Private investment to pick up: CEA Krishnamurthy V Subramanian

Chief economic adviser (CEA) Krishnamurthy V Subramanian

The long-elusive private investment is gathering pace and would see a spurt once the pandemic-induced uncertainties subside considerably, chief economic adviser (CEA) Krishnamurthy V Subramanian told FE in an interview.

Companies have deleveraged, cut costs and recorded profitability, partly aided by a much-needed corporate tax rate cut just months before the pandemic struck. So, their ability to start fresh investments remains strong, Subramanian said.

However, it’s also a “simple fact” that in times of great uncertainties, private investments take a knock, as firms adopt a wait-and-watch approach. But there is further scope for improvement, he explained. Gross fixed capital formation grew 11% in the September quarter, aided by a conducive base (it was -8.6% a year before).

Meanwhile, private consumption, the most critical pillar of the economy, has grown this fiscal even when spending avenues remained limited due to localised curbs, he said.

“During the second wave, although shopping establishments like malls, etc were shut, private consumption still grew 19.3% (in the June quarter), albeit on a low base. In the September quarter, it grew 8.6%. The fact that it grew despite supply constraints shows consumption demand is coming back,” he said.

As manufacturing remains strong and the services sector gains momentum with greater headway in the vaccination drive, as reflected in the Purchasing Managers’ Index, private consumption, too, will get further boost in the coming months, the CEA said. In fact, India’s manufacturing growth over a five-year period (through 2019) pipped China’s for the first time since 1990s, he added.

As the government prepares to bring in a cryptocurrency Bill in the ongoing Winter session of Parliament, the CEA endorsed the official position that private cryptocurrencies shouldn’t get legal tender status. Even granting them the status of a financial asset is fraught with risks at this point, and any such decision, if at all it’s made, must follow careful examination, he said. This is because a cryptocurrency doesn’t derive its value from any underlying assets or earnings nor does it add to real economic activities, he conceded. So, the valuation can be easily swayed with speculative bids, causing excessive volatility. Retail investors, especially the small ones, would struggle to cope with such wild fluctuations. For instance, as some analysts have pointed out, the value of Bitcoin crashed from $20,000 per coin in December 2017 to just $3,800 by November 2018, before rising again.

Asked about consistent muted growth in credit to industry even though the banking system is flush with liquidity, Subramanian said the Covid-related uncertainties are weighing on investment decisions.

“As demand for investments goes up, loans to the corporate sector will also go up significantly. Also, companies currently have deleveraged and are sitting on cash. Only when they exhaust their internal cash flow, they will go for borrowing,” he said.

Non-food bank credit growth accelerated to 6.9% in October, against 5.2% a year before. However, credit to industry grew only 4.1% in October, even on a contracted base.

Subramanian attributed a spike in currency in circulation (CIC) in the aftermath of the pandemic last fiscal to mainly two factors: precautionary savings by people and restricted spending opportunities due to lockdowns and other curbs. “And when the second wave receded, opportunities to spend improved with the opening of shopping establishments and uncertainty level, too, went down. So, savings dropped, so did the CIC ratio,” he said.

The CIC rose just 4.9% until November 12 this fiscal, compared with 13.5% and 6.2% in the corresponding periods of FY21 and FY20, respectively.

Subramanian asserted that India doesn’t stare at a flight of capital in the wake of the taper tantrum in the US. The impact, at most, would be felt for a very brief period, and won’t be wide-ranging, he added.

This is because the economy is on a solid footing now unlike in the aftermath of the 2008-09 global financial crisis when three key indicators of macro-stability —inflation, current account balance and fiscal deficit — went downhill fast due to the UPA government’s excessive focus on stimulating only demand.

“In contrast, this time around, the V-shaped recovery that we had predicted last year did happen and India has witnessed the sharpest recovery among all economies. Fiscal deficit is still lower than our peer economies. Inflation is less than 5% and I expect it to remain around that level for some more months, given the supply-side measures we have undertaken. Current account deficit, which has risen a bit of late, would still be well under control,” he said. So, India is doing pretty well on both macro-stability and growth fronts, and that is something global investors would keep in mind.

Subramanian, who has been an important part of economic policy-making during the unprecedented Covid crisis and before, will return to academia after his three-year term with the government ends later this month. He said he would go back with “enormous personal satisfaction”, as he was part of a team that instilled confidence in everyone even during the darkest of days that the country will overcome the most challenging crisis since independence with flying colours.