An interview with Krishnamurthy Subramanian, Chief Economic Advisor to the Government of India in conversation with Shereen Bhan on CNBC-TV18

New Delhi, May 14, 2020:

Q: We are still awaiting details of what exactly Uttar Pradesh (UP) and Madhya Pradesh (MP) want to get done? Of course these are ordinances that still require presidential assent and are awaiting approval from the central government. But I go back to the Economic Survey, the Economic Survey spoke of deregulation. You held up the Rajasthan example as a playbook to follow. Do you support what is being done by UP and Madhya Pradesh which is not deregulation, but a suspension of all laws? 

A: It is important to keep in mind that there are two aspects to the changes in the labour laws that are being done at the state level. Firstly – the ease of compliance, for instance as you were mentioning there are a bunch of laws and compliance across them, in many cases the definitions actually of the same thing like a wage is different across different laws and that just creates confusion. Bringing in single window clearances for instance these are all aspects that are actually are about enhancing the ease of compliance.

The second part is and in order to understand that which is actually deregulation is it is important to keep in mind that for a country like India, the most important priority has to be job creation and there is no other form of social and economic inclusion than a job in the formal sector. I just take my own example I am the second generation, my father actually got a job in the formal sector and he was able to educate us and thereby actually we were able to uplift ourselves.

For an economy like India with such a young population, it is therefore very critical to have enough jobs being created. Jobs are not created when you actually have firms remaining small, for years together and one of the key restrictions there actually are some of these and let me use the example of Rajasthan for instance. When the threshold for the Industrial Disputes act was 100 employees many firms chose to be at about 95-98 employees and once that increased to 300 they were able to be about 290 employees. So that is a clear addition of about 170-180 employees in each of these firms and that is how basically jobs then get created. So this is a very important aspect that we need to keep in mind. If you have to attract investment and jobs don’t get created without actually firms being large enough, investment coming in and especially if you have to sort of benefit from some of the firms in China who actually are looking to move out which is a very important opportunity for India to latch on to- these are important.

Q: I understand the point that you are making about deregulation and as I pointed out that the survey talks about deregulation, the survey didn’t talk about doing away with all labour laws. I want you to comment on the reactions that have come in not just from whether it is the BMS or the trade unions etc., but also from people who are looking at what has happened in UP and MP and suggest that given the current situation and given the current economic climate not just domestically, but also globally that what we are ending up doing is inviting new anarchy’s on top of what has already been rot by COVID-19 you are opening up a battlefront that you don’t necessarily need to open up at this point in time by taking this approach, this heavy-handed approach of with one stroke saying we will suspend all labour regulation?

A: First I think it is important to clarify that the regulations relating to bonded labour, the one relating to payment of wages and the ones relating to organizational safety those are ones that are being accepted. Now as I was saying earlier as well when you talk about deregulation, it is about actually those regulations that create hindrances, we basically try and eliminate that and which is what in spirit these laws are doing and they will encourage as we provided very careful evidence on with Rajasthan, these will you know encourage investment. Through the investment they will also actually encourage firms to become larger and hereby create more employment.

Take the example of Bangladesh for instance, the textile firms there are substantially larger and that is because while all of us in the Indian subcontinent inherited the same kind of labour laws they went ahead and actually deregulated and relaxed those and in fact actually went along the lines that some of the states now are doing and that enabled them to create significant jobs in the textile sector.

The other important point that is very important to, crucial to keep in mind is when you talk about the formal sector right jobs in the formals is about 11 percent of the workforce, so you have a small minority that gets all the privileges and have a huge majority that is even deprived of actually having of a job in the formal sector. Now policymaking always involve trade-offs, now question is do you want to actually give more and more to the 11 percent that already have privileges or do you want to focus on the remaining 89 percent.
To give an example basically many of us have travelled in in unreserved third-class compartments when we were young, what happens there actually whoever gets into the coaches at the first station ensures that nobody else gets in after that. But you have a large set of people who also want to get to their destinations and they don’t get the opportunity. The situation with labour laws is very similar.

Q: So to put it simply, do you believe that the economic survey held up the Rajasthan playbook which did not by the way do away with the labour laws as is being proposed by UP and MP and I say proposed because these are ordinances that will require Presidential assent. Do you believe that the UP and MP playbook ought to be followed by states are you are standing by what the economic survey held up which was Rajasthan which was much more judicious and balanced in its approach?

