MMA in collaboration with ISB organised a discussion on the book, ‘India@100: Envisioning Tomorrow’s Economic Powerhouse,’ authored by Prof. Krishnamurthy Subramanian, Executive Director, International Monetary Fund (IMF); Professor, Indian School of Business (ISB); and Former Chief Economic Advisor to Govt of India. Mr Gopal Srinivasan, Chairman & Managing Director, TVS Capital Funds (P) Ltd., led the conversation with the author and celebrated economist.
Prof. Krishnamurthy Subramanian
Let me give you a little bit of background to set the context. Two thoughts have led to the crystallisation of my study. Firstly, I have believed that for positive outcomes to manifest, positive thinking is necessary, but for negative outcomes to manifest, negative thinking is sufficient. Therefore, there is a need for credible positive thinking about the Indian economy—and India@100 is an effort at that direction.
I have not built a castle of dreams. I’ve laid it on a foundation of what I think is sound economic logic and data. As a researcher, I have been trained in the Sherlock Holmes philosophy of theorising only after you have the data. That is the philosophy I’ve taken to the book as well. The idea for the book came about when I was in the last few months of my stint with the government.
The celebrations of India @ 75 were happening. I have had the privilege of writing three economic surveys, each of which focussed on a particular theme. The first one, in 2018-19, focussed on the economic strategy for India to become a $5 trillion economy; the second one, 2019-20, on the importance of ethical wealth creation for the Indian economy; and the third on the post-covid economy. My thoughts naturally gravitated towards what India would be when it turns 100, in its centennial year.
Rationale Behind the $55 Tn Economy
The bottom line is, I’m estimating India to be a $55 trillion economy, provided if it can grow at 8% in real terms from now on till 2047. Many of you may find this goal to be audacious, but there is economic logic underlying the power of compounding. Very often we do not understand the power of compounding.
To give you one example, let’s take Japan from 1970 to 1995 over a 25-year period. Japan’s GDP multiplied 25 times from $215 billion to $5.1 trillion. During this period, the GDP per capita increased from 2100 to 44,000. Their inflation fell from 8% to 1% when many of the advanced global economies went through a period of hyperinflation following the oil shock. Its currency appreciated from 350 yens to 85 yens to the dollar. In other words, there was four times appreciation of the currency.
I’m not assuming, but modelling and thereby predicting that in the next 25 years, the rate of depreciation of the rupee is likely to be significantly lower than what it has been. Historically, the rate of depreciation of the rupee has been about 3 to 3.5 percent per annum, but this has been during a period when India’s inflation has been about 7.5 percent on average.
Based on one of the fundamental tenets in international economics, if the real value of the currency remains the same in purchasing power parity terms and there is a decrease in inflation, then there will be a decrease in the rate of depreciation of the rupee. Because, when inflation is higher, the real value of currency reduces faster. To offset that and to keep the real value same, currency has to depreciate more. So with 7% plus inflation, the depreciation has been about 3 to 3.5 percent.
2016: The Historic Year
In the economic history of India, 2016 will be remembered as a pivotal year because it marked the introduction of the inflation targeting regime. This policy requires the Central Bank—the Reserve Bank of India—to maintain an inflation target of 4%, with a margin of plus or minus 2%. From 2016 to March 2024, the average inflation rate has been precisely 5%, despite challenges such as COVID-19, the Ukraine war, and the fact that advanced economies during this period have experienced inflation rates 2.5 to 4 times their historical averages. In contrast, India, whose historical inflation rate exceeded 7%, has managed to achieve an average inflation rate of 5%.
Therefore, going forward, 5% is a very reasonable expectation for inflation. So if depreciation of the rupee was about 3 to 3.5 percent with inflation at 7% plus, with the inflation declining to 5%, the rate of depreciation should go down by at least 2%; therefore, 1% is a very reasonable rate of depreciation of the currency. Growth at 8% in real terms is one of the most important elements of this theory. At 8% growth in real terms with 5% inflation, in nominal terms, the growth will be 13% (eight plus five).
To estimate the rate of growth in dollars, we have to subtract the rate of depreciation because it reduces the value in dollar terms, compared to rupees. So subtract 1% rate of depreciation from 13% and we have 12% nominal growth. Going by the Rule of 72 to find out the period for doubling of investment (72 divided by rate of interest), in six years, our GDP will double (72 divided by 12% growth).
