Sanjeev Sanyal 00:00

Our birth rates are actually dramatically declined. In fact, India does no longer produce enough babies to replace itself. I want to drill it into people’s heads because there is this impression that we will be young forever. No! We have 25 years to do it. Whatever we want to do, this is it. When I joined the government in 2017, you had a banking system that was essentially bust and the then finance minister, Arun Jaitley, called me and said, ‘Since you are from this sector, please have a look at this.’. You go to top universities today and you ask kids, ‘What do you want to do?’. That has changed. When I was there, they either wanted to go abroad or they wanted to write the UPSC. Now, you— the brightest kids want to do a startup. This government has its ears open. We see the problems arise. We fix them. Then another set of problems arise and we’ll keep fixing them. When I was born in the early 70s, Kolkata was the most important economic hub in India. It was one of the most important industrial hubs in Asia. Right in front of my eyes it kind of fell apart. Kolkata didn’t die. It was murdered and I’m a witness to that murder.

Siddhartha Ahluwalia 01:02

Hi, this is Siddhartha Ahluwalia. Welcome to The Neon Show. Today I have a super special guest with me. Today we are going to discuss about economics, policymaking in India. I welcome Sanjeev Sanyal sir to The Neon Show. Just to give you a background about him… Sanjeev Sanyal is economic advisor to Prime Minister Modi and he’s part of the think tank that is setting up the policies for India on the economic front. Super excited to have you sir today.

 

Sanjeev Sanyal 01:29

Very pleased to be here Siddhartha!

Siddhartha Ahluwalia 01:30

Sir, before we dive into you know the policymaking, the economics part of it, I would like to dive into your childhood memories, right. A couple of them that you think shaped a later part of you in your career in government.

 

Sanjeev Sanyal 01:46

So well I grew up in 1980s Kolkata. And I suppose my strong distaste for socialism and communism comes partly from the experience of watching how Chief Minister Jyoti Basu and the communists basically destroyed… Not just the economy of Kolkata and West Bengal, but you know, the entire intellectual, cultural sphere to a point that Kolkata has never recovered from that shock. And so when I was born, in the early 70s, Kolkata was the most important economic hub in India. It was one of the most important industrial hubs in Asia. And within my— right in front of my eyes, it kind of fell apart. And I always say that, you know, Kolkata didn’t die. It was murdered, and I’m a witness to that murder. So that happened and that had a big impact on me. And then when I was at university, of course, the Soviet Union collapsed. And we— our own economy collapsed when we were forced to do the 1991 reforms. So, you know, many of those experiences certainly had a big impact in the way I view the world.

 

Siddhartha Ahluwalia 03:06

And that’s why you went to work for Deutsche Bank for a large period of your time?

 

Sanjeev Sanyal 03:10

No that had nothing to do with that. I mean, I didn’t expect to be in policymaking but you know, I went to work in financial markets. It happened to be that I ended up in Deutsche Bank after having worked in another place, but yeah.

 

Siddhartha Ahluwalia 03:23

And when the government came knocking on your door to be a financial adviser, right, how was your first reaction because that meant a complete change in lifestyle, but additionally, more responsibilities?

 

Sanjeev Sanyal 03:35

So certainly, I mean, it’s an opportunity to be a part of the India story at a major turning point in history. I personally have a huge respect for Prime Minister Modi so it’s, of course, a privilege to be able to work with him directly in this way. So, you know, I was definitely happy and yeah, sure you have to,you know… There’s a drop in your salary and all those kinds of things but, you know, frankly, it’s an opportunity to be a part of history and that is priceless.

 

Siddhartha Ahluwalia 04:03

And you know, right now we’re going to discuss a lot of technical terms, like, you know GDP, recession, but would love to, if you could explain these terms to let’s say a 10 year old kid, like in your own language.

 

Sanjeev Sanyal 04:16

Well, we can explain it along the way, because if I explain all of economics… I can’t do it. But let’s say the term GDP. Well, GDP is basically a measure of the value generation of an economy in a particular year. It’s not a stock. It’s a flow. This is important. It’s like if you added up the incomes of the entire economy, whether it’s from salaries or from profit or from— and so on, it should add up to GDP. So it’s a value generation of the economy as a whole. So not of any— and then of course, you can take it from any specific sector. So when you are saying GDP grew by this much that means the full national income grew by so much. That’s basically what GDP means.

Siddhartha Ahluwalia 05:08

And what do you mean by liberalisation, right? That’s a very important term that—

 

Sanjeev Sanyal 05:11

So of course, it’s a general term. It’s an English word. But specifically in the Indian context, we tend to talk about liberalisation as the process of reform that started in 1991. In order to understand what that meant, it meant that you had to understand what happened before that. So basically, between the early 50s, when we just gained independence and till 1991, India was a socialist economy, which basically meant that the government decided how much everybody earned, how much they— who produced what and there was a huge dominance of the state in all economic but also non-economic activities as well, because it’s a package. And so, you had at one point in time, in the 70s, income tax was as high as 98% at the peak rate—

 

Siddhartha Ahluwalia 05:26

And you were a kid back then—

 

Sanjeev Sanyal 06:09

I was a kid at that time but it’s also about, you know, the commanding heights of the economy are supposed to be the public sector. The bureaucrats have enormous powers. They’re still very powerful but basically they ran everything. And wise men… And of course, in those days, there were only men sitting in the planning commission telling everybody what to do. Now, it turned out to be a disaster, because our economy just couldn’t grow. It perpetuated poverty. It led to huge amount of corruption. I mean, it’s not like all corruption was gone today. There may be all kinds of problems, but people should go and read about the power of characters, smugglers like Haji Mastan. These were the real powerful people of the 1980s in Mumbai, our financial capital. So this was kind of the world that existed till 1991. Now our own economy collapsed and then, somewhat reluctantly, we began to liberalise—

 

Siddhartha Ahluwalia 07:03

So just want to pause here, right? When you say economic collapse, what does it mean?

