Siddhartha Ahluwalia 0:03

Hi, this is Siddhartha Ahluwalia, your host of Neon Show and founder of Neon Fund, a venture capital fund that invests in B2B enterprise software built out of India for the globe. Today I have with me Krishnamurthy Subramanian. Welcome sir to the podcast.

I really enjoyed reading your book India at 100. What a fantastic book, which and you said that this is not optimism, this is realism according to you. Right?

My pleasure Siddhartha to be here. We will discuss various details, right? But you have such an illustrious career, right?

You have been chief economic advisor, the 17th one to the government of India, 2018 to 2021 timeframe. You are now exec director at International Monetary Fund, right in Washington DC. And you are an engineer turned economist.

You have put in your book that you see India as a $55 trillion economy at 2047, like 100th year of independence. That’s the title of your book, right? India at 100.

Ernst & Young says that it will be $26 trillion, Goldman Sachs predicts it will be $50 trillion, but by 2075, right? And you have tried to prove that by mathematical.

Krishnamurthy Subramanian 1:06

Not tried to, I would like to think that I have proved it.

Siddhartha Ahluwalia 1:10

You have proved it by mathematical means, right? So for a common man, how would you explain it? We will go into details of various aspects, but sitting at $3.7 trillion today.

Krishnamurthy Subramanian 1:19

Yes. No, I think, see the first thing that we have to understand is over a long period like 25 years, the power of compounding becomes very important. And let me give a couple of examples to anchor this idea.

You know, examples from other countries. Let’s take Japan from 1970 to 1995. During this period, the Japanese economy multiplied its GDP by 26 times, precisely 25.6 times. You know, in 1970, its GDP was about $220 billion. By 1995, its GDP had multiplied to $5.5 trillion. That’s a 26 times multiplication.

Second, you know, take China, 1996 to 2021, and I did not give China as a first example because the first retort would be, oh, that’s not a democracy, and that’s why I chose Japan as the example. And China, for instance, from 1996 to 2021, multiplied its GDP 22 times. Now, again, over a 25-year period.

What I am projecting here is about a 15 times multiplication. You know, compared to 26 times for Japan, 22 times for China, it actually is not as aggressive. And as you know, I have shown in the book, it’s based on very rigorous analysis.

Even the growth rates that I’m assuming in, you know, real growth rates, I’ve spent an entire chapter, you know, building up from grounds up, you know, based on investment rates, based on productivity, and not just basically one model, but three different models, you know, what the growth rate is likely to be, what’s the potential growth rate that India, you know, can generate, and then I have used that to be able to predict this. So that’s how I, you know, any prediction that I’ve made, and that is where I guess the engineer in me, you know, I like thinking ab initio and build up things ground up, not just sort of pull assumptions from thin air.

So that’s why I think it’s a very, you know, rigorously undertaken exercise. And that’s something which I generally sort of try to take it very seriously, you know, say these things with a lot of rigor. So let me explain, you know, for the benefit of our viewers, how this comes about.

As I said, I think the power of compounding is something which many times over 25 year period, we don’t understand how much right, you know, what, what power of compounding can do and in this process, I’ll explain as well why, for instance, the Ernst and Young and the Goldman Sachs predictions are actually incorrect.

Siddhartha Ahluwalia 3:56

So first, I would like to, you know, you to explain the power of compounding via the example of chessboard that you gave in your book.

Krishnamurthy Subramanian 4:03

Yes, yes, yes. No, I think so I that’s, that’s something which I’ve done all through the book so that, you know, common people can understand ideas, because, you know, one of the main guiding principles for me as an economist, and especially when I was in, you know, when I’ve been in sort of public positions, is to is to enable economics to be understood by the common person. Because in a democracy, good economic policy can happen only when common people understand economics and that’s been one of my, you know, aspirations to make common people understand economics.

That’s why every, you know, chapter in the book starts with a with with maybe an anecdote or a story that anchors the idea, the main idea in that book, consistent with with that actually to, you know, illustrate the power of compounding. This is a story which actually goes as follows, where a sage comes, you know, and challenges a king who prides himself on his chess abilities, to play a game of chess, and, you know, the wager that is put is that the sage says, if I win, you will, you will give me what I want. I mean, and this is a king, so he says, you know, okay, fine, whatever you ask, I’ll give it to you.

And as it turns out, the sage wins the game. And then what he asks actually initially seems to be a very, very trivial ask really, because he says, nothing king, you know, just do one thing, just get a chessboard, put one grain of rice in the first chessboard, double it to two grains in the next one, and then double it to four grains, and then double it to eight, and then double it to 16, and so on. The king does not understand the power of compounding, you know, when these when when it starts doubling like this, by the 20th, 20th, 25th square, his entire, you know, granary is exhausted completely, because, you know, that’s the power of compounding.

And if you actually go and estimate by the 64th square, the entire, you know, stock of grains, not just in his kingdom, but everywhere in the world, if you pull, you know, bring all of that together, also, you cannot basically, you know, satisfy the sage’s request, that is the power of compounding. And another way actually to understand this is, you know, what is called the rule of 72, which is a very, very easy way to understand how much it takes to how many years to take to it takes to double your money, for instance, if your money is growing at 12%, okay, your rate of interest is 12%, then your, you know, your money doubles every eight, every six years, because 12 times six is 72, or 72 divided by 12 is six, right.

So over a 24 year period, if your money doubles every six years, there is there are four doublings, and you know, two to the power four, because two into two into two into two, that’s 16 times your money doubles, you know, 16 times over, if on the other hand, you just you’re, you’re, you know, interest rate of interest, your earning is just 3% less, it doesn’t seem very, you know, very, you know, very, very much lower, you know, at the outset, but if you once you see through this, you’ll see how power of compounding works.

If your interest, your earning is actually 9%, then your your money doubles every eight years, because nine times eight is 72, or 72 divided by nine is eight years, right. So over a 24 year period, you get only three doublings, not four doublings. So your money multiplies only eight times, think about it, actually.

So if you invest, you know, let’s say, 10 lakhs, in, you know, and at 12%, if you’re earning a return of 12%, you’ll have 1.6 crores by the time 24 years, you know, in contrast, if you’re earning only 9%, just 3% less, not very different, you have only 80 lakhs, where’s 80 lakhs, where’s 1.6 crores, that is the power of compounding. And this is, you know, those that, for instance, don’t reflect upon it, you know, upon the power of compounding as much, they’ll say, you know, for instance, sometimes they say, what is this person smoking, you know, 15 times multiplication, we are only at a three and a half trillion GDP and 55 trillion, what is this, you know, that’s one one aspect. Second, if they’ve not looked at other cross country experiences, then they’ll find it difficult to sort of believe.

But as I just mentioned earlier, you know, in responding to your previous question, there are instances of countries actually having multiplied their GDP by 26 times, 22 times over a 25 year period precisely by exploiting the power of compounding. This is something which is very important to understand. That is why, you know, I actually have set out as the ambitious target of 8% growth.

It is achievable, but it is ambitious, because I want to keep that stretch goal, having understood the power of compounding, to actually keep that stretch goal. So now let me, you know, explain the 55 trillion and contrast it with the, you know, with Goldman Sachs and Ernst & Young. So if India grows at 8% in real terms, and real terms means space, it is captured in terms of purchasing power, what you can buy.

Because, you know, this is important to understand, because suppose you have 100 rupees in your pocket today, right? You can buy 100 rupees of goods and services today. But with inflation, let’s say inflation is 5%, which is what it has been from 2016 onwards.

Next year, that 100 rupees can only buy, you know, 95 rupees worth of goods and services. This is important to understand, because money in the pocket is basically, that’s just in nominal terms, you know. As inflation happens, actually, what is, you know, inflation erodes the purchasing power of that fiat money.

And that is what, that’s why when we talk about growth, we talk about real growth, which is what is, you know, enhancing actual earnings in real terms. In other words, what you can buy in terms of goods and services, that’s what. So distinguishing between real growth and nominal growth is actually, therefore, important.

Nominal growth is just real growth plus inflation, you know, as an approximation. Actually, there’s a multiplicative term, but I’m ignoring that for a minute, you know, for the purpose of this podcast here. So if we grow at 8% in real terms, with 5% inflation, and I’ll explain that 5% inflation why, you know, a little later, that’s, you know, 13% growth in nominal terms, 8 plus 5, right?

But that is, you know, growth in rupees, nominal terms in rupees. When we are projecting the GDP in 2047 in dollar terms, we also have to take into account what will be the rate of, you know, appreciation or depreciation of the rupee vis-a-vis the dollar, because that’s what will affect our estimate in dollar terms. Now, in the books, I’ve actually, you know, I have assessed over several 25 year periods, what has been the rate of depreciation, and I have a conceptual framework, which basically, you know, and I’ll explain that just in a minute.

Having done that, I actually have assessed that if India grows at 8%, the rupee will actually depreciate by about half a percent per annum. And let’s round that off to 1% just for, you know, to keep whole numbers, right? So 8 plus 5 is 13, that is in nominal terms, nominal rupee, and 1% depreciation, depreciation reduces the value in dollar terms, compared to rupees.

So you have to subtract that from the rupee growth rate. So 13 minus 1 is 12%. Are you with me so far?