Over the 24 year period from 2023 to 2047, there will be four doublings. In 2023, India’s GDP was 3.28 trillion precisely. Let us keep it at 3.25 so that we can work with round numbers. The first doubling will be from 3.25 to 6.5; second from 6.5 to 13; third from 13 to 26; and fourth from 26 to 52. We have done mental calculations here. The precise number is 55. The most important element in this is 8% growth.
Rationale Behind E&Y’s $26Tn Forecast
Let me use the same exercise to illustrate why the global consulting firm Ernst & Young has predicted our economy to be $26 Tn at 2047. They have assumed 7% growth in real terms. Add 5% inflation. Seven plus five is 12% in nominal rupee terms. Instead of taking 1% depreciation, which should be the result of lower inflation, let’s take the rate of depreciation to be what it has been historically, which is 3%. So, 12 minus three is 9% in nominal dollars. Using the rule of 72, the GDP now will double every eight years (72/9). There are three doublings from now to 2047: 3.25 to 6.5 to 13 to 26. That explains the $26 Tn projection.
Tendulkar of Global Economy
Let me give you an example from cricket. When Sachin Tendulkar played his first series in Pakistan in 1989 against the pace of Waqar Younis, Imran Khan and Wasim Akram, he started with a broken nose. That he fought back is legendary. Three years later, in 1992, he goes to Perth, after he’s already scored his first century at Edgbaston and hits a wonderful 100. Everybody wows about him. Sunil Gavaskar, in 1993, if I remember right, makes a statement and says, “By the time Sachin finishes his career, if he does not score 40 international hundreds and at least 12,000 international runs, I will personally go and strangle him. I will be old. My hands will not have as much strength, but I will still try.”
Now, this was a paternalistic statement from Gavaskar that marked the potential that Sachin had, which was assessed based on his past performance for the last three years. There is an important learning here for the Indian economy. Having seen the performance of the Indian economy over the past 30 years, especially the last 10 years, one can assess that there is potential for 8% growth. Sachin achieved those landmarks not just because Sunil Gavaskar assessed him. Sachin had to work really hard. He had to overcome setbacks like the tennis elbow and creatively come up with solutions.
There is an even more important learning in that as well. The Indian economy will have to work hard. State governments and central governments will have to work hard to implement good policies to deliver the 8% growth. Black swan events will inevitably come during a 25 year period and you must come up with creative solutions, like we did during Covid. If we can do that, we can be the Sachin Tendulkar of the global economy.
Gopal Srinivasan: We meet many people who want to put their country first. But to do it with such optimism and enthusiasm is absolutely fabulous. Subbu, you require a big round of applause. We can also see your intellectual rigour from the way you have analysed the data. I now understand why your thesis didn’t end up with just one award for the best thesis in America from the American Finance Association (AFA) but also won the Kauffman Award for thesis across 12 different sectors. When you were CEA, you talked about thalinomics. In very simple thalinomics language, what are the four or five building blocks beyond the rupee appreciation or depreciation rate that you had in mind?
Krishnamurthy Subramanian: I will share a little bit of the background that I come from, and which is an aspect that oftentimes drives my economic thinking as well. My father lost his father when he was seven years old. He finished SSLC. He didn’t have the privilege to go to university, but he made sure that my brother and I had the opportunity to get education. I have seen the common person’s life. I spent my entire childhood growing up in Type 2 railway quarters. When I was a CA, I got a Type 7 railway quarters and I really missed my father. If he had been there, he would have been so happy to see that.
Economics is a discipline that is extremely important. Each one of us in our own families must study this, but at the same time, each one of us thinks that we understand economics fully. The nuance in that is something which is many times missed. Therefore, it is important to be able to explain economics to the common person with all its nuances. I’ve tried to use examples that are common to us, even to those from non-economic backgrounds. Thalinomics idea was along the same lines, because nothing is more common than a plate of thali or plate of food and we encounter it at least three times in a day. I used that to have a conversation on inflation. In a similar way, let me explain the four pillars.