A: So we used in the economic survey the Rajasthan change as an example of a broader point which was that labour laws are really restricting firms because what entrepreneurs do is they actually create, they bring their firms to about 95-98 employees and then when they reach that threshold they go and create another firm and thereby we actually have firms that remain really small despite them becoming older.

Q: Doesn’t that have to do with what you have also called perverse incentivization, you are forcing people to stay small so that they can use the incentives that the state provides instead of complete suspension of labour regulation why don’t you look at reimagining the way that incentives are given so that the firms don’t feel like they need to remain small to be incentivized?

A: No, I am precisely talking about the incentives that a threshold like the one that has being relaxed creates that when you have a threshold each of these laws creates incentives. When you have a threshold at 100 employees, firms basically, the incentive it creates is to remain small. Similarly these relaxations and even to take into account for instance the minimum wages, right there is also the aspect of enforcement, when you take any law and any law it is actually about the way it appears on the books versus how it actually gets implemented. We also covered this in the economic survey that while you actually have very lofty ideals for how minimum wages should be paid the actual reality is much worse and that also creates opportunities for rent seeking which is also something that you want to avoid.

Q: So wouldn’t that make the situation far worse that you will now have each state doing pretty much what it wants to do and in the vacuum of having absolutely no regulation you might in fact make the rent seeking far worse?

A: Let us understand where the rent seeking originates from. Rent seeking comes when you actually have a law and the implementation of that law, there is scope for interpretation of that and thereby rent-seeking, so I don’t understand where this argument is that you are putting. If you actually reduce some of these regulations those that are clearly hindrances the need for rent seeking or the opportunity for rent seeking goes out not come in.

Q: Let me quote to you what the press release put out by the ministry of labour and employment at the end of a meeting that they had with employers organizations which is really industry and some of the suggestions that this press release talks about is of course relaxations of revisions of the Industrial Dispute Act, to suspend labour laws for the next two to three years, except the provisions like minimum wages bonus and statutory dues, to increase the working hours to 12 hours per day and so on and so forth. There is a long list and there is of course also the response that has coming from trade unions, the BMS etc. are saying that this is all in contravention of the ILO and the central trade unions saying today that they may in fact look at moving the ILO against these proposed labour law changes. So you know there seems to be a need for greater engagement to try and arrive at a path which is somewhere in the middle?

A: See the changes that we were being worked on at the central level so the 40-43 odd laws that were there those have been composed, now have been collected into four codes, the code on wages, the code on organizational safety, the code on industrial action and the code on social security and these have been done through extensive deliberations between the government and all stakeholders and these labour codes actually have been brought in after such deliberations.

Q: But the states are not following the centre’s labour codes in fact only one labour code is being passed so far the others are still with the standing committee. The states have not waited for the central labour code to be formalized, the states have decided to use the ordinance route to do away with all regulation?

A: Remember that labour is a concurrent subject and this particular exercise that was going on was at the central level and states have actually given a situation that you have with the COVID episode and the need to ensure that employment generation happens states are within the rights to basically implement the changes that they have done.

Q: One of the other arguments that is being made against the moves by UP and MP in suspending all labour regulation is that look we are in a situation today where there is a huge trust deficit on the back of what has happened with migrant labour I mean those images speak for themselves. This is a time when you need to provide a safety net, this is the time when you want to build the bridges, when you want more trust between employer and employee specifically in this case where labour is crucial for restarting economic activity and this would in fact, this coercive way would in fact boomerang?

A: So firstly, I think we have to understand that and I have mentioned this earlier as well that the labour laws apply for jobs that are in the formal sector. Migrant labour basically corresponds to jobs in the informal sector, so let us not mix the two issues. So if for instance, given the seven decades experience that we have had with these kind of labour laws they have not created enough jobs. The reason we have actually had such migrant labour is because we have not had enough job creation in the formal sector. As I mentioned and I repeat the statistic which is that 11 percent of the workforce works in the formal sector, huge majority 89 percent actually works the formal sector and it is because of the restrictions that there are.