Siddhartha Ahluwalia 11:38

Yeah, so just for our listeners, why when you calculating the growth rate, you are adding the capacity of the growth, like the GDP growth, plus inflation, both?

Krishnamurthy Subramanian 11:50

Yeah, as I know, I’m not adding capacity, I’m saying real terms. So real, see when you have to actually, as I said, you have, suppose you, let me take this example, right? If your earnings are growing, let’s say, you know, maybe my salary, maybe is growing at 12%.

Okay, that is in nominal terms. In other words, the actual money that you have in your bank account, that is a nominal value that is, let’s say it’s growing at 13%. But if suppose inflation is 5%, then even though your bank balance is growing at 13%, your, you know, ability to buy goods and services is not growing at 13%.

As I said, and you know, for instance, you know, one of the ideas and it’s there in the book as well, I introduced the concept of Thalinomics, which is, you know, what is the price of a thali? If for instance, today, let’s say you can buy one thali, you know, having paid 100 rupees, next year, because inflation is happening, the value of your money has gone down, you cannot buy actually one full thali using that same 100 rupees, because you know, the value of that money has gone down to 95. That is the important thing to understand.

Inflation essentially reduces the value of, you know, of the purchasing power of, and so that’s why the distinction between real growth is captured in what you can purchase in terms of goods and services. And going back to your salary example, your earnings example, your bank balance might be growing at, you know, at let’s say 13%. But inflation is happening at 5%, then you’re, you know, you have to subtract that to know how much is your earnings capacity growing in terms of what you can buy, you know, goods and services that you can buy.

And you know, you can understand this, for instance, let’s say, if you ask your, you know, your maybe your dad or your mom, you know, they’ll say, oh, you know, we used to pay for instance, they’ll sometimes say, we used to pay 10 rupees for a kilogram of, you know, milk, let’s say, right? And today, we pay 60 rupees. What is what has happened?

It’s just inflation, right? So what is what was 10 rupees, let’s say worth, you know, maybe 20 years back today is worth about 50 rupees or that is the impact of inflation. That is why when we talk about economics, we always talk about what we can buy in goods and services terms, because money, when you think about it, money in and itself has no value, right?

Maybe for some people, money in and itself, maybe looking at the numbers, the number of zeros they have in their bank account, they may derive, but that’s not how, you know, most people will think about you think about, you know, money is basically just a means for you to buy some goods and services. That is why when you, you know, capture the value of money in economic terms, you capture what you can buy in goods and services. That is why you focus on what is called real growth.

That’s the, that’s the reason. So 8% is that real growth, which is essentially capturing if India grows at 8%, every year, you know, the average Indians, his ability to buy goods and services will grow by 8%. Even though his his salary nominal terms, what is increasing in his bank account will grow at 13% because of the inflation 5%.

Okay, so that’s the that’s the idea. But this is in rupee terms. Now when you have to measure it in, you know, in dollar terms, right dollar terms, dollar also has inflation in the US economy too faces inflation.

So if for instance, if he wants to convert in dollars, you know, the number of dollars he would have in his bank account that will grow at the dollar rate for which you have to take into account the rate of depreciation of the rupee vis-a-vis the dollar, which I said I have assessed it to be 0.5% if the economy grows at 8%. So that’s why you know, 8 plus 5 13, right, that is basically the rate of growth in nominal rupees. If depreciation is, you know, 1%, I’m rounding out to 1%, you know, in, instead of taking it as half half percent, it’s a little, you know, sort of less convenient to work with decimal.

So that’s why. So subtract that you get 13 minus one, you get 12, right. Now go back to the example I gave when I was talking about compounding, I said, if you are growing, if your money is growing at 12%, then GDP, then then your money multiplies every six years.

So same way, if your GDP growth rate in dollar terms, nominal dollars, actually, you know, in other words, the sort of what would be in bank accounts, you know, would be that is growing at 12%, then your GDP is multiplying every six years. And as I said before, if over a 24 year period from 2023 to 2047, that’s a 24 year period. If GDP multiplies every six years, there are four doublings there, right?

That’s two into two into two into two, two to the power four, which is 16 times. And let me to be precise, let me actually lay this out. In 2023, India’s GDP was $3.28 trillion. Let me round it off to 3.25. So the first doubling is 3.25 to 6.5, right? The second doubling is 6.5 to 13. Third doubling is 13 to 26.

Fourth doubling is 26 to 52. Okay, which is close to the $55 trillion number. Now, let me explain why I think the assessment by, you know, one of the most one of the key elements that is missing in the assessment by Ernst & Young and Goldman Sachs, let me explain that and why that leads to the 26 trillion, you know, in the case of Ernst & Young.

So they assume the rate of depreciation of the rupee and sort of back calculating from there to be what has been there in the past. And this way, let me explain. So if you go by the data, and that’s what I always go by, I use evidence to actually inform, you know, inform the real world.

From 1991 onwards till you know, 2016, when India implemented what is called the inflation targeting regime, that essentially means that the government then, you know, entrusted the Reserve Bank of India, the central bank of the country to target inflation at 4%. Earlier, before this inflation was much higher in India, there were periods where inflation is to be, you know, was in double digits following the global financial crisis, you know, and at that time, you know, peak inflation, for instance, was 18%. Okay.

And for 18 months, we had at that time inflation that was, you know, in double digits every month. So the average inflation was about seven and a half percent. Okay.

Post 2016, after this inflation targeting regime has been put in place, inflation has reduced to 5%. And, you know, many common people will say, Oh, what is this Prof talking that, you know, everything has become expensive. That’s the reason is, you know, and Daniel Kahneman, in his in his wonderful book, Thinking Fast, Thinking Slow, actually talks about, about the, you know, what we have, we all of us actually suffer from what is called saliency bias, which is, we just look at what is happening in the last one year, maybe one, two years, we don’t take enough of a, you know, a longer span of history.

So we forget the fact that there was a period of time when inflation was growing at more than 7%, seven, seven and a half percent, which means that, you know, prices of all common goods and services were growing even faster than today. And it is just that because we only focus on, you know, here are now and not look at, you know, enough of the past. So people will say, you know, Oh, you know, what is he talking about for inflation has decreased, I’m finding in my, yes, prices are, you know, prices are growing, prices are growing at, on average, 5%, not at seven and a half percent.

And I think that is something which is really important to understand many of, I think now, behavioral economics highlights all the many biases that we suffer from in our thinking, and which is why many times actually, you know, people sort of maybe will go far too much by anecdotal, let’s say, they were instead went to maybe, maybe some commodities have actually, you know, prices have increased. But when you look at inflation in the economy, you have to average out across all commodities, not just you look at a few commodities. I think that’s the other bias, which is basically anecdotal bias that many people suffer from as well.

But as an economist, I have to actually try and avoid these biases, you know, when I talk about about the economy. So this, the fact remains actually using data inflation was more than, you know, 7% up until 2016 has declined significantly, you know, to 5%. And this is despite COVID despite the Ukraine war and all the supply side problems, which actually cause inflation, when you have a reduction in supply, that means prices will go up and inflation goes up, right.

So now, what does this mean for the for the currency? Here, let me explain again, as I mentioned earlier, what does inflation do? inflation reduces the purchasing power of your of your money, right. So US inflation has been on average about, you know, about 2%.

Okay, India’s inflation now is 5%. But historically, India’s inflation was about seven and a half percent, which means that if you had 100 rupees today, 100 rupees could buy goods and services worth 100 rupees today. But next year, you know, it could buy it could buy only 92.5 worth of goods and services, while in the US $100 today, actually could buy $100 worth of goods and services today. But next year, it could buy $98 of you know, goods and services. In other words, the value of the dollar was eroding at a much slower rate compared to the value of the rupee. This is in the past.

Now, when the rupee value or the value of the rupee is eroding much faster, in order for the exchange rate, or which is basically capturing, you know, the ability to purchase goods and services in some sense, what 100 rupees can buy in India versus what $100 can buy in the US for that to basically remain the same, the currency which faces higher inflation, higher erosion in the in its value has to depreciate more.

That’s the fundamental principle that if a currency faces higher inflation, it will face higher depreciation as well. Said said differently, or conversely, lower inflation means lower depreciation. And that is why, you know, during the period when inflation in India was seven and a half percent, US inflation was 2%.

In other words, the difference in inflation was five and a half percent, the currency was depreciating at about three and a half percent. And the this is the fundamental difference, what the what the Ernst and Young and the Goldman Sachs predictions do not take into account is this importance of the inflation targeting regime, the change in inflation, a very important macroeconomic phenomenon that has to be taken into account. They just extrapolate from the past.

And, you know, in my opinion, this was an important regime change, which hasn’t been factored into account. So now, let’s do the same calculation. As I said, instead of a half a percent or a 1% inflation, if I basically if it is three and a half percent, instead of half a percent, so that’s 3% difference, right?

So instead of 12% growth, you get 9% growth. Now go back to again, the example that I laid it out earlier, when your GDP growth in nominal term is growing at 9%, then you know, you are doubling your GDP every eight years, which means instead of getting the the four doublings over a 24 year period, you only get three doublings, which is two into two into two, which is eight times.

