‘Little bit of a disease…’: Ex-RBI Deputy Guv Viral Acharya cautions against GDP comparisons

Ex-RBI Deputy Governor Viral Acharya has said India should not compare its GDP growth with other countries and instead focus on ensuring a much higher growth rate to create last mile jobs.

“I think there’s a little bit of a disease we have in India which is that we keep comparing our growth rate to the rest of the world rather than to the growth rate that we need to create jobs for the new labour workforce that’s entering into the jobs market,” Acharya said in the podcast The Global Indians on YouTube.

“That is the reorientation that is required, which is not to keep patting ourselves on the back for being higher growth than the rest of the world but actually measuring ourselves relative to the potential growth that we need in order to deliver on the job strength.”

The former RBI top executive said that India needs to change the mindset and acknowledge the growth it needs to be able to create more jobs.

“Until we make this shift we’ll keep deluding ourselves that we are doing enough because as long as you look good you know we look good in the IMF tables as long as we are better than the rest of the world, but the real internal question we need to ask ourselves is: What is our need for growth and are we at that level or not?  We are not, unfortunately, regardless of which government has been designing policies. That is the real challenge,” he said.

“It requires a mind shift, it requires a bit of an honest acknowledgment of where the state of the things are rather than saying that simply because we are growing faster than the rest of the world and China is now having a very hard landing that we are sort of good enough. It’s misleading because it’s hiding the fact that we are still short relative to our own needs on the jobs front, both in terms of numbers and the quality of the jobs,” he explained.

Acharya also cautioned against concentration of industries among a handful of business houses, which he felt was the growing trend.

“After liberalization, industrial concentration in India was coming down very sharply. Public sector enterprises gradually gave up their share to the private sector firms. But what we are observing especially over the last 10 years is that private sector concentration itself is rising. A lot of industrial concentration of India now looks like a lot of private domestic companies becoming large in a whole host of sectors just the way the government was a very big player before the ’90s.”

He explained why the trend was problematic. “I think generally this form of industrial concentration is found to be problematic for variety of reasons. It gives these companies undue advantage in pricing power, it keeps inflation structurally high, it reduces investments because they try to make more money by keeping volumes low and keeping margins high rather than all companies gunning for more volume because margins are so tight. You get a smaller economy but you get more valuable publicly listed companies because their operating margins are very high.”

“They also can become very powerful in the economy in a political sense in being able to influence regulation. So that it’s always incumbent friendly rather than allowing free entry and easy entry by market companies. And usually what you find is that entry growth of medium-sized companies into large companies becomes smaller if large companies are becoming larger and larger in the sectors in which they operate. So my sense is sooner rather than later India needs to take a very objective view of where the concentration in the industrial landscape is heading. I think it’s becoming very concentrated in my view.”

He highlighted the divergence in the performance of key economic parameters and the stock market.

“We need more discussion about the issue. I don’t even see it on the table. And the stock market is playing a very big role in this. Because, of course, these companies are becoming very valuable, their margins are very fat. So some of their gains are being shared with the part of India which is in the stock market. But I think it’s also there for creating this divergence between the real economy and the success of these companies, which is that the consumption engine, the investment engine, the job creation are not keeping in line with the success of the stock market.”

Acharya was the Deputy Governor at the Reserve Bank of India (RBI) during 23rd January 2017 to 23rd July 2019 in charge of Monetary Policy, Financial Markets, Financial Stability, and Research.