 

Sanjeev Sanyal 07:08

So basically, what happened is that our exchange rate began to fall apart. There was a spike in inflation. We had a huge recession, you know. We were no longer able to keep our economic system going and so we were forced to reform it. And one of the ways— one of the first things that happened at that time, the Prime Minister Narasimha Rao, and then finance minister, Manmohan Singh, then carried out a huge bunch of reforms. The sort of central part of it was getting rid of what is called the licenced permit system, by which basically the government civil servants, and of course, by extension, the political class, would decide— give out licences and permits. So if you wanted to manufacture something, or set up some sort of a company or something, you had to go to some government department, and they would then look at it, put a stamp, and then at every step… It’s not just at the beginning. At every step, you would have to go back. So if you were a car manufacturer, you would have to go to some department, and they would tell you what technology you can use, how much steel you are allowed to have, how many tires you were supposed to have. And for every tiny thing, you would have to go back to this department. And you can imagine this led to obvious, you know, rent seeking, but it also made us extremely inefficient. So, you know, if you’ve had the misfortune of driving around in an Ambassador car, you know, what it felt like.

Siddhartha Ahluwalia 08:38

And then the liberalisations meant, you know we allowed foreign investors to invest in India and—

 

Sanjeev Sanyal 08:43

Well not just foreign investors, but even domestic investors were allowed to do what they wished. So you suddenly began to have a new class of entrepreneurs coming in, you know, there was the boom in the IT sector, which wasn’t there, but new entrepreneurs as well. So to understand what this licence permit does… It basically also froze our entrepreneurial class. So if you go and look at the big industrial houses of India in 1947 when we became independent, and with the one exception of the Ambanis, it was the same people in 19— in the early 90s. Because effectively once you had become big, and you had the wherewithal of getting those licences, no new entrepreneur could come and there was certainly no concept of startups and all of this that we are now talking… This simply didn’t exist. You know, if you were a young person, your ambition in life could be one of two things. One is to leave the country. The other is to sit for the UPSC and become a bureaucrat so that now you could give out the licences. That was basically it. There was no question of having a— you know, becoming a sportsman, writer or any other kind of profession basically meant that you had to be somehow beholden to that Sarkari (Government) system.

 

Sanjeev Sanyal 09:18

And it’s a strain that, right, I think the privatisation of banks started in 1991 at that point in time?

 

Sanjeev Sanyal 09:59

Well they allowed new private banks to come in but they were already existing banks… But at the very least we stopped nationalising them. So new banks came. Not just new banks. Everything… Airlines. I mean, of course, many of those airlines went bust which is okay but there was Jet Airways, ModiLuft, Sahara, all kinds of new entrepreneurship happened. Some companies succeeded. Some failed. That’s all right. That’s part of the creative destruction of a market-based system. But what stopped happening is this whole mindset that, you know, there’ll be a small group of people who will control the whole system and they will tell you what to do in exchange, obviously, for economic and political, you know,

Siddhartha Ahluwalia 10:42

And 34 years later, right. Or 35 years later, you became part of that team that was reforming the banking system again. Tell us about it.

 

Sanjeev Sanyal 10:54

Well, I mean—

 

Siddhartha Ahluwalia 10:55

What happened and why was it required?

 

Sanjeev Sanyal 10:57

Okay so to understand this, you have to understand the sequence of the entire liberalisation process. So first of all, what happened is that you had this burst of reform in 1991 to ’93. But once those initial reforms happened, and the benefits of that began to accrue and the economy stabilised, then after that they stopped doing reforms. The reason for that was very simple. We hadn’t actually embraced reforms. We had done reforms because we had been forced to do it. And even though it was obvious, even at that time, that we were benefiting from these reforms, the intellectual class or so called “economic scholars” of that time weren’t sold on it. So what happened is that once we did the reforms— bare minimum reforms that needed to be done, and the economy stabilised, we stopped doing reforms. So now other than once, or one or two things we did along the way, basically, we didn’t do reform so what happens is the momentum got lost. And then, of course, the Asian crisis also happened in ’97/’98. Although we weren’t part of the Asian crisis, our economy also began to slow down and the momentum was lost and generally, you know, okay, fine, we had a good time but that was it. Luckily, we got a new Prime Minister… Prime Minister Vajpayee. And he also then did a bunch of reforms around about 2000-2003, and that was the first time we began to create new infrastructure, you know, seriously think about global infrastructure. He talked about the global quadrilateral (Golden Quadrilateral), etc. So then you got some momentum of growth generated out of that as well. Ironically, the prime minister who then came to power was Manmohan Singh, the guy who had actually done the original set of reforms. But in his tenure, he didn’t do very much and so what happened, you got the momentum from the Vajpayee reforms. You got some years of very high growth and it also happened to be a particularly good time for the world economy. You know, you had the Goldilocks years. So the combination of the two meant that there was a period in the last Vajpayee years and into the next few years. About four or five years of very solid growth. But even that, by 2006, was beginning to lose momentum and then in 2007, you had the global financial crisis. The problem was that our response to that was not to do more reforms, but instead to keep this momentum going by somehow pumping up the bank. So there was a period from 2006 up to about ’12, so five-six years, when in response to a slowing growth, the authorities of that time basically opened up the banks and basically said you go and blindly lend everywhere. And so some part of that capacity creation, investing etc, was good but then after a while, because we had no restraint on the system, there was a huge amount of misallocation. So, even though that process began to be somewhat tightened from 2013, or thereabouts, enough damage had been done that by 2013, ’14, ’15, you could clearly see that there was huge amount of NPAs building up on the banking system. And certainly by the time I joined the government in 2017, this was you know, one of the big issues in the government. So, of course, this is where, you know, I can say it was a little bit personal because I was a part of the story at that point. So, when I joined the government in 2017, you had a banking system that was essentially bust and the then finance minister, Arun Jaitley… So, he called me in and said, ‘Since you are from this sector, please have a look at this. So I looked at it and then there was a huge pile of NPAs as you all know, you know, 10s of 1000s of crores.