Or in other words, you go from 3.25 to 6.5, 6.5 to 13, 13 to 26. So you see clearly now that based on absolutely fundamental assumptions, and, you know, deep thinking, rigorous thinking, and not just, you know, in my opinion, actually, if you were asked me, I would say, you know, just assuming that whatever inflate whatever rate of depreciation has prevailed in the past, you know, will prevail in the future. I do not think that is actually an example of deep thinking, because some very important macroeconomic phenomena have actually have not been factored in, into the analysis in contrast by thinking deeply and, you know, relating how the change in inflation matters for the currency, you know, the currency depreciation, and then factoring in is actually far more rigorous analysis, far more realistic analysis.

And that’s something which actually I must mention in the book, because I didn’t want to belabor this, you know, for ensuring that what I’m saying is very robust and rigorous. I did not just test, you know, this framework for 25 year periods, I tested it for 20 year periods, I tested it for various 15 year periods. And I tested it for 10 year periods as well, which is not there in the book.

But that was first to convince myself, you know, if I’m not convinced, I cannot go and convince anybody else. So I did that. And actually, I found that, you know, 10 year periods, the framework does not work that well, because it’s not long enough period economic fundamentals don’t throw up or don’t show up as much, you know, but over 15, 20 and 25 year periods, this framework that I’ve explained to you, which is difference in inflation, and differences in GDP growth, GDP per capita growth, you know, they do show up in the in the in the currency appreciation or depreciation. And that is why actually, you know, I can say it with with, you know, good amount of confidence, of course, you know, nobody can predict the market, you know, that as for instance, you know, Keynes said that you can remain, the market can remain irrational for far longer than you can remain solvent.

And that is an important lesson that you have to always keep in mind whenever you make a prediction. But but nevertheless, I think, you know, on average, if you have to put your bets on something, you will bet on fundamentals showing up over a 25 year period. But that’s what I’ve, and that is why I actually, you know, say it with conviction, that the analysis that I have actually undertaken is far more bottoms up, far more rigorous, and takes into account some very important macroeconomic phenomena, which which is especially the, the inflation targeting regime that has been put in place.

And thereby, I think the so the main ask that I have for the for the Indian economy is really for, you know, for us to grow in real terms at 8%. And here, if you look at the, again, at the data, from 1991 onwards, you know, we’ve grown at on average at about 7%, close to 7%. So from 7% to 8% is a stretch goal.

But in my opinion, ambitious, and I think it is important to have, you know, to have ambition. That’s why I’ve actually, even, even though in the book, I have, you know, estimated two other scenarios growth at 7% and 6%. I focused, you know, on the 8% goal.

So that actually set that ambition for the Indian economy to aspire to grow at 8%. Thereby become a $55 trillion economy in 2047.

Siddhartha Ahluwalia 26:18

And from 2016 onwards to 2023 onwards, you mentioned that 2024 2024. Yeah. The, the inflation of India was 5%. US inflation was still 2%.

Krishnamurthy Subramanian 26:30

Yes, US inflation has been about, yeah, about 2%. Correct.

Siddhartha Ahluwalia 26:33

So was the currency depreciation 0.5% or 1% during that period?

Krishnamurthy Subramanian 26:38

So I think… very good question. This is a period where the, the, you know, you had COVID, there’s a period you also have had the Ukraine war. And what happens and this is whenever, you know, there is there is a, an economic shock, negative economic shock.

Typically, what we’ve seen is that and this happened even during the, you know, in the global financial crisis as well, that the dollar appreciates. That’s, that’s something which is not a long run phenomenon happened actually what what temporary periods of it and that temporary period can last for maybe a couple of years. The reason that happens, you know, or a little long could be even a little longer.

The reason that happens is that there are two aspects, which is what is called the flight to safety. And what and home bias, let me explain this. The reason I’m saying is actually I’ve looked at this data and during this period from 2016 onwards, the rupee has depreciated by actually lower than previously.

As I said earlier, it used to depreciate about three and a half percent, it has depreciated at about 2%, not the half. But do keep in mind the GDP growth on average from 2016 has not been, you know, has not been 8% either. So growth has been about actually I think on as a but has been about six and a half percent.

And that actually therefore leads to, you know, the currency depreciation itself being about one and a half percent, but it’s been about 2%. The reason being that these two shocks, which is COVID and, you know, Ukraine war, during that period, the dollar has appreciated far more than economic fundamentals demand, because of the combination of these two things, which is, first, you know, flight to safety, what happens is that, you know, even today, for instance, about at least 50% of overall global investors and the money is in the US, right? And, you know, that’s one factor, which is the fact that most of the money is in the US. Second, you know, there is what is called home bias, all of us are very comfortable at home, right?

You know, physically as well, you know, compared to staying in the hotel, you come far more comfortable in staying at home. In a similar way, you know, investors understand their home country far better than they understand other countries, especially emerging economies. That is why when there is a shock, a negative economic shock, people become risk averse.

And because they understand the domestic economy very well, and American investors understand the American economy, you know, much better than they understand, let’s say the emerging economy like India. There is this, you know, during crisis periods, because of this, you know, sort of risk aversion, there is flight to safety, they think they find home assets to be much safer. And that’s because of the home bias.

Therefore, they move money, you know, away from emerging economies, on to the United States. It’s a combination of these two that actually leads to appreciation of the because anything that says, you know, there’s a lot more buying, if they’re actually moving into dollars, there’s a lot more dollar buying, and therefore the dollar appreciates. That’s why during periods of crises, the dollar appreciates.

So it’s not exactly, you know, one and a half percent as it should have been in the, you know, in the, what the model would predict from 2016 onwards till 2024, it is 2% up slightly higher at half a percent because of this phenomenon. But as we go along, you know, the impact of some of this, you know, will will be even out because there’ll be periods, there’ll be some crisis periods, but there’ll also be periods of high growth. You know, when high growth happens, actually, then, you know, risk aversion goes down investors then look for better opportunities in emerging economies like India.

And that is a period where actually some of this gets evened out.

Siddhartha Ahluwalia 30:26

Got it. And let’s say, let’s evaluate period since liberalization, right? What was the Indian economy back then? And what is today?

Krishnamurthy Subramanian 30:34

Very good question. So let me give you a startling statistic. You know, in 1947, when India became independent, our GDP per capita was $2,730.

Siddhartha Ahluwalia 30:49

And the same today.

Krishnamurthy Subramanian 30:49

It’s the same today, today. And that is, so you know, you, you robbed my thunder. That’s what I was going to actually say.

But but in but but the interim, you know, the process through which we went, this is really critical to understand which is. So let me explain for the benefit of viewers how this 2,730 in 1947 comes about, you know, in rupees, the GDP per capita was 9000 rupees in 1947. The exchange rate then was 3.3 rupees to the dollar. So you know, to divide 9000 rupees by 3.3, you get 2730. Because of the socialist policies that we pursued from then on till 1991, when we liberalized, and there is an important lesson, actually, that’s why I’m explaining this. We reduced our GDP per capita from 2730 to $300.

Siddhartha Ahluwalia 31:42

How is that possible?

Krishnamurthy Subramanian 31:43

What do you what do you mean, that’s possible that exactly happened. We reduce our GDP per capita nine times, if you if you follow bad policies, obviously, you’ll get bad outcomes.

I mean, it’s not rocket science, right? If you could, if you do think about it in our own lives as well, if you let’s say, you know, instead of choosing to go and study and maybe work hard, if you start to basically go and let’s say, you know, you’re lazy all the time, it is whiling around, you’re not doing anything productive. You’re not investing in yourself, you know, will your, will your earnings grow?

No, in fact, if anything, you know, others will get ahead. And you will you will be left behind. So if you’re not investing enough, if you’re not, you know, being productive enough, you will be left behind.

That is exactly what happened for India as well. Other countries were investing very well, other countries are becoming more productive. And India actually left behind, you know, during this period.

And that’s there’s important lesson. That’s what I’m coming to. This actually, you know, I mean, I’m glad you asked this question.

How is that possible? It actually was. I mean, what do you mean it’s possible, it actually happened?

We reduced our GDP per capita from more than $2,700 to $300 in 1991. And there is a phenomenally important lesson in this, because there is still a lot of residual socialist thinking, you know, in today, you know, and a lot of political rhetoric also, you know, spews socialist ideas. That’s why it’s important to understand, you know, using actual data and evidence.

So from liberalizing from that $300, and not just $300, you know, in 1991, we had to go and, you know, pledge our gold, you know, with the Bank of England and Bank of Japan, think about it, you know, that is what socialist era policies gave us, right. So we have to, you know, really remember that, that. And I think across the world, if there is one lesson that actually, you know, whether it’s, for instance, you want to learn from the erstwhile Soviet Union, or even, you know, China till the 1970s, you know, if China has become the economic powerhouse, it did not become that economic powerhouse by pursuing socialist policies, they’ve become the power, a powerhouse by pursuing capitalistic, you know, but far most states sort of, you know, supported capitalistic policies. And I think even the Eastern Bloc, some of the communist bloc, actually countries, you know, which which have also grown, they’ve actually done that by abandoning socialism.

And I think this is really important to understand. You know, so from from $300 in 1991, we are back now to, you know, to basically 2730. In other words, we are we have just retrieved all the ground that we lost, you know, during the socialist era policies.