The Four Pillars of Equitable Growth
In a democracy, it is important to get the necessary support for good economic policies and structural reforms to happen. It is really critical that the benefits of growth spread far and wide. Therefore, one of the pillars, is social and economic inclusion driven by jobs. If my father had not got a job in the Indian railways, I wouldn’t have even one hundredth of what I have today. I was socially excluded, but with the power of education and a job, things changed. We have a very young demography. The young population need to live the Indian dream too. That is where the social and economic inclusion is important.
The second pillar, from a macroeconomic perspective, is the focus on growth and growth alone. Good policy making requires absolute clarity of thought. Having been part of government, I cannot emphasise enough what the first Nobel Laureate in Economics, Tinbergen said, and which was coined as a Tinbergen rule: as many instruments, so many policy goals.
When we have conversations on things like tax policy, we try and hobble that with multiple objectives. Tax policy should be about efficiency, not about trying to do socialism. Tax is the most critical part of ease of doing business. Our intellectuals take one of those narratives that is prevailing in the West and just transplant it here, without thinking whether that is equally applicable for India or not. For example, higher inequality translates into lower socio-economic indicators. But that is not the case with India and that is why we must focus on growth and growth alone at the macroeconomic level.
The third pillar is wealth creation. In my opinion, if there is one mindset change that is required in India, it is about the way we think about wealth creators. Given our socialist past, we think about wealth creators only as a necessary evil. We do not think about them as enormous contributors to society.
Let me draw again, a personal example. When we were young and living in Bilaspur, we were a lower middle class family. We used to have a house help who used to come and help my mother in doing the dishes. This house help would also work with nine other families. A lower middle class family like ours, which was not creating much wealth, was creating one-tenth of a job. In contrast, the local jeweller in Bilaspur was a wealth creator. He used to employ about 100 employees between his business and home. While we were paying a meagre amount to the house help, he was paying at least three times of what we gave as salary. He was creating jobs both in terms of quantity and quality.
I do not hold a candle for any industrialist in this country, because not one rupee have I earned by doing consulting for any one of them. Therefore, I can speak with absolute conviction that what I say is in the interest of the country and our economy. No industrialist puts his money in a mattress and sleeps with that. He puts it in the companies and those companies provide jobs.
Just 5% of us might be working in government jobs. The rest work in private sector jobs. The jobs come from wealth creators, who create companies. We allow many demagogues to pull wool over our eyes. They create an artificial tension between what is good for the citizen and wealth creation. The reality is that there is no tension—natural or artificial. You need wealth creation for employment to happen, and thereby enabling social and economic inclusion. This is a mindset change that is absolutely required.
And finally, the fourth pillar, is a virtuous cycle driven by investment. Over the last 100 years, every country that has grown at 5% plus growth rate in real terms, not just for one or two years, but over an entire decade, has done that by investing more. Therefore investment is absolutely critical. These are the four pillars for India to have not only high growth, but growth that is equitable and the benefits of which spread far and wide and create employment
Gopal Srinivasan: In India, democracy is noisy. We cannot do stroke-of-the-pen changes. The RBI is unfavourable to credit expansion. Can we really manage 8% growth with all this noise?
Krishnamurthy Subramanian: Stretch goals are important. Research in psychology also shows that a 10 or 20% stretch is something that goads you to work harder. Some of the challenges are absolutely well taken. We are a democracy. I actually want to take this opportunity to therefore highlight that we are a federal structure in which both states and centre have equal roles to play. I am not part of the government now and so I’m not speaking for or against the government.
When it comes to governance, power and responsibility are two sides of the same coin. For instance, if states say, ‘You are getting into my into my territory,’ let’s ask them the question: ‘Are you fulfilling your responsibility?’ Agriculture is a state subject. Have you reformed the farm laws that seem to continue since 1960s and benefit only a few? For all the rhetoric about farmers, has it benefited the small farmer? Have you done the changes? What about your responsibility? We need to ask these questions. Immediately after the central budget, we ask a lot of questions to the union government. Why are we not asking similar questions to the state governments after they present their budgets?
Manufacturing requires factor inputs, which is land, labour, capital, logistics, power and economies of scale. How many of these are state subjects? Land, labour and power are all in the domain of the states. If smart meters are not employed and there is power pilferage, what will happen? Economies of scale don’t happen when firms don’t grow. The incentives are very perverse. When are our media friends going to ask questions to the state governments and start writing editorials asking the states to do reforms? This is very important for a democracy like ours.