 

Siddhartha Ahluwalia 14:42

For our listeners who are basics. Like NPAs—

 

Sanjeev Sanyal 14:45

What is an NPA? NPA is a non performing asset. This is an asset… This is a debtor who has taken loan and are no longer able to repay it. So, he’s gone bad. It’s a bad loan at this juncture. And there’s so much of it that it’s now threatening the stability of the banking system and not just the banking, even the non banks had lots of this. So now what do you do with this? So there were many ideas. So one of the ideas that was floating around then which was popular which, I think, if I’m not mistaken, the then Chief Economic Advisor was also very keen on it. But others were as well. To create a bad bank… What is a bad bank? You take all these bad loans. You stick them in there, so that they don’t infect the rest of the— and the rest of the banking system is then recapitalized and you get it going

Sanjeev Sanyal 15:32

I personally thought that it was a bad idea. The reason for that was that all you would do is first of all, there would be no ownership of all the bad behaviour by the bankers before… Because now you can just wash off your hands. Secondly, we actually have a history of creating bad banks. We used to have an institution called BIFR (Board for Industrial and Financial Reconstruction). Okay, and BIFR was like a warehouse. You sent all your bad loans there, and then they would live there— they would be festering there so there would be a factory that went bank or whatever. All these assets would be put there, and they would fester there forever and ever and government would keep putting money in there to keep them half alive. And this was, you know, a bad idea. And now we would be doing it on a totally different scale. So just imagine, you know, this is BIFR pro max. So I thought this was a bad idea. So, I did a little bit of research and I found something quite interesting, which was, although there were a large number of bad loans, something like two-thirds of it or even more… Almost 70% of it was due to only 50 cases. In fact, 25 to 30% was only due to 12 cases, which I named, in fact, the ‘dirty dozen’, if those of you remember it. So I went back to Jaitley ji and said, ‘Look, why don’t we take them through the insolvency and bankruptcy process. Now, the argument against this was that the insolvency bankruptcy process had just been created. So the sensible thing to do was to test it out with some small cases and do it. But I argued, and I have to say, at that time, there was a banking secretary, Mrs. Anjuly Duggal. She really supported me on this and I want to mention her specifically because she was a key part of the story, and so was Deputy Governor in the RBI, Viral Acharya. He and I disagreed on monetary policy bitterly but on cleaning of the banks, we worked very closely. So I want to mention them, because they are also a part of the story. So, the idea was that look, the complicatedness of a case is uncorrelated to the size of the case. So if you want to test the system, why not test them with these 12 big cases, the dirty dozen? And they were not very complicated cases as it happened to be. So you know, if you want to test the system, test it with the big guys. Why with the small guys? And so the insolvency and bankruptcy process… The first lot of cases they got were huge cases, and they took them on and it turned out to be very successful because the IBC process and NCLT crunched out these things. These very large companies got sold off. They had two benefits. One is that the banks got some of their money back. Not all of it, but quite a lot. But more importantly, these assets which are going to fester in BIFR or bad bank or something, ended up actually becoming productive assets and then eventually obviously, they are also generating value and GDP and taxes and other things. So what would have been a drain on the system became an asset to the system. Two, the banks got some of their money back. And very importantly, the second order effect of that because suddenly, creditor rights came back. So there was an attitude before, generally in India, that once you got a loan, it’s the bank’s problem. ‘I may or may not repay it. That’s my problem.’ That whole attitude changed. And so as a result of this, the insolvency and bankruptcy process is now very important. Now I’m not saying it’s a perfect system. There are lots of problems, [Inaudible], delays, all kinds of things. I’m not making excuses for it, but it did change the mood. It definitely dramatically changed the systems that were there. And of course, the whole attitude towards loan giving, credit rights, etc changed. So that led to a cleaning up of banks, which through ’18 and ’19 had changed our banking system enough, that despite the shock of COVID in 2020 and 2021 our banking system has continued to improve and today is in rude health. The NPAs are down. The liquidity is up. They are well capitalised and they are all rudely profitable. Even the public sector banks… Very often people, you know, criticise them but they’ve actually done a rather good job of bringing themselves back.

 

Siddhartha Ahluwalia 19:56

And I think this happened all in the last five-seven years when there were a lot of bad cases like Kingfisher was one. Nirav Modi was one. Then PNB and Yes Bank, right?

 

Sanjeev Sanyal 20:04

So there are many cases here. Some of them I want to distinguish here because many people confuse this. See, just because something is a bad bank doesn’t mean there’s been a scam. Perfectly good business decisions may lead to some situation where somebody may go bankrupt and insolvent. So I want to distinguish between business failure and scam. Unfortunately, in India, we still have this overhang and this comes primarily from the socialist period that business failure is some sort of scam. It’s not. The bulk of the cases that went wrong were just business failure. And do not confuse them. If those entrepreneurs, after having gone through the NCLT process, come back and take new risks, the bank should lend to them. Investors should back them, because it’s only a society that takes risks repeatedly. That is not to be confused by people who actually did scams. That’s a different thing altogether. And they should be treated in a criminal way. And that’s a different issue.

Siddhartha Ahluwalia 21:01

And when these assets got sold off, right, I assume they generated a lot of surplus cash for the government?

 

Sanjeev Sanyal 21:08

Not for government. For the banks, yes. Not surplus. They had written those off. And now, they got some of that money back. So you know, since they had provision for them already so that meant that you know, they had written them down. So now they are getting some money coming back. So instead of losing 100 rupees, they’re losing 80 rupees, which is good. Now they can get on with it.

 

Siddhartha Ahluwalia 21:31

I think— and that improved the banking system by the example you mentioned when this year right, U.S. Silicon Valley Bank collapsed Few other banks collapsed. India was untouched when—

 

Sanjeev Sanyal 21:41

Absolutely, so this shows the strength of our system. Like every country in the world, after the COVID crisis was over, we then began to increase interest rates back to more normal levels. And in Europe, in North America, when this increasing of interest rates happened, as you yourself just mentioned, this dramatically stressed out their banking systems and many banks went bust and still going bust. In our case, that has not happened. Our banks are in rude health, and that is even true of the, you know, the non-banking system. Now, this is not to suggest that in future date, something may not happen. But this is, you know, an episode which showed that we were capable of cleaning it. The Reserve Bank has continued to under Governor Shaktikanta Das has continued to do a very good job of keeping track and we are macroeconomic conservatives. So as we expand this lending out, we keep track of, you know, very, very conservatively. So, in fact, you may have seen Governor Das making a comment recently about, you know, excessive exuberance in the non-banks. That’s because, you know, we don’t want to go through this cleaning up experience ever again. It’s like extracting teeth. It’s not fun for the person whose tooth is being extracted, but it’s no fun for the dentist either. [chuckles].