And I think I want to here, cover one more aspect, because in the book, I actually, I lay out a four pillar strategy for India to actually become a $55 trillion economy, of which one of the pillars I want to talk about specifically is the importance of wealth creation, you know, and especially ethical wealth creation, right? The reason I say this is because there is this wonderful book by, you know, by Angus Maddison, this book is published by Oxford University Press. In this book, Angus Maddison showed that for three quarters of known economic history, again, saliency bias, where most of us don’t look at, you know, the entire, we only look at, you know, the way the Western economies have been there in the last 50 years, and say, oh, you know, the West does it all right, and all that, you know, but if you look at a much, if you do not, you know, become a victim of saliency bias, and actually have a much longer period, then, you know, research by Angus Maddison shows that for three quarters of known economic history, up till from 1 AD to 1750 AD, India accounted for at least one third of, you know, of world GDP every year, every century, over 17 and a half centuries. And, you know, and India was basically the leading economic economy, you know, during a large part of this. And how did India do this?

Not by pursuing socialist policies, because that was never in India’s DNA. It was always markets, actually, you know, trade, capitalism, but a far more, you know, sort of ethical model, you know, more dharmic, you know, capitalism in us. When I say dharmic, I don’t mean a religious sense, but actually sort of following those that are much more ethical, you know, that’s what India followed.

And I think India became so prosperous by following markets. And these ideas of socialism and communism, in fact, are imports from, you know, from Europe, those were not part of, and in other sense, you know, in other words, you know, in 1947, when we chose to implement socialism, we were, you know, trying to very, very hard fit a, you know, square peg into a round hole. Because India’s DNA has always been of entrepreneurship of, you know, of basically a trade and, you know, enabling markets.

And this is written, actually, it’s not just that, you know, I don’t think that, you know, ideas like markets, etc. did not exist, they existed. In fact, you know, if you go and read in the North, and I’ve covered that, you know, Kautilya, for instance, actually speaks about, you know, he exhorts the king, he says, hey, king, if you want economic progress, remove all obstacles to economic activity.

What is it but the ease of doing business? So I mean, Kautilya is talking about ease of doing business 2,500 years back, you know, down South, Thiruvalluvar actually is talking about, he’s basically saying that wealth is that lamp that actually removes the darkness of poverty. He’s saying 3,500 years back, that if you want to severe or, you know, destroy the pride of your enemy, become wealthy, you know, and philosophers like that, and even in common life, if you think about it, right, if you have a, you know, in particularly in the North, this is something which is very common, if you have a, you know, altar at home, let’s say, you know, you have some, you do, you know, some, let’s say, puja, etc. You typically write Shubh Labh there, right? You don’t write Shubhani, or you don’t write Ashubh Labh either, you write Shubh Labh, that’s been part of our culture.

And yet, we basically tried to very hard, as I said, to import, you know, an economic model that was actually very different from what is in our DNA. So if you think about it, you know, since 1991, what India is now trying to do is to get back to its DNA, get back to its economic DNA, essentially, which is of enabling markets, enabling competition. And I think, you know, economists oftentimes disagree on a lot of things.

But economists rarely ever disagree on one thing, which is that healthy competition is absolutely good for everybody. And I think, I think one can give lots of examples to look at sector after sector, you take media, you know, take, take telecom, take airlines, you know, once the sector was opened up, you know, when, for instance, earlier, when there was only one Doordarshan, you actually look at the quality of content, what there was, versus when they, you know, when it was opened up now, there’s so much competition, so many channels, and, and there may be some aspects of maybe not as, you know, healthy competition as well. But more or less, you get healthy competition that leads to capabilities. You take, for instance, some of some of the competitive examinations that we have in India, they are by far the most difficult examinations anywhere in the world.

And that therefore builds capabilities, you know, look at the way people who actually, you know, clear some of these competitive examinations, go and achieve laurels for the country, you know, abroad, whether it’s a Satya Nadella, or actually, or many of the other CEOs that now, you know, are heads of multinational companies, that is, again, showing capability. So I think, you know, one can keep giving evidence after evidence after evidence of how benefits of healthy competition, and that is what we really need to take as a lesson. And when I said from 2700 plus, we came down to 300, the lesson is to basically not again, you know, not follow socialistic policies, the residual of which will still remains in a lot, many sectors of our economy.

So, you know, basically, you know, to work very quickly to remove them, and have more, you know, open up those doors and ensure healthy competition. And that’s a lesson to take from liberalization. That’s a lesson to take from our, from our, you know, longer, longer period of history when we were very prosperous.

Last comment I want to make, because whenever, you know, and when we covered this for the first time in the economic survey, 2019-20, after that, now people, some people who basically, you know, maybe want to criticize this typically will say, oh, you know, it is because of our population. I think that’s not a very sound argument. Because, you know, in in these times, actually, if you look at historical times, populations, you know, you know, sort of gathered or congregated around geographies, which basically were prosperous.

In other words, populations moved to… population was not something that was sort of, you know, random, it was a higher population in India happened because of the economic prosperity, you know, because people didn’t want to actually go and live in places where we did not have economic prosperity. That’s why the Gangetic Delta, you know, in the south, for instance, the Cauvery Delta, all these basically became very prosperous, because, you know, people moved in there and for by following the right model, which had trade, which had healthy competition, actually, you know, and open competition, that’s how that’s what led to prosperity. So this criticism that, oh, India was not prosperous, because it, you know, our whatever we’re talking about in terms of our contribution to world economies, because purely because of population, that is not true, because population, you can’t treat that as random, it actually was that population came together because of the prosperity that India had at that time.

I think that is a lesson we need to take, to make sure that, you know, we basically do not repeat some of the mistakes that we made from 1947 to 1991, you know, and keep learning from. And that is why I think one of the aspects that I focus on is to have, at least on the, I can speak from from, you know, economic perspective, it’s important to have a longer perspective and read, as you know, as Francis Fukuyama said, you know, if those who are those who don’t learn from history are condemned to repeat it.

Siddhartha Ahluwalia 42:10

So a couple of questions that I want to ask, right, is you said, there’s still residual evidences of socialism. Yeah, in India, what are those and why are still those there? Yeah. And the second is, does GDP per capita grows along with, it will become 16x also??

Krishnamurthy Subramanian 42:29

Well, you know, so GDP growth overall divided by population growth is GDP per capita growth, so population growth from here on, and I think we’ve, you know, I’ve put those estimates as well, we had done a chapter in the 2018-19 economic survey showing what will be the growth rate of India’s population up untill 2040-2050. So India’s population growth is likely to be about half a percent on average per annum. So if, for instance, India grows at 8%, GDP growth grows at 8%, with half a percent population growth, your GDP per capita will grow at 7.5%. If India’s GDP growth is, let’s say, 7%, then our per capita growth will grow at 6.5%. And here, you know, if you see, for instance, right, when India’s GDP per capita was, you know, was $300, from there, now we’ve actually come to $2,700, right? So GDP growth rate of about 7% actually has delivered much higher, you know, has delivered growth in GDP per capita. That is, that has to happen, because, you know, when you basically grow faster, the benefits do reach the population as well. And there are other metrics, actually, if you take just the last 10 years, for instance, you know, take poverty, take inequality.

I’m talking about, I’m not talking about wealth inequality, I’m talking about consumption inequality. And, you know, I want to point out, using the consumption expenditure survey, you know, poverty, for instance, which is, let’s say, very, very abject poverty, you know, that has decreased from 12.2% in 2012, to 2.2% in, you know, in 2022. That’s a significant decline.

Similarly, if you look at inequality, what, you know, economists use what is called the Gini coefficient to assess inequality, which is basically what is the amount of consumption I’m talking about, you know, here, the consumption done by the wealthiest versus the poorest, or maybe the wealthiest 10th percentile or 20th, you can take versus the poorest, you know, if you look at both in rural areas and urban areas, that Gini has declined, that is consistent with basically the benefits of this growth has reached, you know, lower segments of the population, lower income segments, but we can do more on this, you know, actually, I think, to ensure that, that benefits are widespread. Now, let me come to your question about, you know, which areas does, for instance, socialist era policies still remain, and I will single out agriculture for that, you know, that’s one, I’ll also come to, if you take, for instance, you know, many other sectors, like if you take, for instance, land, labor, the many of these, actually, we still not, you know, continue to, you know, to be, especially what economists call factors, factor markets or markets for, you know, for basically factors of production, especially from the manufacturing perspective, actually, that’s where, but let me explain agriculture first.

So, you know, as I was explaining, one of the key lessons from liberalization is the importance of healthy competition, right? If you take, for instance, the podcast itself, you know, you’ve done well podcasting, there are many others who are podcasting as well, right? So there’s enough competition, because there is competition, you actually, you know, you have to try and all the time be, you know, you have to have your A game in order to be able to compete with others, right?

And that is true for every other producer, you’re producing content, actually, right? You’re a, so you’re a producer of content, and you have to, you can go, for instance, you put it up on YouTube, you can, but you can choose other platforms also, in other words, you can decide to go and sell your product or service or the content, whatever you’re producing, wherever you want, right? I can go and, for instance, similarly, I produce this content, which is this book, I had the choice of actually, I could go to, you know, Publisher X, I could go to Publisher Y, I could go to Publisher Z, I had the freedom to basically go and sell, you know, in this case, basically the content of this book to whichever publisher that were, you know, if you take something like take this court, you know, textiles, any this mic, whoever, any producer in this country, except the farmer. And I, I want to, you know, let that sink in that every other producer in this country, except the farmer has the freedom to go and sell his or her produce, you know, wherever he or she wants.