On credit creation, mindset change is required. In 2020, our private credit to GDP ratio was 58% while the global average was 130 to 140%. This average of 58% prevailed for the globe in 1960. It means we are six decades behind. It is because, almost 94% of credit in the Indian economy is collateral-based. This is in a country where 60% of the economic value-add comes from services which do not have too much assets. What we need is cash-flow based lending. We now have the public digital infrastructure to enable this.
Gopal Srinivasan: We call ourselves democracy. But we do not have district level or municipal level or panchayat level democracy. The administrative officers appointed by the state government are ruling all the way. Should not changes be happening here?
Krishnamurthy Subramanian: This is a phenomenal question. Yesterday, I was coming from Kanchipuram and we were 26 kilometers away. Google Maps was showing me that it would take me one hour to travel. I was quickly comparing that with travel in the United States. I would cover 15 miles in 20 minutes. The question that automatically came to my mind was, “How do we get state governments to become responsible?” Some parts of the roads are absolutely shambolic.
The thought that came to my mind was, ‘Why don’t we start tracking, using Google data?’ It is possible now to see the average speed of all the major cities and feed that to state governments. Social media gives us that democratisation. Local roads are afterall developed by state governments. If we save travel time, we can improve the quality of life and spend extra time with our families. We must also think innovatively if we can stagger the work timings.
Gopal Srinivasan: We generally compareourselves with China. But aren’t we getting into a middle income trap like Brazil, which is also noisy democracy like ours?
Krishnamurthy Subramanian: We don’t need to restrict our comparisons to China. Many of the East Asian economies have been able to grow their GDP per capita significantly without getting stuck in the middle income trap. There are important lessons there. The political establishment must realise the importance of reforms. Citizens also must highlight the importance of reforms at the state level.
In India, we have the PLI scheme. But incentives should not be ad infinitum. We support children. But supporting them when they are 40 does not make sense. In Latin American countries, the industries that benefitted from policies wanted to protect their turf and did not allow subsequent reforms to happen. Three factors are sufficient for a country to avoid the middle income trap: manufacturing sector growth; increase in secondary sector productivity; and rule of law. India needs to be definitely aware of that. Judicial reforms are also very important for our country.
Gopal Srinivasan: During peak Covid time, when the Western world was spending a big percentage of the GDP as relief package, you were stingy and economists were shouting from rooftops that it would take India deep into trouble. But you were very confident of handling it and you proved later to be correct. There was criticism and then there was praise. Where did that optimism come to you in the midst of such an overwhelming catastrophe?
Krishnamurthy Subramanian: When I took over as Chief Economic Adviser in December 2018, growth was declining. There were many narratives explaining the decline, but I was convinced that it was primarily due to crony lending and its lingering effects. I firmly believed that there was nothing structurally wrong with the Indian economy because we had implemented policies like the Insolvency and Bankruptcy Code (IBC), the Real Estate (Regulation and Development) Act (RERA), and various other reforms. We had also achieved significant progress in financial inclusion, with over 500 million people brought into the system. Additionally, cleanliness initiatives were underway, and our health outcomes were improving.
As soon as the lockdown began, we assembled a phenomenal team of young Assistant Directors, Deputy Directors, and Indian Economic Service officers in the Ministry of Finance. I took great care in creating this team, which we called Team CEA. I tasked them with tracking about 60 high-frequency indicators on a weekly basis, starting from the very beginning of the lockdown. Every Monday morning, we would review the level of each indicator from the previous week, compare it to the current week, and assess the change. We shared this data with the Honourable Prime Minister, the Honourable Finance Minister, and several senior cabinet ministers. This data, along with my assessment of the economy, proved to be invaluable.
During the lockdown, many of these indicators, such as e-way bills and power consumption, were trending downward. However, they began trending upward as soon as the lockdown was lifted. I could see the ‘V’ shape in the data. The 24% decline in GDP was solely due to the restraint on economic activity caused by the lockdown. As restrictions were lifted, the GDP rebounded, leading to the V-shaped recovery.
Gopal Srinivasan: My last question. Have you received a call from the Prime Minister’s Office and what’s next for you?
Krishnamurthy Subramanian: I’m tempted to say, ‘with friends like you, who needs enemies?’ (laughs). But honestly, given my background, what gives me the greatest satisfaction—and something I am deeply passionate about—is serving the nation.