 

Siddhartha Ahluwalia 23:05

It’s a painful process for everybody involved.

Siddhartha Ahluwalia 23:08

And tell us about the five most impactful economic reforms that you have been part or you have seen closely since you came in government.

 

Sanjeev Sanyal 23:17

So I came into government in early 2017. I mentioned, of course, the bank cleanup, which was a very major episode, but a few months into being in government in July, GST was introduced. I didn’t have very much to do with actual introduction, because I was very new in government. So the credit goes to everybody else, but I did witness the introduction of that. And then I was part of some of the iterations that were done to get it going. Then… We were then, you know, there was a whole bunch of other reforms that happened during that period, which I think are smaller reforms but they are a very critical because I’m a big believer in something called process reforms. Which is small nuts and bolts reforms which may influence some small segment and you know, may not make it to the front pages, but these add up. So I can, you know, say that I was part of many of these reforms. So, for example, we liberalised the drone sector. We liberalised the space sector. We liberalise the geospatial sector. We intro— then there were all kinds of somewhat obscure reforms like bilateral netting. I’m sure almost nobody in the audience knows what this is, but this is a financial sector reform that is very necessary in order to create you know, certain kinds of corporate debt market instruments. So, you know, the small steady doing of these small nuts and bolts process reforms has been a very important thing. And some of these things are now beginning to, you know, show up. So for example, one thing that I was very much involved in is dramatically expanding our patent system. It’s still ongoing. It has not finished. We’re still doing it. But, you know, in 2016, we were giving out only 9000 patents. Last year, we gave out 35,000 patents a year. This year, we will do about— between 50 and 60,000 patents a year. In one half to two years time, we will be doing a lakh patents a year. So in less than one year, we’ll have gone from 9000 to over a lakh. Now we want to be in the, you know, knowledge economy. You know, we have to be serious about patenting. Now, this is the sorts of nuts and bolts reforms. A lot of these doesn’t require grand… Some grand change. It requires going and hiring more examiners and controllers and smoothening the process in the patenting system, let’s say. Or we had another reform that I was a part of, which is getting rid of any of these telecom regulations on the BPO ITES sector. In legal parlance, they are called other service providers. And till 2020, there were these almost licenced permit Raj type reforms— Licenced permit Raj type requirements on them which, you know, they had to go to the telecom ministry and send for permits and ask and in fact, technically work from home was actually illegal.

 

Siddhartha Ahluwalia 26:40

Okay. [Surprised]

 

Sanjeev Sanyal 26:41

In 2020—

 

Siddhartha Ahluwalia 26:41

How would we have managed COVID if that was illegal? [chuckles]

 

Sanjeev Sanyal 26:44

Yeah exactly… So it’s quite fun to know how I actually discovered… This is because of Covid. you see, when COVID happened, the telecom ministry issued a notification saying that, okay, now all of you can work from home. I have worked in government long enough to realise that there’s something extremely suspicious when ministry says that you’re now allowed to work from home. So I thought we were all allowed to work anyway. So I looked up that thing, and then I realised that in fact, the law said that you couldn’t, and in fact, you had to have an EPABX machine in your basement in order to work from home.

 

Siddhartha Ahluwalia 26:46

What is that?

 

Sanjeev Sanyal 27:08

Exactly! What is an EPABX machine? It’s a 1980s/1990s machine, but you had to have one of them in your… In your basement to work from home. Now, obviously, it was ridiculous. But the very fact that the ministry issued this notification tells you that the bureaucrat was signalling that this law was still in place. If somebody tells you that, you know, you can now do it for the next eight, nine months. That means what they’re telling you after the nine months these laws apply—

 

Siddhartha Ahluwalia 27:48

And you don’t know what laws apply.

 

Sanjeev Sanyal 27:49

No, no, those laws were there and, you know, while individuals may not have been influenced, but if you were a back office operator,or back office offshoring group or doing ITES, it applied to you and you had to go to permissions and it was something like 70-80% of the time of the management time of some of these back BPO operators was used up keeping track of these regulations. So once I discovered that, then, of course, I took it up with the authorities and you know, once your eyes have set to it, we began to do those reforms. And yes, those reforms, you know, got liberalised, and subsequently in the years ’21 and ’22, those sectors dramatically grew for two years, because you had removed these archaic regulation. Now, there are many such things that can need to be further done but I’m just pointing out to you, none of these require great genius. You don’t need Nobel, laureate theories or something like that. These are mostly you can see the blockage in the system. It requires you to roll up your sleeves, climb in, figure out where in the system the blockage is, and tweak those things till that flow happens.

 

Siddhartha Ahluwalia 29:02

I think I really appreciate the effort that the government brought in external experts like you to figure out that because you could see it with a fresh pair of eyes. If anybody was I believe, already 20-25 years in and they asked him to clean up… He’s just like, I’m sitting in a dirty room. Right? So I would not say it’s a dirty room because I’m sitting in it.

 

Sanjeev Sanyal 29:21

To be fair, there are people inside the government, whether there are, you know, whether it’s from political leaders, ministers in this government. There are also many talented civil servants. And, you know, I’ve had a lot of support from them from getting these reforms done, so I will not [Inaudible] them [chuckles]. So they are also part of the— in fact many of these things like this patent case, I got to know because actually a Joint Secretary who was in charge at that time of the Patent office actually brought it to my notice so many of these reforms got done because they were brought to my notice or we’ve made many of these changes with the help of many of them. But it’s also other people outside government also who have provided lots of inputs. There are lawyers, for example, a school friend, Rahul Matthan, who has been a big help here in giving me inputs in how to make the changes. And you know, of course, there’s the— I had the guidance of both the Prime Minister and the finance minister, the commerce minister, the current telecom and railways minister. Many of them give me a lot of support and ideas and recommendations based on which these changes were made.