The farmer is also a producer of what producer of food, right? The farmer, on the other hand, for all the rhetoric that we have, you know, political rhetoric that we have, we don’t give that basic freedom to the farmer to go and sell his or her produce wherever he or she wants. And what is the impact of this?

The impact of this is actually felt, you know, the bulk of that is felt by the small farmer. Let me explain here. Because of the, you know, the APMC Act, the small farmer, you know, cannot go and sell his produce wherever he or she wants, he can only go and sell in his close, the mandi that is closest to him, right?

So if you think about a small farmer, you know, I come from a small town, I’ve actually, you know, so I’ve seen stuff like this. And therefore, I’m speaking both from, I was born and brought up in, you know, Bilaspur, you know, what is, we thought about it, which was part of the, you know, the combined Madhya Pradesh, now it is part of Chhattisgarh. And then I actually spent some of my schooling in, you know, in Durg district, also, Durg Bhilai, basically towns there, right?

So, so if you take, for instance, a small farmer, let’s say he wants to go and sell his produce, you know, what does he do? He doesn’t have a tractor, he doesn’t have a tractor trailer, obviously, he’s not wealthy enough to be able to buy those things. So he hires a tractor trailer, he wants to go.

So, I mean, the farmer, I’m sure, you know, gets up, you know, gets up early in the morning, I’ve seen that he gets up early in the morning, you know, reaches the mandi at seven o’clock, eight o’clock in the morning with all his produce, enthusiastic to go and sell his, sell his produce. Now, the intermediary, who’s called the arhatia, you know, in the, in the, in the, in the mandi, knows very well that this small farmer does not have the option to go and sell his produce to anybody else, right? The basic freedom that every other producer in the country has.

So what does he do? Or, you know, he basically says, okay, I know this guy cannot go anywhere. So the farmer has basically come, you know, he’s lost his, he’s losing his day’s earnings, because he’s come here to, and he’s hired a tractor trailer, right?

So those are investments he’s made. The intermediary makes him wait, wait, wait, wait, wait, wait, you know, actually, it’s three o’clock, four o’clock, you know, and at four o’clock, by this time, the small farmer is actually exhausted. He, you know, his patience is running thin.

And he just wants to actually now sell it, right? Because he doesn’t want to take this produce and come back again. If he has to come back, he has to, if one more, he has to hire the tractor trailer one more, he has to pay for that, pay the rent for that, he has to lose one day of, one day of, you know, work, and therefore one day of earnings, all these are costs, tangible costs.

So he basically thinks that it is rather whatever price, you know, whatever price you get, I sell it at it, right. That’s what this arhatia knows very well, because he doesn’t have the option to be able to go and sell anywhere else. So what does he basically do now, he makes him wait, and at about four o’clock, this, you know, really, you know, sort of farmer who’s actually, who’s running very thin on his patience, you know, very, he’s basically, he can’t even try and pressure that, that arhatia, because he wants actually to have his business, right? He wants to come and sell next time as well.

So he can’t, you know, pressurize. So what does he do, he sells it, and as a result, if you look at the data, because of this phenomenon, of 100 rupees of value added, let’s say in, you know, in farm produce, 90 rupees is cornered by the intermediary. The farmer, small farmer gets only 10 rupees, think about it.

So for all the rhetoric we have about farmers and small farmers, we’ve not basically, you know, he’s not getting his due, he’s only getting 10 rupees out of the 100 rupees that he’s jointly, you know, helping to produce, right? Now, if suppose, let’s say we give this freedom to say, you can go and sell, you know, you can go and sell to, for instance, to any corporate also, it could be, you know, it could be corporate X, or it could be just, he can go and sell to a Mandi. If basically a corporate is allowed, the corporate, you know, there may be many corporates, there may be corporate X, who might be willing to buy his produce, corporate Y, so he can bargain among them, he can for, not just that, in this case, he can say, you know, he can tell the arhatia saying, so he’s come at seven o’clock, you know, he’s waited for, let’s say, eight o’clock, you know, maybe one hour, he’s waited for maybe one, one more hour, two hours. At nine o’clock, he says, you know, If you want to buy, you know, please do. Otherwise, I have the opportunity, I have the freedom to go and sell this produce in the next Mandi.

I’ve just… I picked up my phone, I’ve called him, you know, and I can go. The arhatia now, with this freedom, arhatia knows that this is a tangible threat. It is not an empty threat, right?

Because, you know, he has the freedom. What does the arhatia now do? He says, okay, okay, I’ll buy it, you know, and now with this, therefore, the small farmer actually is not driven to frustration, to the limits of his impatience.

And now he can get, he will get about 50% of the, you know, which is a fair deal, where, because, you know, the arhatia needs to, you know, needs to buy his produce. So, you know, and the farmer needs to produce that, both the buyer and the seller are important in any transaction. But in this case, unlike the very skewed, which is the seller is getting only 10 rupees and the buyer is basically getting 90 rupees and 100 rupees of value added, here it will be 50-50.

That’s a fair deal. This is what actually, you know, undoing the socialist era policies can do. Not just this, and people, many people actually, you know, because I think that those who actually voice about this are often people who benefit from the status quo.

They’ll say, oh, the coming of corporates will basically, you know, destroy the small farmer, et cetera, which is actually not true. Because the presence of corporates in other sectors. Institutionalizes everything.

Yes, actually, I mean, the same corporate that actually works, let’s say, you know, in buying textiles, or actually, you know, these suits, et cetera. If it has not destroyed those, those industries, the small people there, why should it destroy that, you know, in the case of farming? Not obvious, right?

And in fact, if there are corporates, for instance, the small farmer can contract directly to sell, and there will be many, there will be, you know, maybe corporate X, corporate Y. If corporate X is basically not giving, you know, the farmer a good deal, he can say, you know, you know, corporate Y is giving me 20% more, I will go to him. So corporate X will say, oh, is it the case that corporate Y is giving you 20% more?

Okay, I’ll also give you 20% more. So the bargaining power of the small farmer increases far more when he has many selling opportunities. Right now, we don’t have that.

There is no competition, you know, for the farmers producers. This is basically one of the key socialist policies. One more again, in the context of farming itself, which is, this is a relic of 1960s when India faced food shortages.

You know, but today we have abundance of food, you know, we don’t need to, I mean, it’s really unfortunate that this still continues when the state of our food economy has changed drastically, right? I’m talking about the Essential Commodities Act, which is, you know, another relic of the socialist era. An intrinsic feature of farming is that supply is actually seasonal, but demand is all through the year, right?

You know, when the kharif crop comes, actually, then that is when, you know, for the rice is in abundance, supply is huge. And you know, demand is actually is much lower than supply. But you need demand all through the, you know, so when the kharif crop comes, actually, at that time, obviously, supply demand mismatch is very high and prices are very low.

But six months later, you know, demand is there, supply is not as much. So you have to store. Whenever you have a situation where supply is seasonal, and demand is all through there, you have to store, right?

And I’ll give you the example of something, you know, something as prosaic, let’s say as achar. Think about, you know, our grandmothers, basically, you know, they make, they made achar, even my mother makes achar now, you know, you don’t make achar all through the year, right? You make it when the season, for instance, if it is, let’s say, you know, it is pickle that is made mango pickle, it is made in the summer, but you actually, you make it in such a way that it’s last all through the year.

That is because you have supply that is seasonal and demand that is all through the year. So that’s why a lot of oil is put into, you know, into, you know, pickles, so that they last all through the year to serve demand that is all through the, so in a similar way, like this example of pickles, like achar, you know, what advanced economies have done, other economies have done is to have cold storage facilities, so that when the supply produce comes in, you know, the small farmer can hire these cold, this cold storage, he need not go and sell it when the price is very low, he can wait for a time when the price is much better and go and sell it, he will get a much higher price then, and therefore, he will basically get a higher income as well.

This is a organic way of increasing the income of the small farmer. And for all the rhetoric, we basically treat all storage as hoarding. Every form of storage in agriculture is treated as hoarding as part of the Essential Commodities Act.

As a result, there’s been, you know, if for instance, let’s say I’m somebody who goes and invests in cold storage, creating cold storage facilities that I can hire out to the small farmer, you know, I can be put in jail for saying, oh, you’re not storing, you are a hoarder. Why will I have the incentive to go and create cold storage,? and that is why we don’t have cold storage facilities in our country. And who gets hurt by this?

Again, the small farmer. The rich farmer actually can go and buy, he has the deep pockets to go and buy those cold storage facilities. Again, you know, the status quo benefits the rich farmer, hurts the small farmer.

So I think it is really important to understand that many of these socialist era policies, actually continuing that the status quo really benefits the well to do people, it really hurts the most vulnerable, in this case, a small farmer. In a similar way, when it comes to labor law, and I think I can continue giving you examples, but the broad, you know, point that I’m making is that there is absolutely, you know, a desperate need, in order for us to be able to actually become more prosperous, you know, we need to actually remove these, the relic of socialist era policies that we have in many sectors.

Siddhartha Ahluwalia 57:09

And the government tried to do it via farm laws, but it was opposed and the government had to remove them.