You can actually, and one can do this this counterfactual experiment that if you actually had let us say provided the necessary relaxations and focused on creating jobs for this and reducing there by that large majority then it is actually and I would say based on my research that it is arguable that this proportion would have been much lower. The proportion of the informal sector and that is what has been seen in many other countries as well and if your overall informal sector is lower as a percentage and the migrant population would also have been lower. So on the one hand we can’t basically be seeing to be let us say talk about migrant labour, but not at the same time taking the necessary steps that are required to reduce informalization and thereby the migrant labour as well.
These restrictions are one of those key parts in that calculus.

Q: Do you believe that this will in fact at this point in time be the appropriate thing to do, to create more jobs, to draw in more investments? I mean do you believe that this is actually going to provide that fillip that clearly government seems to believe that it will?

A: Look this is all of course about in the future and nobody knows for sure especially during the kind of uncertainty and uncertain times that we are in. But what is critical and this is something which is important to recognize is that if we basically need more investment to come in and we have to ensure that jobs are created and these will be steps that will help in that direction.

Q: You are in support of more states taking this route which is to do away with most or all labour regulation with the exception or two or three at this point in time.

A: I am in favour of the deregulation of these labour laws which we showed very clearly using carefully crafted evidence that they are binding constraints on firms being larger and thereby more formal sector jobs being created, firms being more productive and these are actually binding constraints. So I am in favour of greater deregulation of these labour laws.

Q: Let me talk about that informal sector that you spoke of the 90 percent which don’t really have that safety net at all that we just spoke of? Given where we see ourselves today and the wait continues for the relief measures that the government is expected to announce, what is the realistic expectation in being able to provide that safety net for the large informal economy?

A: So one of the key aspects for the migrant labour is the fact that they are not able to access the public distribution system in the state or in the district where they are working because their ration card for instance works in the state where they are supposed to be residing. One of the key initiatives that the government is working on is one nation one ration card which will basically enable portability of the ration card and as we speak there are many states that actually are in the process of implementing this. Once we have portability of the ration card then under the National Food Security Act, the NFSA which basically gives 35 kilograms of food grains in normal times and that has been enhanced by another 25 kilograms assuming a household of 5 individuals because every individual is getting 5 kilograms more, so once that portability is enabled then one of the key aspects actually that creates vulnerability for the migrant workers will be addressed.

At the same time other measures actually also in trying to bring in more financial inclusion like we have done through the Jan Dhan Yojana for instance which has reached large sections and by the way this is a parenthetical comment, but an important one which is that unlike countries like the United States which are physically mailing cheques, we have been able to reach these vulnerable sections just through the click of a button of the mouse and that is because of the jan dhan, Aadhaar and mobile trinity. So extending the same actually to these migrant labourers apart from the PDS portability would really enable in bringing a permanent fix to some of these vulnerabilities.

Q: Since I have you with me, I would like to ask you on how one should read the government’s plan to increase the borrowing program to Rs 12 lakh crore from Rs 7.8 lakh crore? How should we read this, how should we make sense of this largely on account of revenue shortfall or also factoring in expenditure compression revenue shortfall plus the need for relief?

A: It is a combination of all of that – if you go by any of the previous episodes internationally whenever there has been a crisis like this take the Great Depression which was followed by the New Deal or the take the World War II after which Europe got the Marshall Plan or the Global Financial Crisis or even our own experience during the Asian financial crisis and we did a huge stimulus times like these actually require a stimulus package. Government has to spend because if you take the GDP identity which is C plus I plus G plus X minus M, your consumption, investment, government spending and net exports consumption will be down, investment will be down this year, net exports will also be lower and therefore government has to step in which basically mechanically adds to the GDP and also creates a multiplier.

Now I have elsewhere also mentioned that this needs to be done within the constraints that India has. But there is no denying that there is a need for a stimulus for basically a boosting consumption and also some supply-side and given the lower GDP that we are going to have this year because of the COVID lockdowns there will be a revenue impact. Taking all these into account one would expect an increase in fiscal deficit and therefore an increase in market borrowing as well.

Q: So since you spoke about the fact that revenue estimates as well as expenditure estimates are likely to change significantly from what was factored in budget 2020 would it be fair to assume that perhaps somewhere down the line we will need to see a big reset which could also mean a fresh budget because your budget 2020 estimates on expenditure and revenue are infructuous in the current situation?