Siddhartha Ahluwalia 30:35

And let’s say the ease of doing business in India, right, is still not among the top 100 nations according to global indexes. What is required to make India among the top five places for ease of doing business?

 

Sanjeev Sanyal 30:48

Look it’s an ongoing thing, although I think you’re being unfair. I think we would put ourselves much, much higher than outside the top 100. I would think, but anyway, I mean, all feedback is welcome. And, you know, we should, we should say that— We should neither be too depressed nor become too triumphalist. We need to take a realistic view. And there are many, many things that we will take feedback on. So let’s say if you had come 10 years ago and said doing business in India is difficult because of the following things. One would have definitely been infrastructure. And you can see right in front of your eyes, we are doing a massive rollout of—

 

Siddhartha Ahluwalia 31:29

Absolutely.

 

Sanjeev Sanyal 31:30

So you know—

 

Siddhartha Ahluwalia 31:31

Digital infrastructure in India is world class right now, be it— infrastructure

 

Sanjeev Sanyal 31:35

Physical infrastructure too! I mean, the airports you use at our end would very often be better than the ones you use, whichever country you’re flying to.

 

Siddhartha Ahluwalia 31:42

Even better than the US airports.

 

Sanjeev Sanyal 31:43

Well, the U.S. is a very low bar. Many other places as well. Then, you know, many of the other physical infrastructure, now we are beginning to slowly build out the urban infrastructure. Places like Mumbai, for example, have massive construction going on, you know. I apologise for the dust it creates but you know, at some point, it had to be built. And it would be inconvenient whenever we built it, but it’s getting built. So the physical infrastructure is getting done. Similarly, many of the old bureaucratic hassles are one by one removing. I talked about, you know, opening up the drone sector, space sector, many of these other sectors. I specifically talked about doing, you know, reforms in the OSP sector. The right patents. Right now, I’m trying to get rid of mandatory mediation in commercial court, commercial cases. So if you read my articles in the newspapers, you will see, many people are surprised that I’m in the government and I write these articles which are very critical of certain processes in the government. But you know, there is a culture here of taking a critical view of things and debating them. And, you know, we have been given the freedom in the Prime Minister’s Economic Council to take up these issues. You know, my colleagues in the Prime Minister’s Economic Council, for example, took on the statistical system and argued that, look, we need to upgrade the system. So in a sense, you can clearly see that, debate and discussion and reforms are actively encouraged. And right from the Apex body, like the Prime Minister’s Economic Council also, you hear strong views on, we need to fix this, fix that. And, you know, we are encouraged to engage with the system. So it’s not just that, you know, we want to ra-ra about the economy. So, we fully appreciate the feedback we’re getting. We ourselves give quite a lot of negative feedback and as a result of which this self reflection you also have some reforms get done. I’m not claiming that there aren’t others to do. I mean, I would argue that the direct tax system is way too complicated. Needs to be fixed. And, you know, at some point, we will get it done.

 

Siddhartha Ahluwalia 34:01

But do you think countries like Dubai and Singapore, because of their small size, they’re able to move very fast and able to create a hub for financial activities?

 

Sanjeev Sanyal 34:10

Certainly they have an advantage of being small. We have some advantage of being big. So, I mean, there is we can sometimes mimic some of their advantages. For example, in the case of GIFT City. We are trying to mimic some of the benefits of being an offshore financial hub. But then there are also benefits of being really big. I mean, we have a large internal market so when there is a massive shock, like say, for example, COVID and you know, the world begins to fall apart. And you know, global supply chains break down. A place like Singapore can very quickly unwind. In our case, we can keep things running in and we have resources and scale that provide us a certain amount of strength. So there are advantages and disadvantages. But yes, I mean, if you’re small and nimble it means that you can—

 

Siddhartha Ahluwalia 34:26

The political will can come into action really fast

 

Sanjeev Sanyal 35:04

Yeah it’s a smaller system, so we can but you know, to be fair, we also have smaller units of government in India where you can take decisions and get things done. I’ll give you one example. Municipal issues. One big issue in India is municipal issues. Just cleaning the city. And you know, you have a city like Indore, now more recently, Bhopal just got its act together and cleaned it up. Relatively small— we have small states like Goa. I would argue that Goa has really got its act together. Those of you who visit Goa. I have been visiting it for the last 30 years and let me say Goa of today… Okay, it’s lost some part of its old charm, but on balance, it has dramatically improved from what it used to be as a holiday destination. It’s cleaned up its act. The old you know, drugs and hippies image has slowly got diluted out. It’s now a real high end, high quality destination to go to and— by world standards, by the way. I’m not just taking Indian standards. And so, you know, we have smaller units and they can perform if there is political will and you know, the business elite also has the will, they can perform.

Siddhartha Ahluwalia 36:21

You mentioned one example right, how India’s population— So, if you have to summarise, how does India being the largest nation by population help it and deter it in economic growth?

 

Sanjeev Sanyal 36:34

So, I mean, having a very large population means also everything is large. So, the problems are also large, but the opportunities are also large. It creates a massive common market, but you have to—

 

Siddhartha Ahluwalia 36:47

What does common market mean?

 

Sanjeev Sanyal 36:48

A common market means that the internal demand… The system is very large. So, if you produce a product in say if you’re in Singapore, yes, there’s some benefit but you know, there is no large domestic market. So, you have to go out and sell it and you know, sometimes the world may be in a nice globalising environment where you can easily spread yourself. There may be other circumstances where you can’t. Now in India, the problem was till GST came in, we were not a common market. It was actually more difficult for Mumbai to trade with Delhi than it was for Mumbai to train with Shanghai because if you just took a truck across the country, and are stopped at every state boundary, and different laws are there. Of course, lots of rent seeking and all of this. It was just a mess. Now we have an unified system called GST. I’m not saying it’s perfect, but it’s a dramatic improvement on whatever that stood before.

