India has capacity for 8-9% growth; judicial, bureaucratic reforms key: Ex-CEA Subramanian

New Delhi: India can unlock 8-9 percent economic growth by accelerating structural reforms to reduce the cost of doing business and the cost of financing, former Chief Economic Adviser Krishnamurthy V Subramanian said on Monday.

He called for implementing factor market reforms in land, labour, and capital, as well as judicial and bureaucratic reforms.

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"Macroeconomic stability got India to 7 percent growth. Institutional reforms can take India to 9 percent," Subramanian said told PTI in an interview.

"India achieved above-8 percent growth when private investment as a share of GDP was more than 30 percent. We are currently at around 22-23 percent, 7-8 percent short of the target," he said.

"We will then leapfrog from 7 to 9 percent growth!" Subramanian said, adding that the public capital expenditure of the last five years has laid the infrastructure that private investment follows, and the banking system with gross NPAs near multi-decade lows is ready to support it.

Subramanian, who served as India's 17th Chief Economic Adviser from 2018 to 2021, and later as Executive Director at the International Monetary Fund, recently became the first Indian economist to receive the University of Chicago's Alumni Award for Professional Achievement in the institution's 85-year history.

The award has previously been conferred on more than a dozen Nobel laureates and other distinguished global leaders.

The eminent economist noted that India's macroeconomic foundations are strong and falling crude prices provide a near-term tailwind.

"… What takes us from 7 to 9 percent growth is the next wave of reforms: factor market, judicial and bureaucratic reforms that reduce the cost of doing business, and the cost of financing," he said.

Earlier this month, Asian Development Bank lowered India's GDP growth projection to 6.6 percent as against 6.9 percent estimated earlier for the current fiscal on concerns of higher energy prices fuelled by the West Asia crisis.

On artificial intelligence, Subramanian identified open-source frontier models as a strategic inflection point.

"The arrival of Kimi AI, which now matches leading proprietary models, is a huge opportunity India must not underestimate," he said.

"India need not build the next ChatGPT. India must become the world's most effective deployer of AI across healthcare, education, manufacturing, MSMEs, and most importantly public administration and regulation. Rapid and intensive deployment will determine productivity growth. That is the race to win for India," Subramanian said.

On managing external shocks, Subramanian offered a distinction he said policymakers often blur.

"Buffers help you survive a shock. Reforms make you less vulnerable to the next one," he said, adding that India's comfortable foreign exchange reserves handle the first.

The structural answer, he argued, lies in national income accounting itself.

"Consumption, investment and government spending account for over 95 percent of India's GDP. Every reform that strengthens private investment simultaneously raises growth and reduces external vulnerability," he said.

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On inflation risks from a potentially deficient monsoon, he conceded that food carries roughly 40 percent weight in India's CPI, and a weak monsoon could exert meaningful upward pressure on food inflation.

"Raising interest rates cannot grow more tomatoes," he said.

According to him, the RBI should look through temporary food price spikes provided inflation expectations remain anchored, which they currently do.

On the sharp decline in FDI and portfolio inflows, Subramanian said the Federal Reserve's sharp tightening cycle pulled capital to dollar assets across all emerging markets.

"But that was context, not excuse. The domestic explanation is more actionable, and more important," Subramanian said.

"Domestic private investment is the magnet that attracts global capital," he said, adding the way to attract durable foreign capital is through reforms that lower the cost of doing business.

"Judicial and bureaucratic reforms are central to that agenda. The reformatory zeal that India displayed before and during the Covid crisis needs to rejuvenate," Subramanian said.

Subramanian observed that a market economy rests on enforceable contracts the way a building rests on its foundation. "Countries compete for capital the way firms compete for customers", he said.

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