Krishnamurthy Subramanian 57:14

And here, actually, I must mention, because at that time, for instance, you know, many of those that were in support of state governments, and you know, federalism, etc, said, agriculture is a state subject. Like, okay, let me grant that, but let’s take that argument to its logical conclusion. If agriculture is a state subject, and so, you know, states have the power to actually implement policies in agriculture, you know, let’s basically complete that argument by also recognizing that power and responsibility are two sides of the same coin.

And therefore, it is then, you know, if they have the power, they also have the responsibility to take care of the small farmer. And therefore, now, why don’t states go and, you know, do the same, the equivalent of the farm laws, why don’t states go and implement? You know, I think we have, we as citizens have to ask that question.

Not only will farmers benefit, even consumers will benefit also from this. It’s a win-win for sure. And that’s why we need to be asking state governments saying, you know, yes, you all said that this is a state subject, that you have the power to legislate on the APMC Act on some of these, why don’t you legislate then?

You know, if you have power, you have responsibility. I want to remind you, you know, of the two sides of the same coin, you’re talking about your power, I want to talk to you about your responsibility as well.

Siddhartha Ahluwalia 58:27

And why didn’t, just asking in, you know, from a previous past lens of the past, that the state governments which had the same central party ruling, right, why didn’t they introduce the farm laws then?

Krishnamurthy Subramanian 58:41

No, I don’t think this is as much as much from the perspective of political parties or which political parties in power. More often than not, I think, you know, many of us common people don’t understand that, you know, that the status quo is only benefiting the large farmer. And, you know, eventually, in a democracy, it is basically the preferences of the people that shape government policy.

So if common people don’t understand, and I think, you know, I don’t think it needs an economist like me to actually tell any common person, what I’m saying is absolutely plain common sense, right? That if you don’t have the option, if you to basically go and sell something, if you don’t have the option to go and store something, you know, as agricultural produce, which is seasonal, then obviously it hurts those that don’t have the deep pockets, which is a small farmer. So without actually that, you know, that basically recognition, that pressure being put by the citizens, you know, you won’t have irrespective of the, you know, of the political dispensation that is at the state level, they will not focus on it.

I think this is therefore, you know, now, absolutely important that we as citizens actually say, okay, states said, this is states, you know, state level policy, go and implement it, you know, states say, you know, it’s your responsibility.

Siddhartha Ahluwalia 1:00:00

So you also mentioned about national productivity, you mentioned that, you know, earlier, we had 1.7% productivity, now we have 2.7. What does it actually mean?

Krishnamurthy Subramanian 1:00:10

Yeah. So I think it’s important to then and I want to give you an example from first, again, a common example. Think about how growth happens, whether it’s whether that’s at the individual level, or, you know, at the at a firm level, industrial level, or even at the country level, growth is about two things, which is what what investment do you make?

And how productive that investment is, for instance, if you take, let’s say you made this investment to, you know, to basically make this do this podcast, right? So you must have bought all this equipment, you know, everything all and that was an investment. So without that investment, the growth, you know, of basically of podcasting for you wouldn’t have happened.

So that’s the first thing, right? But if you know, let’s say you build this infrastructure, you actually made the investment, but you you know, continue sleeping, let’s say, right, you know, you don’t, you don’t do podcasts, then that investment is not being put to good use, right? So how productive your, you know, your investment is, that’s the second aspect.

So for instance, and you may be for instance, I mean, just just to example, maybe you might be doing, you know, two podcasts a day, or maybe maybe 10 podcasts a week. If you’re if somebody else is, let’s say doing 20 podcasts a week, with the same equipment, he’s being more productive, obviously, his growth will be higher, right? So investment times productivity is basically what generates growth, it is it is true at an individual level, it is true at the firm level, it is true at the at the at the at the country level as well.

And you know, in economic jargon, we basically call it, for instance, we will say for investment, we will say gross fixed capital formation, you know, as a percentage of GDP is just fixed capital, basically investment that you’re making right in some sense. And for productivity, we’ll call it, you know, the incremental capital output ratio, as it’s there in the term itself, incremental, which is basically at the increment capital, you know, output, how much capital are you investing and how much output are you generating out of that, which is basically your productivity, excuse me. So when one wants to assess the potential of the Indian economy to grow, it is important to look at the trends, both in investment and productivity.

And that’s what I’ve done basically in the so the specific thing that you’re talking about, using the you know, the the data from from the Klems database, which is used, you know, internationally across across countries. If you look at the the the productivity growth from 2002 to 2013, India’s productivity grew at about 1.7% per annum 1.6 1.7% per annum. So in other words, so and the way to think about growth and productivity, which is, let’s say last year, you were doing five podcasts a week.

And let’s say this year, you’re doing six podcasts a week, that means six divided by five that basically are 20% more productive, right? Same way. So so India’s Indian economy, you know, increased its productivity by 1.1 point, actually, it’s about 1.3%, not 1.7%, 1.3%, from 2002 to 2013. From 2014 onwards, India has increased its productivity at 2.7% per annum more than double. So now, if you if basically productivity growth is much higher, that will translate into higher economic growth as well, right? Because as I said, if you’re if you’re becoming more productive, you will do far more podcasts, and you will actually earn more, you know, revenues through YouTube, you know, subscriptions, etc.

And that is what basically leads to growth. Same way. You know, if India’s productivity growth has been much faster, that will translate into higher GDP growth and higher earnings. That’s that’s the basic idea.

Siddhartha Ahluwalia 1:03:52

Got it. And so you mentioned in your book, right? That dollar to rupee would somewhere be between 100 to 120.

Krishnamurthy Subramanian 1:04:00

Yeah, that comes basically from the rate of depreciation, which I explained to you, right? So I think the biggest determinant actually is the rate of inflation. And I explained that if India grows at, you know, at 8%, then, you know, with the difference in inflation, actually, earlier, for instance, as I said, when inflation was seven, about seven and a half percent, the difference in inflation, India versus US was about five and a half percent.

So even though our GDP per capita was growing much faster, that was getting drowned by the five and a half percent difference in inflation. Now, it’s likely to be India’s inflation likely to buy, you know, this is my conservative estimate five percent on average, US inflation, I’ve taken it at 2%, but actually, it could be higher as well. So even from a conservative, you know, estimate, so if the difference in inflation will only be about 3%, and maybe it may be lower as well.

So from five and a half percent, if it drops down to 3%, it will translate into into into lower rate of depreciation that’s basically what…

Siddhartha Ahluwalia 1:04:51

So my question here was, let’s say, we are not considering the factor that, example, the US economy has so many challenges right now, the debt, political instability. And if those things…

Krishnamurthy Subramanian 1:05:02

Yeah, actually, I mean, I just wanted to be conservative here. So for instance, the way this can show up is it can show up in higher inflation. For instance, if that because they have their debt to GDP ratio is high, their fiscal deficit actually this year, I think their fiscal deficit will be about eight, eight and a half percent.

And you know, for an emerging economy that would have been extremely high, right. And I’m glad you’re actually bringing this up, that can translate into higher inflation. So instead of, for instance, 2% inflation, what has been an, you know, what has prevailed on average, if the US inflation is 3%, then, you know, instead of actually about a half a percent depreciation in the rupee will appreciate by half a percent, because, you know, instead of actually the the difference in inflation being being 3%, 5% minus 2%, it’ll actually decline to 2%.

And therefore, you know, you will have. So yeah, of course, I think I have just to be conservative, because, you know, people will say, oh, if I actually say that the currency is going to appreciate, many will think that, you know, because most people have are, you know, victims of saliency bias, we’ve not seen over the last, you know, maybe 75 years, we’ve not seen a period when they when the elongated period when the rupee has appreciated.

So you know, many people find it therefore to sort of difficult to, as I said, because they’ve only seen currency depreciation. So to be able to see say that, oh, currency will appreciate, people will find it by not even more difficult to believe. That’s why I sort of chose to be more conservative.

Siddhartha Ahluwalia 1:06:32

And India at $55 trillion economy, you’re assuming at some point of time, we’ll cross US and China, what time would that be?

Krishnamurthy Subramanian 1:06:38

No, I think that’s, that’s, you know…

Siddhartha Ahluwalia 1:06:39

I’m making an assumption.

Krishnamurthy Subramanian 1:06:41

I’ve not said anything about that. I think you have to be very careful there. Because remember, the $55 trillion is nominal. Okay. So now during this period, you know, US will also grow.

Siddhartha Ahluwalia 1:06:52

And what is the current rate of growth US?

Krishnamurthy Subramanian 1:06:54

US will be about the rate of growth will be I think their rate of growth would be close to 3%.

I think that’s what, and the inflation, as I said, is 2%. So, you know, so I estimate, I think that economy might be about, you know, 60-65 trillion. So when we are 55, there may be about 60-65 trillion, again, projecting based on so, so I’m not saying that we’ll actually be, see, you have to see, you have to keep in mind that if the Indian economy is growing, and their economy also growing, this is in nominal terms.

So their economy also, you know, will be will be higher as well. That’s why now I understand this, this is a book on India. And that’s why I focused on on India.

And I’ve not basically gone into projecting what the size of the of the other economies will be.

Siddhartha Ahluwalia 1:07:35

But but for our listeners, you know, I think I just want to take the overall international view rather than just only an India view.