A: In India we have to recognize that a lot of policy making happens outside the budget as well, so the budget need not necessarily be a constraint for policy making. I am someone who actually always believes a lot more in the substance than in the form and especially given the fact that policymaking happens outside the budget as long as we are doing what is required to support the economy whether it is actually about presenting a new budget or by other measures I think that is something which I would not worry about as much.
Also do recognize that this is a situation where there is significant uncertainty you know it is possible you present another budget and then again things change and do you want basically 12 budgets to be presented in each of the twelve months, that is not feasible, so you have to keep that in mind as well. This is a period of significant uncertainty, so it is better that we actually respond via the necessary measures that have to be taken.

Q: When you talk about responding via necessary measures and in the context of what you just said this evolving uncertainty when we last spoke you also said that that we will need to take a much more calibrated approach. Now the view from industry, from the sectors is that are feeling the heat at this point in time that the time is of the essence and the wait has gone on for a fairly long time, for relief, for support measures from the government. What is holding it back, what is holding the package back are there any specific considerations that the government is weighing which is what is holding the package back?

A: There are many considerations including the ones that I have spoken about and ensuring that all the inputs that have come in are also at account, there are inputs coming in as well as in the last few days and weeks. So they are all being taken into account, as I have insisted with you earlier as well the decision about when to announce it is above my pay grade and this is all they could share.

Q: Let me ask you this again I mean I have all the inputs come in and is the plan final? I mean an announcement is a political decision but is the plan final?

A: I can say that there has been a lot of work that has happened already in deciding all the key elements for the measures that need to be announced.

Q: Specifically as far as MSMEs are concerned and there has been a long list of demands including further interest waiver for perhaps another 12 months at least, for a credit line you know which could be levered, what do you believe is the need of the hour today as far as MSMEs are concerned since we have been speaking about them?

A: I think from the perspective of MSMEs for them liquidity support is what is really critical. A typical firm especially if you take an MSME turns its inventory over about four or five times a year and so an increase of about 20 to 25 percent in their credit you know can really help them to tide over a quarter or two of difficulties, so liquidity is what is really critical for these firms.

Q: Along with the credit guarantee provided by the government?

A: That may be actually also have to be kept in mind given that some of the risk aversion that is prevailing in the banks.

Q: Speaking of what you said the fiscal package, the stimulus or support or relief package will have to be within the fiscal constraints how would you at this point in time consider the way that rating agencies will view the moves of the government, the borrowing plan as well as the medium-term outlook as far as revenue and expenditure is concerned? Is the government factoring in how rating agencies will be viewing this and what the concerns are?

A: We are keeping in mind all the considerations, policymaking has to be nuanced enough to take all these considerations into account including the rating, including our tax to GDP ratio and making sure that these stimulus packages of other countries are compared with carefully, all those are actually being taken into account.

Q: As far as the GST is concerned and there is a constitutional obligation to provide GST compensation to states, but once again the revenue assumption was very different from where we find ourselves today do you believe that there will have to be a need to redraw that?

A: Redraw what?

Q: The revenue consideration as was promised to states, the basis for the compensation provided to states, the 14 percent formula.

A: That formula actually is being adhered to and in fact already money has been transferred to states and the commitments that have been made at the time when the GST was signed will be adhered to.

Q: Since you have spent a fair amount of your time in not just last year’s economic survey, but the previous year the economic survey highlighting the issues with the labour market as well as the need for deregulation what would your prescription be as more and more states look at what UP and MP are doing and go about deciding what to do with their labour laws? What would the safeguards be, what will the checks and balances be that you believe need to be put in place?

A: The template that has been provided by these two states are actually are in the larger interest of creating jobs for our youth which is by far the most important national priority that all of us must be attending to. We have provided very careful evidence for the fact that these restrictions and not just the specific one that we employed in the economics survey, but more broadly these restrictions act as a binding constraint for firms growing bigger and there by actually not only becoming more productive but also hiring more people in the formal sector. So, these are actually, I think very important path-breaking reforms that states actually should look to implement.

Corporate Comm India (CCI Newswire)