 

Siddhartha Ahluwalia 37:39

Agreed.

 

Sanjeev Sanyal 37:39

Now, you can think of GST as a free trade agreement India signed with itself. Now since you said population, you have 1.4 billion people to whom you can sell things. Similarly, they can participate both the demand side, but also on the supply side. You have a cluster of talent. you don’t need labour. You can move them around. People can move around the country in ways you can’t do you know, all of those things. And of course, we are building infrastructure in scale. So all of those things are possible because we are large. Now, of course, if that population is continuously growing at a very, very high pace, that complicates matters, and that has been historically a problem. But let me also say, and many people don’t realise this. Our birth rates have actually dramatically declined. In fact, India does no longer produce enough babies to replace itself. It may surprise people. Yes, our fertility rate is now just slightly below replacement.

 

Siddhartha Ahluwalia 38:42

You think we might taper off at 1.5 or 1.6 billion?

 

Sanjeev Sanyal 38:45

Or relocate more young people—

 

Sanjeev Sanyal 38:45

A little bit more than 1.5 but because we are very close to it. But let me say that our population is no longer growing because we have too many babies. It is growing now purely because we are living longer. So that is a good reason for, you know, population growth. So as a result of this, what is happening… We are now in a sweet spot for about 25 years where there aren’t too many children in the pipeline. And we haven’t aged that, you know, a large part of the population is old and beyond the working age. So we have a bulk of the population now in working age or will soon be entering the working age in the next decade or so. So we are in a sweet spot. We can deploy a large part of our population to produce things without having to spend energy on looking after children or looking after the ageing. And this is happening at a time when many countries in the world are rapidly ageing. Even China has now tipped over into the rapid ageing rate. So this is why you know when the Prime Minister says Amrit Kaal, it’s not just about the coincidence of the next 25 years being, you know, the 75th to the 100th year of independence. It coincides as it happens to be with our demographic peak, but we have to take advantage of it. And also remember that it also will come to an end. On the other side, we too will age. Okay. It also means we need to do some things very, very quickly. And we need to understand the changes, the dynamics, so many things. There are already states in India, which have already begun to age like Kerala, or Himachal shortly. And we have to begin to continuously change our mental dynamics for this. So, there are parts of the country where you need to actually shut down schools. People don’t realise this. We may have too many schools and not enough children in those villages and so on, to participate in the schools. So we cannot be emotional about these things. We need to look at what is actually happening and in some parts of the country, we actually have to flip it and you know, encourage births, because they’re not enough children being—

 

Sanjeev Sanyal 39:25

Relocate to those places. Maybe those states have to take a view that they are happy to import more people or there are parts of the country, for example, in the hill states, where entire villages have been emptied out. We now need to actually find ways of populating people along the border areas to make sure that there is adequate populations living there, other than just the military presence. You need populations living there. So there are all kinds of issues that happen as the demographics flips.

Siddhartha Ahluwalia 41:24

You mentioned briefly about the Amrit Kaal. The next 25 years could be again where India becomes a “Golden Bird”, right? What are the factors, like the global factors? So India is working hard. The Prime Minister, you are working hard. The population is working hard. We as entrepreneurs are. Our investors are working hard. So what are the global factors because timing has to coincide for a lot of things for that to happen. Like if we remember and recall you are a historian as well, right? So India became the trade route. During the—

 

Sanjeev Sanyal 41:53

So look, we have historically been a very major part of the world economy. And it’s not for nothing that the Indian Ocean is called the Indian Ocean. It’s named after a country. It is the only ocean in the world named after a country. The reason for that is that, you know, Indian merchants, mariners, etc, were sailing all over the world trading and we were the engine of world growth. In fact, you know, till about 1000 years ago, 1/3 of the world’s economy was India. Then that number kept declining through the centuries. Through the Mughal period, even though many people think of that as a golden period. Let me say that even during that period, our share of world economy was declining. In fact, China went past us at about 1500. And then it kept declining, but even then, we were a very, very large part of the world economy till about 1820. And then it just drops off as the colonial experience, you know, deindustrialized India. But interestingly, it will shock people to know that our share of world GDP was around about 4% at independence, but after independence, also, it kept declining. So this is the thing that, you know, you have to understand how we let ourselves down in the first 50 years of independence. For half a century, our share of world GDP declined. So by the time we were liberalising our economy in the early 90s, the share of world GDP had dropped a little bit below 2% of GDP. So at Independence, we are 4%, down to a little less than 2% when we began to liberalise the economy. Since then it has slowly been drifting up. And we are actually now just a little bit above about four or 5% of GDP or world GDP, which actually brings us back to where we were at Independence. That’s all we have done in the last 30 years of growth. We’ve just gone back to where we were, and that is also roughly true of our position in the world in per capita terms also. We are just about where we were. We are still a very poor country, but as a proportion of world incomes, we have basically regained our place where we were at Independence. Of course, the rest of the world had gone far ahead. We have begun to now catch up. From here on, we are actually now beginning— getting into the zone where we are climbing the stairs. So as you yourself pointed out, we are now the world’s fifth largest economy in dollar terms. U.S. dollar terms. Nominal. In purchasing power terms, which is if you adjust for the fact that different things cost differently in different parts of the world. We are already the world’s third largest economy. Now in dollar terms, we will go past Germany in about 18 months to two years time. In three to three and a half years time, we will go past Japan. Then we will be however you measure it, the world’s third largest economy. This doesn’t mean that everything has been solved. We will still be quite a poor country because we have the third largest economy, but we have the largest population. So once you divide one by the other, we are still a lot poorer than, you know, Western countries, but much better than before. And even just having size has some benefits. Just the sheer size of the economy means that we can negotiate with the rest of the world in a very different way. Our place in the world is different.

 

Siddhartha Ahluwalia 42:58

Our passports will become more powerful.