Krishnamurthy Subramanian 1:07:41

Yes. Yes.

No, I think from that perspective, as I said, we will be rubbing shoulders with the with the with the largest economy in the world that I think if we can grow at 8%, we will be absolutely rubbing shoulders. With some luck, we could possibly potentially we could be the, you know, the largest economy. But that’s hard to say at this point, because that depends on the growth demand dynamics that will prevail in other countries, and especially, you know, in US, US and China.

And that this book is all about India. So I didn’t want to, you know, project about what the other economies will be. But I think that’s something which, you know, it depends how their how their growth dynamics is.

With some luck, as I said, we could actually be, you know, we could be the largest economy. But we will definitely be an economy. For instance, today, if you see India is about, you know, about three and a half trillion, the US is about 25 trillion, you know, China is about about 18 trillion, right.

So, so there about the China is, for instance, about five times, you know, bigger than us. US is about, you know, let’s say, seven times bigger, bigger, bigger than seven, maybe eight times bigger than us. Not not eight, actually about seven times, right.

So now, now, you know, that wouldn’t be the case in 2047. In 2047, we might very well be, you know, 90% of the, you know, GDP of the US.

Siddhartha Ahluwalia 1:08:56

And where would China be in your estimates?

Krishnamurthy Subramanian 1:08:58

China I think is, you know, it’s that’s much harder to estimate at this point in time, because they are, you know, growing to have to have a big transformation in the structure of the economy, the structural problems, you know, which is like, especially their demographic, you know. For instance, they, they enjoyed this very, very, you know, powerful pace of growth during a phase when their population was growing. But in the next 25 year period, actually, China’s working age population is likely to decline to about 30%.

And you know, their entire growth has been investment-driven, not as much consumption. Now they need to sort of change their model to be more towards consumption. But if you’re working age population, who are the ones who consume goods and services, if that is going to decline by 30%, then consumption is very hard to grow.

Plus their financial sector also lots of bad assets there, you know, so, so I think they’re going through a far more structural, you know, structural change. So at this point in time, it’s, it’s, it’s a lot more difficult to assess. And let me be, you know, as I said, this is a book not on the Chinese economy.

And, you know, I’m not an expert on the Chinese economy, I actually, my expertise, you know, is, is, is on the Indian economy. And so, but I’m aware that, you know, China is going through a phase of sort of structural transformation. So it’s very hard to project their growth rate over a 25 year period, you know, what their growth rate would be, my guess will be that it will be, you know, it’ll be much lower.

And, but what will that precise number be only when this structural transformation sort of comes to a more steady state, will one be able to sort of, I think, even Chinese experts or experts in the Chinese economies will be able to estimate that.

Siddhartha Ahluwalia 1:10:42

And my next question, which that’s why I was leading to, right, you mentioned in your book, the Chinese GDP per capita was 2600 in 2007, where is it today?

Krishnamurthy Subramanian 1:10:53

I think the GDP would be close to would be about 9500 or so, 9000, I mean, latest I checked that’ll be 9000-9500.

Siddhartha Ahluwalia 1:11:02

And I assume, let’s say, even if we multiply by 15, not 16, India’s GDP per capita would grow.

Krishnamurthy Subramanian 1:11:09

So in the, if we grow at 8%, our GDP per capita would be close to about $40,000 in 2047. If we grow, so if you grow at 7%, we’ll be close to $30,000 GDP per capita, this is all nominal dollars, you know, again, it’s not in purchasing power parity, you know, it’s not in purchasing power terms, okay, that’s why it’s not real, that’s what you have to keep in mind.

So, you know, Chinese GDP per capita also may actually be, you know, may be different, depending on what is the growth rate that they that they are able to accomplish. Better keep that in mind.

Siddhartha Ahluwalia 1:11:42

But leading to the next question is that today we are at 2700. At what point of time a GDP per capita will cross that of China of today?

Krishnamurthy Subramanian 1:11:51

As I said, that actually is that’s very hard to, you know, that’s that’s much harder to assess at this point in time, because as I was telling you in your in response to your previous question, you know, that that actually requires one to have a good, precise estimate of the growth rate of the Chinese economy. As I was saying, in the past, they’ve grown at on average about, you know, eight, eight and a half percent. But in the last few years, they’ve actually their growth has declined significantly from eight, eight and a half to 5%.

And you know, but they are, as I said, going through us through a lot of structural transformation. So it’s very hard for me to actually give you these estimates, because, I mean, these will be very speculative. I don’t want to speculate.

Siddhartha Ahluwalia 1:12:30

The question I was trying to ask is, today we are at 2700, what how much time will it take for us to cross 9000?

Krishnamurthy Subramanian 1:12:36

Oh, okay. So I think that that I can that I can tell you, I think, you know, as I said, from about, so if for instance, let’s say our GDP growth grows at 8%, okay. In you know, that’s that basically translates into, so you know, it’s a reasonable thing to say that we will double our GDP per capita in about six years, slightly more than six years, but let’s just take six years.

So from about 2700, you know, we’ll be close to 5500, you know, in 2700, yeah, about 5500 in six years, and about 11,000 in, you know, in 12 years. So by about 2035, we should be close to 11,000. So my sense is then by 2031, 2032, you know, I think we should be about 9500.

Siddhartha Ahluwalia 1:13:29

It’s difficult to imagine standing where we are standing today, considering the amount of say, poverty in India to be closer to that number, like, because…

Krishnamurthy Subramanian 1:13:39

No, that’s, as I said, you I know, you are actually, you know, sort of, I think letting letting saliency bias affect your, I think, you know, as that, which is why I actually chose these examples of Japan and China, if for instance, if someone had said in, in, you know, in 1970, that the Japanese economy is going to grow by 26 times, whoever might have would have said that would have said, you know, I can’t believe it, that is basically what the response would have been.

Similarly, if somebody said, even a Chinese, whoever actually was the most, you know, sort of, let’s say sanguine about the Chinese economy had sent in 19, you know, 1996, that the Chinese economy has grown by 22 times. You know, in fact, at that time, if you look at…you may go and read, go and read the writings about the Chinese economy, nobody believed and I think and that is because most of us actually there are these, these biases are so strong in our thinking. Whenever there’s actually, you know, sort of, you know, there’s strong growth and there’s also the other other aspect is that somehow it’s a it’s a it is I think, you know, a human tendency that we saw, we found, we believe negative things far more than positive things.

And I think when somebody basically makes a positive prediction, we don’t, we are more likely to there’s actually, in some sense, there is also the negativity bias, right. And it’s a combination of the saliency bias, the negativity bias, all that. And therefore, when someone makes a positive prediction, we basically find it difficult to believe it.

But as I said, I think I, you know, for my purpose, you know, I actually have done this very rigorously by being aware of these biases, you know, and I think those who are looking at it, if they want to look at it in a more objective manner, then they should be aware of these biases. And, you know, I think once they sort of, let’s say, think far more rationally, rather than being afflicted by these biases and understand the, you know, the rigorous, you know, economic logic and the evidence that I’ve provided, I actually, you know, I have no, I have, you know, no reason to, to sort of think that they wouldn’t believe it. In fact, you know, just to give you an example, last week, Mr. KV Kamath, you know, actually wrote a piece in the Times of India. And you know, we know, all of us know, actually, he’s an icon, you know, in Indian banking, built ICICI bank to what it is, right? He wrote a piece actually, and you know, he really said, he said, this is eminently doable. You know, and he’s someone who actually, you know, having been there, you understand some of these biases, and you understand the economy, you know, very well as well.

In fact, you know, many other, many other people who actually have, you know, privately other industry stalwarts have also actually reached out to me privately also said, you know, we definitely believe what you’re saying, you know, so, so I think many times what we what, what, what, what, you know, most of us have to be very careful about is to, is to, you know, be aware of our biases. And if you if you are aware of that, those biases, and then, you know, look at the evidence carefully. And I think then then, I don’t think you will, you will basically think that this is not achievable.

Siddhartha Ahluwalia 1:16:42

So then what you literally mean is by the numbers that you have put in the book, is India is globally the best place to invest in right now?

Krishnamurthy Subramanian 1:16:50

Absolutely, absolutely. I think, you know, I, I mean, it’s, it’s not just the best place, but even from even for, you know, youngsters to actually work, you know, I think India in the next 20-25 years will actually provide the maximum opportunities. Why?

Let me tell you, you know, in general, actually, if you think about salary growth, or let’s say you’re, you know, if you’re an entrepreneur, your earnings growth, etc, you know, because a high tide actually lifts all boats. So India will be the high tide in the next 20-25 years. So if you think about salary growth, you know, it’s a reasonable assumption to say that, you know, your salary growth will be at least at the rate of the rate of growth of GDP, you know, as I just said, 12% in dollar terms.

So which means you’re, you know, if the economy is growing at 12% in dollar terms, your salary will, you know, will double every six years. And think about a youngster, let’s say, you know, you know, 22-23, it’s reasonable to say that he or she will work for at least he or she is 65. That’s about a 42 year period, right?

So over a 42 year period, you know, if his his or her earnings are, you know, are doubling every six years, there are seven doublings, seven doublings is two to the power seven, two to the power seven is 128. So so you know, whatever salary they’re starting out with, by the time they’re 65, they would basically be earning about 120 times what they’re earning in dollar terms, you know, in contrast, if you take, for instance, they chose to choose to be, let’s say, in the United States, right? In the United States, you know, with about 3% growth, you know, and let’s say, you know, with 2%, or let’s take even 3% inflation, let’s say, right?

