fastest growing major economy in the world. 

Edited excerpts: 

Just last week, an op-ed in a Chinese state-backed newspaper questioned India’s GDP growth. The words used were: ‘Manipulated economic data’. ‘Creative’ use of statistical methods. ‘Paper growth’. What is your take?

The Chinese will recall that exactly the same accusations have been levelled at them for years. Perhaps this is how all incumbents greet new entrants. Over the last half century, American media and academics questioned the rise of every Asian economy—first Japan, then the small Asian tigers and more recently China. In the 19th century, the Europeans were similarly dismissive of the US.

Nonetheless, I agree that India’s economic statistics are not internally consistent with a GDP growth rate of over 7% per year. Data for credit growth, industrial production and exports do not seem to gel with such a high rate of economic expansion. However, it is disingenuous to make an accusation that the headline number is being deliberately massaged. 

The same government publishes all the data and it could quite as easily change all of them to be consistent. I think there is a need to dig deeper rather than point fingers. As pointed out by economist Surjit Bhalla, a part of the problem is that we live in a disinflationary world where real growth rates are higher than nominal growth rates. Not only are we intuitively unused to this, it may be causing many distortions in the statistical models and assumptions. A second factor is that India’s economy is heavily dominated by services, but the data collection systems have not kept up. Incidentally, this is a problem worldwide. We need to revisit the GDP framework being used to measure economic progress and update it for the 21st century.

Despite my reservations about the accuracy of the data, my reading is that India is still the fastest growing major economy in the world. The actual growth rate may be somewhat lower than the official number, but the same can be said of China.

Considering how the global media has been covering some of the events in India of late, from the tolerance debate, to ‘water supply cut off to capital’, ‘army called to restore order’, to ‘caste crisis leads to deadly rioting’, among others, does India face a perception problem? Are potential investors influenced by these headlines?

Serious investors are aware that India is a noisy democracy and, in any case, the recent headlines are no worse than those that have appeared for years. If you went by western media headlines for Singapore, one of the world’s most advanced cities, one would get the impression that the single most important issue is chewing gum sales. Yet, the ban on the sale of chewing gum has had no adverse impact on investment flows to Singapore or the quality of life in the city. Unlike India, where the mainstream media pretends to be neutral, news channels and newspapers in most countries are openly partisan. So, people have learned to take news reports with a pinch of salt.

This does not mean foreign investors do not have genuine concerns. Tax disputes with Vodafone and Nokia continue to fester. Then there was the mysterious episode involving the banning and un-banning of Maggi noodles. In other words, there are serious issues with enforcement of contracts, opaque regulations and arbitrary knee-jerk policy decisions. Many of the same issues plague domestic investors. These are the concrete issues that worry investors, not media headlines.

A lot of debate today is on whether the ‘idea of India’ is under threat. What is your view?

The question is—whose “idea of India”? India is an ancient civilization and at different times, different people have had different views about the country. Those who perceive a threat to the “idea of India” are usually the promoters of a certain Nehruvian world view, but it is not obvious that other world views are not valid. Why not a Kautilyan idea of India? As long as the debate remains within the framework of the Constitution and does not undermine the integrity of the country, let a thousand ideas of India bloom.

The problem with the Nehruvian idea of India is that it is used to perpetuate the privileges of a tiny elite that has dominated the country for the last seven decades. Now, its system of patronage is breaking down. Politicians are being evicted from Lutyens bungalows, where they have squatted for years. Rogue promoters are being told to pay back loans or risk being named defaulters. Mainstream media narratives are being challenged by the social media. Thus, the cosy assumptions of the old establishment are being challenged by a newly emerging middle class. Expect a lot more noise during the transition.

Considering where India is currently, is it time the West updated its image of the country. India has a lot of soft power—Bollywood, Mahatma Gandhi, curry, among others. What can or should it do to build up the ‘hard power’?