 

Sanjeev Sanyal 45:29

Yes. Also, you know, the revenues the government is raising goes up. So even if we are doing, you know, transfers to the very poor, let’s say. Our ability to do it goes up. Our ability to create infrastructure goes up. So all of this has been generated by that same growth engine that is expanding the economy. So we have to keep this going. No messing with this. And without, you know, doing what we did, you know, blow up our banks or do anything, which in any way interferes with macroeconomic stability.

 

Sanjeev Sanyal 46:01

This is a compounding process. And those of you who’ll know compounding… I’m sure you learned compound interest rates in class eight. The key thing, if you experiment with compounding, you will learn, is that that compounding process really gathers pace over time. So it’s really about maintaining that. You know, this year, for example, we will grow at about 7%. Now, that is the world’s fastest growing growth rate, but in this one year 7% doesn’t matter. Now you do the 7% for a few more years. Maybe the world economy will be slightly better off a few years from now. We may even do 8%. Maybe one year we’ll get lucky and do 9%. But it’s not about that any one year. Whether it’s 7%, or 9%, is not the point. The point is, is it getting compounded? Every year are we just doing it? And so do this over 25 years and you will be surprised how dramatically the thing goes off. I mean, even China, everybody’s saying, you know, it’s now the world’s second largest economy. It’s now competing with the US and all that. All of this is about compounding.

Siddhartha Ahluwalia 47:06

I think the U.S. is about $40 trillion. China is at—

Sanjeev Sanyal 47:09

So in USD terms, nominal, the US is about a $25 trillion economy. China is somewhere about an $18-$19 trillion economy.

Siddhartha Ahluwalia 47:20

Not very far behind.

Sanjeev Sanyal 47:22

Yeah, I mean, it’s on the same scale. It’s a little bit behind but it’s on the same scale. In PPTP terms, by the way, China is already bigger. So, you know, China is a serious player. But it has got here, let me also clarify, through the same process of compounding. In 1990, they were just a little bit larger than us as an economy, We have since the liberalisation of the 90s, we have actually grown rather well. In fact, I would say, for any large economy, probably second only to China itself. But China has grown by a few percentage points higher and that compounding effect means that they are in a totally different place from us. So now that has just flipped. Just now flipped. This year or last year. We are now growing a few percentage points higher than them. That is all that is needed. Just compound this for a few years and certainly if we do it for 25 years it’s a totally different thing. But even if you did it by the end of this decade, we know we will be rapidly catching up.

Siddhartha Ahluwalia 48:26

And China also follows a different version of socialism.

Sanjeev Sanyal 48:31

Well they… Firstly, the economy is totally not socialist, except for the idea of political control at the very top. So they have got a mixed bag. And since they began to really look, they began to do their economic reforms much before us. They started in 1978. And in the initial years, when you had Deng Xiaoping and others, this was done very much, even though state control was used, but there was a sense that you know, economic efficiency, entrepreneurship, risk taking, etc, shouldn’t be interfered with. In the last few years, there has been some change in the dynamics of it. And you may have seen that the central government of China has gone back to being much more interventionist. And that is, by the way, as you can see the effect of that already. Yeah, I mean, that their growth has slowed down. They are having their own problems in their banks. You know, some of the top entrepreneurs, you know, Jack Ma, for example, has simply disappeared from, you know, the front pages. So, you know, the fact that in the last few years, they’ve tried to go back in some way has already shown you the price you have to pay for unnecessary top down control.

Siddhartha Ahluwalia 49:56

And I believe between 2010 to 2015, China was the place where Indian businessmen were going for imports to learn manufacturing?

Sanjeev Sanyal 50:06

No, look, China is a serious player in the world economy even today. We may have our geopolitical frictions with them or whatever, but we can’t wish them away. And we still import large amounts of components from them. And—

Siddhartha Ahluwalia 50:19

Even after the Make in India initiative that we—

Siddhartha Ahluwalia 50:21

And what about… Do you think India can, if you have ever, you know, thought, or given serious thought to it. But can India be a $20 trillion economy at some point in time in the future?

 

Sanjeev Sanyal 50:21

Yes, even with that, and will continue to be for a while. Of course, there are areas where they do obvious dumping, etc. So we will protect certain parts of our economy from dumping and unfair practices. But to say that we can wish away China is, you know, we can’t. We may have our differences with them, but we will still trade with them as indeed does the U.S. U.S. I mean has even bigger geopolitical concerns about China. And they still trade with them, and so does Japan. So it’s not that we can wish them away. But yes, whatever we do, we have to do with our eyes open.

 

Sanjeev Sanyal 51:07

Look, the whole game is about compounding. So you know, you choose the growth rate we think we can do and compound it. So in, if I’m not mistaken, if you take a PPP (Purchasing Power Parity) perspective of things, we are already a $12 trillion economy. So you know, it is the case that we can get there. If exchange rates were more PPP driven, then we would get there. But you know, if you compound it over a period of time, yes, absolutely. It’s something we can aspire to but you know, it’s not like it’s at some god given certainty. It requires that over a period of an entire generation, we put in that effort.

 

Siddhartha Ahluwalia 51:46

And why I’m saying that number is because, imagine a $20 trillion economy with 2 billion population.

 

Sanjeev Sanyal 51:53

First of all, I don’t think we’ll ever have a 2 billion population. As I said, we are not producing enough children already to be able to sustain the current population. So while our population may go up a little bit more because of longevity growth, the population will probably max out at 1.6, and then very rapidly then begin to decline. Because, you know, as I said, our birth rates are in fact, now no longer at replacement rates.

Siddhartha Ahluwalia 52:21

Yeah. But the important thing that I’m trying to get to the income of a common man, by that time, just dividing the GDP by the population will be like $10,000 in the U.S.—

 

Sanjeev Sanyal 52:32

So I think we will reach $10,000, but not with the population benefit. I keep coming back to this and I want to drill it into people’s heads, because there is this impression that we will be young forever. No. We have 25 years to do it, whatever we want to do, this is it. After that we too age. Okay, number one. And our population will not be growing. And at some point it will be declining well before you know, somewhere in the 2050s. and I’m hoping to be still around at that time, it will begin to decline. So don’t count population being the bulwark of prosperity into the future.