Let’s go with 2%, because if you know, if their inflation is 3%, the rate of depreciation actually will be different. And so with this, if it’s like 3%, you know, growth and 2% inflation, then nominal GDP growth is 5%. At 5% growth, you know, their GDP doubles every 14 years, you know, in India, it doubles every six years of earnings, therefore will double every 14 years, which means over a 42 year period, there are three doublings, you know, not not seven doublings, three doublings is two to the power three, which means it’s eight times.

So salaries in dollar terms in the US will multiply about, let’s say, you know, if I even round it off, and actually, I’m more conservative, you know, over the over the course of an average career, 10 times salary multiplication would actually be, you know, what would be something that is common, what would happen in India, it’ll be likely to be 100 times. So, you know, you can say, even if let’s say, today, somebody who works in the US is going to, let’s say, he or she earns five times more, compared to what he or she earns here in India, right? Even then, clearly, you can see in dollar terms, starting out at a much higher base five times.

So by the time you know, so so basically, the multiples, so let’s take absolute, let’s say somebody is earning 100 $100,000 there, right $100,000 is about 80 lakhs, right? In India, that person, let’s say is earning 20 lakhs, that’s about, you know, that that’s one fourth, right? So somebody who’s earning $100,000 will, let’s say, earn, you know, a million dollars by the time they, you know, they retire, that’s on average.

In contrast, in India, somebody who’s actually earning 20 lakhs is likely to be earning, you know, 20 crores, right? Because it’s a it’s a multiplication of 100, you know, do the math and see where the opportunities are. I think this is basically, you know, I’m laying this argument out so that those that are thinking about their careers, you know, I have no hesitation that opportunities will be here.

That said, I also want to, you know, point out, and this is something that our state governments especially need to work on is to improve the quality of life. You know, I think people care not only about their earnings, people also care about their quality of life. And I think, especially travel times should be reduced.

I think this is an onus on the state governments. If travel times reduce, I think quality of life improves significantly. At the same time, you know, I think we should state governments and others should also be working on reducing improving quality of air, these things, just these two things have actually are quality of life will improve a lot more, instead of, you know, instead of brain, brain drain, you’ll have brain gain.

Siddhartha Ahluwalia 1:20:59

And you said, you know, if this is going to happen, then what US saw in the last decade, or even let’s consider the last 50 years, I would say, a lot of immigration happened into the US. Yeah, India would see the same amount of immigration happening from other countries.

Krishnamurthy Subramanian 1:21:15

That is hard to say. I think even if let’s say the Indian diaspora, which is very, very large, you know, their kids, some of their kids and those those Indians that are thinking about, let’s say going elsewhere, they remain here and some other, I mean, that itself is actually that that itself will be wonderful talent for the country, you know, to benefit from.

Siddhartha Ahluwalia 1:21:33
Yeah. Nobody moved to China for a quality of life.

Krishnamurthy Subramanian 1:21:36

Yeah because quality of life also, it, you know, your freedom to do what you want, which you have in a democracy is also important.

Siddhartha Ahluwalia 1:21:46

But do you think are the cities ready for that kind of a growth?

Krishnamurthy Subramanian 1:21:49
As I said, I think, you know, this is where, as we grow, we will have more cities built too, right? More satellite towns, you know, for instance, think about it. If you take Bangalore, right, you know, I’ve because my some of my relatives stay here, I’ve been coming to Bangalore, since the since the 80s. If you take for instance, Yeswanthpur, right, you know, it was only Yeswanthpur at that time, actually.

And, you know, Malleshwaram and Yeswanthpur, these were the two places. Today, you know, there’s so many satellite towns that have built or that have gotten built, you have, you know, and so I think you have to you have to think about these things, not in a static manner, you have to think about in a dynamic manner as, as you know, economic growth will happen, there’ll be far more, you know, cities that will get built, many small towns will become, you know, they will become far more accessible, they’ll be they’ll have economic opportunities as well. And, you know, I think those will grow too.

Siddhartha Ahluwalia 1:22:40

Subramanian, I’m really, you know, learning so much during this conversation. I have half of my questions left, like, like, what’s a middle income trap, right, the digital public infrastructure, and we are at towards the end of the conversation, yes, but I’ll keep it as an episode two for you.

Krishnamurthy Subramanian 1:22:54

No, I think I just want to, on the public digital infrastructure, I want to, you know, just say something because this is one area where India is really leapfrogged, you know, the rest of the world. And I think India’s leadership in this area is likely to stay in the near future. I say this from the vantage point that I occupy at the at the, at the board of the of the International Monetary Fund, I get to see the, you know, the economic landscape, you know, not just for for a few countries across, you know, all the member countries closer to 100 countries.

So based on that, I have, you know, I can say with conviction that this is one area where India is really leapfrogged. And there will be a lot of opportunity, you know, especially for using this public digital infrastructure to formalize the economy for productivity growth and credit creation in the economy. And this is where a lot of opportunities are.

And I think venture capitalists like yours, like you actually should be looking to support a lot more formalization growth of SMEs, you know, some of the most technological frontiers you should be and this is a message to you know, you should be looking to solve India’s problems. You know, your venture capital funding should go to startups that are not the ones that are just basically doing what startups in the US are doing, they should be, you should be funding startups that are solving India’s problems. That could be as we said, you know, startups that let’s say enhance quality of living maybe startups that end that that enable, you know, us to reduce the the travel time.

Can we have startups that basically, you know, maybe use drone technology to show every every pothole there is and bring it to the, you know, attention of, I mean, I think the earnings model, etc, will have to be thought through, but this is where, you know, both venture capitalists and startups will have to put their, you know, thinking hats together and come up with, you know, to improve quality of life.by. Can’t we basically, for instance, have a startup that tracks travel time over 10 kilometers in city roads and bring it to the attention of state governments and you know, and it’s like, for instance, you can download this data from Google Maps, right?

And track not only how much time it takes for, you know, to travel 10 kilometers here in you know, let’s say in Bangalore, for instance, actually, the couple of months back I was I was in Chennai, you know, a distance of 22 kilometers actually from Kanchipuram to Chennai took me two hours, okay, 22 kilometers about 15 miles in the US, you know, even with city traffic, you would cover that even let’s say in peak hour traffic, you would cover it in half an hour, you know, so so if for instance, two hours think about somebody who actually has to drive every day, or maybe take a train or whatever, you know, they take about an hour and a half to, you know, one way, you know, so in other words, three hours of the 24 hours is going into, into just travel time, if that is reduced to half an hour, they basically are, you know, saving two hours, that two hours can, they can spend time with their family, they can spend time maybe learning something, or maybe, maybe leisure, right? Maybe watching in two hours, actually, maybe they can watch a watch some good shows, maybe three, four episodes of… and I think that enhances quality of life.

So these are aspects that we need to, you know, work on, I think, so so Indian startups really should be thinking about solving India’s problems.

And I think, you know, not just sort of sort of do what what startups in other advanced economies are doing. I think that round of startups, actually, those opportunities actually now, you know, those are good initial opportunities to utilize. But now I think, you know, hard thinking and really doing what is for, you know, for India; pollution, water, for instance, you know, I think that, I mean, historically, if you look at civilizations that have actually, they’ve always come about come around, actually, you know, where there’s been abundant water.

And so, you know, we have to make sure because, you know, as it is, if you have adequate rainfall, you know, there’s no question, it’s just that we have either flooding or we have, you know, drought. So, so there are, it’s basically from an economic perspective, just a supply demand mismatch flood is basically far more supply than, than demand and, and drought is basically far too far too little supply compared to demand, but we can, I think, and these kind of technologies we’ve had in the past, you know, in, in India as well. So we can think about startups need to really solving, start solving India’s problems and venture capitalists need to actually, therefore, you know, say, hey, this is, this is too, this is too new, you know, show me, show me one country where this has been, you know, implemented.

If you ask questions like that, I don’t think you will have startups that basically will, you know, will, will come in and solve India’s problems. You need to be open-minded enough and don’t say, you know, that show me one, one country where, and there’s, oh, oh, if you, if, if no other country has solved this, you think you can solve it? You know, these kinds of questions I think will certainly not help.

You have to be open minded enough to support, you know, new, new ideas with actually entrepreneurs that would come with conviction to solve India’s problems. That’s where, so, you know, there you’ll, of course you’ll be, I have no doubt you’ll make your money, but you’ll be putting your money to good use as well in the service of the nation.

Siddhartha Ahluwalia 1:27:57

Thank you so much. Fantastic suggestions. Definitely my audience who are VCs, entrepreneurs are going to listen and love it. Right. And hoping that, you know, next 25 years, it will really be a $55 trillion economy.

Krishnamurthy Subramanian 1:28:10

I hope to venture capitalists and startups thank me and I’m giving out these ideas for free.

Siddhartha Ahluwalia 1:28:14

Yeah. Thank you so much, Subramanian.

Krishnamurthy Subramanian 1:28:17

Pleasure.

Siddhartha Ahluwalia 1:28:18

Pleasure having you on the podcast.