India does not yet have soft power although it has the opportunity to build it using the tools you mentioned. However, it requires concerted effort to create the levers of soft power. Prime Minister (Narendra) Modi has made a beginning by actively engaging with the Indian diaspora, but a lot needs to be done. Importantly, soft power is a force multiplier that is not effective unless backed by real hard power. This includes a strong economy, diplomatic influence and military strike capability at least in the Indian Ocean rim. I am not suggesting India should become an expansionist bully, but legitimate national interests need to be protected.

What are the key areas the budget needs to fix to revive demand and investment? Is Make in India more nationalistic than realistic?

In the last two budget presentations, the government was still new and learning the ropes. It probably also wanted to signal some degree of continuity. Thus, changes were mostly incremental or about making the existing processes more efficient.

However, the government now needs to step up and deliver on its promise of “minimum government, maximum governance”. I realize progress on GST (goods and services tax) is being stalled by the opposition in the Rajya Sabha, but the direct tax system can be radically simplified within the Union budget.

Note that many of the important reforms are not under the finance ministry and will not be a part of the budget discussion. Therefore, we need other (sections) of the Indian state to contribute.

For example, the judicial system is crumbling and unable to enforce contracts or ensure rule of law; there are some 32 million pending cases. Yet, legal system reforms are not being seriously discussed.

Without wider changes, Make in India will not be possible. I do not think it is unrealistic to pursue national interest by building up a strong industrial sector.

The services sector now dominates our economy but is not able to generate enough jobs. This is why construction and manufacturing are absolutely essential. The strategy is right but we need to see concrete progress. 

A good place to start would be for the government and Reserve Bank to coordinate policy in order to lower the cost of capital. Cheap capital is a necessary, albeit not sufficient, condition for reviving investment.

Is the ongoing turmoil similar to that of 2008, or even bigger? Where does India stand?

The latest readings of economic indicators from around the world suggest that the global economy is losing momentum and is at the risk of entering another recession or at least a period of very anaemic growth. 

Unfortunately, central banks have little ammunition left as interest rates are already very low and huge amounts of liquidity have already been injected into the system. 

Pushing rates into negative territory is really an act of desperation. There is perhaps a bit of space for fiscal expansion in some countries, but governments are quite indebted and will not be able to sustain a prolonged expansion.

Thus, the time has come to rethink the traditional idea that economies are like mechanical systems that can be returned to “equilibrium” if only the correct combination of pulleys and levers are used. The whole field of economics is in crisis and needs to be reimagined.

Meanwhile, India, too, will hurt as its exports decline with falling global demand. However, India can also benefit from cheap capital and commodities. The problem is that its banking system is jammed due to non-performing assets and its ability to allocate cheap capital is impaired. 

Global capital is also concerned about framework issues such as the slow legal system, a complex tax system, and so on. So far, therefore, India has not quite been able to take advantage of the situation beyond cheap oil.

Since late last year, foreign investors are pulling out funds from emerging markets. Can India withstand it?

The problem for most emerging markets is they are commodity-driven. When the world economy slows and commodity prices decline, their credit worthiness also declines. Thus, they are usually unable to access cheap global capital just when they need it the most.

There are two exceptions—China and India. Both of them are commodity importers and benefit from cheap commodities. However, in this cycle, China is itself the source of the problem. This leaves India as a potential beneficiary of the situation—an economy that benefits from cheap commodities and also has profitable avenues to deploy cheap capital. There is more than enough global capital willing to come to India. However, as I mentioned earlier, this requires a financial, legal and taxation framework that can absorb the flows. This is where reforms must focus.

What will be the next big investment theme in India?

India is like China in 1995; everything needs to be built or upgraded. The country needs to upgrade its housing stock, railway network, urban infrastructure, manufacturing capacity, health/education systems; the list is endless. 

In a world suffering from inadequate demand, we have demand for almost everything. The problem is making it happen and then managing the process. There is no time to lose as we have already entered our demographic peak phase and the next 25 years will be crucial. After that, we too will age.