 

Siddhartha Ahluwalia 53:14

Wow so that’s why you’re always coming back to that we have only 25 years to do what we want—

 

Sanjeev Sanyal 53:18

Yes this demographic thing lasts 25 years. Make it during this time. It is now.

Siddhartha Ahluwalia 53:23

What are we doing in 2023 and 2024 right now, on the policy level? On an implementation level, when there’s almost a global recession, triggered by printing money in the U.S. Two wars for the first time in the history of the world after World War Two.

 

Sanjeev Sanyal 53:39

That’s not true. There have been many wars—

 

Siddhartha Ahluwalia 53:41

But at this scale?

 

Sanjeev Sanyal 53:42

Yes, yes, you know, the Vietnam War, this war. I mean—

 

Siddhartha Ahluwalia 53:46

But these are two wars going together.

 

Sanjeev Sanyal 53:47

Well, there were many wars, I can assure you. You go back and look at the 60s and 70s there were many wars going on. And they have been since then too. The war, more recently in Afghanistan and in Iraq was going on so the world has always had wars, but yes, right now, we have two wars. They are certainly unhappy things and they affect oil prices and other things that we depend on.

 

Siddhartha Ahluwalia 54:09

And China is almost like a threat to us. And our neighbouring nations like Sri Lanka have gone bust. Like Pakistan has gone—

 

Sanjeev Sanyal 54:16

Absolutely. So you know, if we had followed the kinds of policies our U.S. academics were telling us to do, we would have also been in Sri Lanka’s position, let me tell you this. So thankfully, we did not do that. But right now what our game is, look, first of all things are going great here right now domestically. And all—

 

Siddhartha Ahluwalia 54:35

And what do you mean by that?

 

Sanjeev Sanyal 54:37

So for example, if you look at the latest number that came out just now for the second quarter, which is the July to September quarter of the financial year. You can see that we grew by 7.6% year on year. That’s a massive real growth. In nominal terms, it’s even higher. And then you also had, you know, the industrial sector in particular. The construction sector is growing. So these are solid numbers coming through and it is happening without any help from export because exports are actually mostly flat. They had grown in the previous year, particularly services, but now they are flat. So without the benefit of a global environment that is expanding, we are managing to hit… For the full year, we’ll probably hit something like 7%. That’s a really solid growth rate. Easily makes us the fastest growing economy in the world. And very importantly, we are doing this without stressing the macros of this economy. So there is no spike in overall inflation. Yeah, tomato prices may go up and come down, but there is no sustained inflation. Similarly, our external accounts, our current account, our trade balance, etc. They are not blowing up in any which way. We have $600 billion in foreign exchange reserves. So, you know, the external sector is not under stress. Our banks, as we have discussed before, are in decent shape. So we are doing this 7%… It’s like we are jogging and doing the 7%. Now we may not— we may now get an opportunity, at some point the next few years where let’s say the world is in a better place. Let’s say they’ll be cutting interest rates, the world will be growing, and so on. In those circumstances, we can do 8% plus growth rates, but I wouldn’t try to do it right now. My most important thing right now is to make sure that we continue to build out the infrastructure. We keep doing these reforms I mentioned. All these 1000s of small reforms we need to do to make ourselves more efficient. Get our private sector and multinationals who want to move to India to build capacities, and then wait for that boom period in the world economy, then we will make hay. Meanwhile, we take advantage of the fact that we are a large domestic economy and build out that capacity.

 

Siddhartha Ahluwalia 56:43

And the last question is what percentage of you know your time or the entire economic advisory time goes into thinking about startups?

 

Sanjeev Sanyal 56:55

Some part of our time, yes.

 

Siddhartha Ahluwalia 56:56

I just want to highlight that the U.S. is what it is today and what role has it played. The four largest companies in the U.S. today are all startups of the generation. Apple, Google, Microsoft and Amazon. Right? So is India thinking of building a—

 

Sanjeev Sanyal 57:13

Absolutely. We are fully— You know, it has required us almost a generation since the 1991 reforms to create a culture which is risk taking, innovation. If you go to top universities today, and you ask kids, what do you want to do? That has changed. When I was there, they either wanted to go abroad or they wanted to write the UPSC. Now, you know, the brightest kids want to do a startup. So there has been a major change in risk taking. And when I say startups, I don’t mean only you know, some guy doing some technology thing. Even somebody doing something like what you are doing is a startup. Somebody wants to go and take a risk in a completely different field. Wants to be a sports person or wants to be a writer. That’s also a startup of a type. So I am talking about the culture of risk taking. And that has definitely come back in India. I mean that there is a real energy that you can feel when you go out and meet young people trying to do all kinds of things. And I spent some time thinking about it. Look, some of the problems I need to solve are generic to everybody. Startups or not. I mean, improving the patenting system or the system of India is good for startups. It’s good for non-startups, existing companies, but they have specific problems. For example, you know, lots of problems relating to taxation, for example.

 

Siddhartha Ahluwalia 58:27

Angel Tax.

 

Sanjeev Sanyal 58:28

Angel tax. We try and keep fixing them. I won’t say they get fixed in one shot. We’ll keep deterring it but what I want to say is, this government has its ears open. We see the problems arise. We fix them. Then another set of problems arise and we’ll keep fixing them. This will keep going on. But what really matters is that we really want this innovation-driven economy that sort of really drives India. And it is in some ways, this is what our real history is. If you go back and look at our very long history, India’s economy has been an economy of startups and innovation. We are the people who explored across the Indian Ocean. You know, we sent merchants exploring to, you know, the Middle East. We have them going all the way through Southeast Asia. All the way through Japan, China and Korea. We have a long history of risk taking and exploration. And of course, we have intellectual risk taking in terms of mathematics and medicine and so on. So we are a culture which is naturally risk takers. We are open minded. You know, Hinduism is very much about searching for the truth. It’s not about telling you what the truth is. So this culture of risk taking is very much in our blood. And finally, we after having let ourselves down for half a century after independence, sadly. Finally, we have built back that culture and you know, that confidence that you’re seeing in India today comes from having built back that culture of risk taking.

Concluding Remarks