Larry Summers on Parliament logjam: There is ground for concern, but optimistic about India reforms

The present roadblocks India faces on the reforms front on account of political logjam as seen in the ongoing winter session of Parliament are indeed a concern for the country, said Larry Summers, American Economist and former US Treasury secretary, in an exclusive interview with Firstpost and Forbes India on Tuesday in Mumbai.

Summers, however, is hopeful that the Narendra Modi government will pull off the much-needed large ticket reforms such as Goods and Services Tax, necessary to lift the economy to a high-growth trajectory over the next few years.

“I think it is right to be concerned (on account of the policy logjams in Parliament) but I remain optimistic that India will undertake reforms in this period. (But) I think there is ground for concern,” said Summers, who is on a short visit to India.

The ‘intolerance’ debate has dominated the discussions in Parliament since the session began on 26 November. There are doubts among investors about the ability of the Modi government to confront the opposition in Parliament and progress on the legislative process in the aftermath of the defeat the party faced in Bihar polls.

On Tuesday, both houses of Parliament adjourned following ruckus by Congress parliamentarians over the National Herald case.

This happened after the Delhi High Court, on Monday, dismissed the plea of Congress President Sonia Gandhi and Vice-president Rahul Gandhi to quash a trial court’s summons to them in the National Herald case. But the Congress termed this as “petty vendetta politics of the BJP”.

Summers has maintained that India has potential to grow at 9 percent for a decade and 8 percent in subsequent years if the country takes bold reforms measures.

But, the NDA government, which came into power in May 2014 has not managed yet to pull off large reforms beyond FDI liberalisation in a few sectors and some minor incremental reforms, because of its weak position in Rajya Sabha.

The GST, an important tax reform for the economy, is still stuck in Parliament. The government wants to roll out GST from 1 April 2016 but for that to happen, the Bill needs to be passed in the Winter Session of Parliament.

“I think GST is an important start (for India),” Summers said.

A simplified tax regime is expected to improve compliance and can significantly improve the revenue collections over a period of time, subsuming several stand alone taxes. This is expected to add to at least 1-1.5 percent to the GDP going by estimates.

Summers said there is need to capitalise the Indian banking system to prepare themselves face the industry challenges. A “better capitalized banking system, which is more private sector oriented and has a larger share of its assets in the private sector,” is critical for the economy he said. Also, the new set of payments banks can significantly add to the financial inclusion efforts of the country.

India’s prospects better than China

The imminent US rate lift-off should not be a major reason for worry in emerging markets including India. Instead, these countries should be focusing more on strengthening their domestic fundamentals such as skilled capital and labor, Summers said. “I think the right thing for the countries is to focus on their fundamentals.”

Summers said India stands as an attractive spot for global investors in comparison with other peers such as China.

“I think India will be a beneficiary given the fact that there are increasing questions being raised about China. That will cause more people to take a serious look at India.” India has lot of potential in services, particularly IT services and areas like tourism, which are labour intensive, Summers said.

Indian economy grew at 7.4 percent in the September quarter outpacing the 7 percent, technically making India the fastest growing economy in the world surpassing China’s growth.

But there are questions being raised about the still continuing weakness in certain areas of the economy such as muted corporate earnings and stress in bank balance sheets and slow bank credit growth.

On the other hand, the threat of inflation in the economy has come down in the past few months with the consumer price index inflation staying well below the central bank’s 6 percent target for January 2016. In turn, this has enabled the Reserve Bank of India (RBI) to bring down the interest rates in the economy by 125 basis points so far this year.