Swarajya: The last time we spoke to you, you talked about the sheer breadth and range of issues that someone working in the Government of India has to deal with. Do we see that reflected in the 700-plus pages and the 17 chapters of the Survey?

Dr V. Anantha Nageswaran: If 700 pages don't convince you that we have covered the breadth and depth of issues, I don't know what else will. We didn't plan the Survey to be this long. We allowed the issues to be covered first. The focus was not on a particular size. Given how much the world had changed in the last one year since we wrote the previous Survey, we simply wanted to do justice to all the key pressing issues, priorities, concerns, and challenges. The size and length of the Economic Survey was a byproduct of that rather than the goal. Producing a mammoth Survey was never the idea.

Swarajya: When we read the Survey, we are not just looking at data. We are reading your views on policies past and what must be kept in mind before policies for the future are formulated. So when you were writing the survey, who was your primary reader that you had in mind?

Dr V. Anantha Nageswaran: It is either existing policymakers or budding ones. And sometimes it is not only the policymaker directly, because sometimes you also have to create a critical mass of opinion, which can then influence, convince, or persuade the policymaker. In that sense, it is open to all thinking people inside or outside the government.

Swarajya: In the Preface, you mention that while India had a very strong year in terms of macro performance, the global scenario had changed and India was not rewarded for its success on the macro front. Was there a sense that we played by the rules but then, at the finish line, found that the rules had changed?

V. Anantha Nageswaran: No, I don't think the rules were changed as we approached the finish line. This was not a lament as much as a recognition of the geopolitical reality. It was not a complaint or a sense of "the world has been unfair to us." That doesn't take you far. It doesn't help to have that sense of injury. It is important to understand the world you are in. It was more a statement of acknowledgment of geopolitical reality than anything else.

Swarajya: What are those two, three or more variables which still keep you up at night in terms of the external scenario?

Dr V. Anantha Nageswaran: I've always told people that in general, I try not to make things keep me awake at night. Otherwise, you can't think about things when you are awake if you let them dominate your sleeping patterns. Anyway, that apart, what is unfolding in the financial markets is exactly the kind of thing that could keep you awake at night, because ultimately the kind of leverage that got built up in the world, the debt burdens both in the public sector and the private sector post-COVID, I think that has the potential to unravel. And probably it is showing some signs of unravelling in the last few days of action in the financial market space and different asset classes.

In a politically fractured world, this comes on top of existing political contestations. In 2008, there was at least on paper a coordination between countries. This time, that may not happen, which can actually accentuate the impact and the period for which it lasts. All these things could be far worse this time.

The three risk scenarios that I wrote about in the Preface are mostly global in nature. Those are the ones that can keep one awake at night, and how the three scenarios kind of telescope into one another.

There is a very fine dividing line between scenario one and two, and between scenario two and three. That's exactly a matter of concern, and we need to be aware of the implications.

Swarajya: You include a passage on the cost of impatience, not as a moral discussion but as an argument for why it makes economic sense to delay gratification. Can you expand on that?

Dr V. Anantha Nageswaran: This is about the quick-fix, shortcuts approach that we tend to take. Your own magazine carried an article about the development of fighter jets. That's exactly a classic case of where you need to do the hard yards.

A lot of things we start but don't take to their logical conclusion. And I am not talking about one particular sector. It applies to individuals and households as well. In Chapter 16, Part II, we talk about the obligations of the private sector and households, and the chapter on urbanisation talks about what citizens need to do.

Why, for example, does India have the highest number of doping incidents among athletes? That is a classic case of seeking short-term glory instead of preparing for the long haul, achieving excellence, and then reaping the rewards. In chess, by contrast, young players go through years of preparation and grounding. There is no shortcut.

We see this approach to delayed gratification in some parts of the economy, but not as an operating system, not as an ethos, whether in business, sports, or personal skilling efforts. You need to do the hard yards, and then be prepared to accept that gratification will come once you make the investment in time, effort, and resources.

But if you look for short-term answers, and if they don't come, then you kind of fritter away your energy. You expend your mental, emotional, and financial bandwidth. And then when the real opportunity arrives, you have nothing left.

Delayed gratification means doing the hard yards, resisting the temptation to take shortcuts, putting in the effort required, and respecting the goals you are pursuing.

Swarajya: At one point in the Survey, you mention that India's very size and the fact that it is a functioning democracy precludes it from following certain templates. Can you speak more on that?

Dr V. Anantha Nageswaran: Some of these things, if you try to unpack them, it becomes problematic. It should be left to individuals to understand it. When the world has become more strategically oriented, some of the luxuries we take for granted—again, unfortunately, I'm deliberately being obtuse here—in a different time, a different period, and a different context may no longer be applicable. But if the government were to mandate that adjustment, people will resist and react. It would be better if both sides appreciate that boundaries have changed because the global context has changed.

That is not easy to bring about in democracies. That is precisely why strategic thinking and strategic approaches become that much more problematic and challenging for democracies than for non-democratic societies. We are caught in certain abstractions which were always relevant but always had a contextual backdrop to them. We forget that and think these are eternal principles, independent of context. That is not true.

It would be far easier if all of us appreciate these limits and boundaries ourselves rather than the state mandating them. If the state mandates them, there will be howls of protest and suspicion that the state is going back on its democratic commitments. But the world has changed, and certain commitments are always woven into their underlying context. That has to be appreciated. But that is precisely why it is more challenging for democracies to respond to a changed geopolitical context.

Then, speed also becomes an issue: speed of decision-making and speed of execution. Democracies have to follow certain processes. In a changed global context, you need rapid-fire responses. Things that would ordinarily take six to eight months or a year to go through the consultation process have to be compressed within a shorter time frame. When supply chains are disrupted, you have to move very fast. That is another problem democracies will face.

Swarajya: Do you also think that no country can pick and choose traits from other countries? That if we want our trains to run on time like Japanese trains, we have to adopt the traits of the Japanese people at large, and cannot just pick train timings from Japan and engineering from Germany?

Dr V. Anantha Nageswaran: Absolutely. The punctuality you see on Japanese train platforms, and the announcer apologising for a 10-second delay, are all part of a different mindset and culture. What you can try is bring in one element and hope that it creates a diffusion in other dimensions. So you have to try both bottom-up and top-down approaches.

And that brings me to the next point—you have to open yourself to experimentation, which is what we write about in Chapter 16, calling it an entrepreneurial mindset. It's not about the state running businesses. It's about being open to experimentation.

But your larger point is well taken. You cannot simply plug one element and impose it, because it has evolved organically as part of a larger system of norms, preferences, values, and therefore behaviour.

Swarajya: You cite an FT report describing how $120 billion in AI data-centre spending was moved off-balance-sheet via special purpose vehicles. If this is a bubble, how do you fear its effects might transmit onto the Indian economy?

Dr V. Anantha Nageswaran: It was a well-written article. There was also another report about whether these AI companies in the United States even allow you to identify who their auditor is. Those are questions for which answers are apparently not easy to find from their published statements or stock exchange disclosures.

The systemic cascade is always a risk factor in globally integrated finance. In trade, there is an attempt to pull nations apart because we realise that global supply chains can be weaponised. We saw that during COVID, when personal protection equipment and vaccines were not shipped easily. In a crunch, so-called seamless globally integrated markets don't work. Countries are now trying to build slack and buffers in trade.

But in financial flows, it is yet to happen. There is still a great deal of integration, and therefore the biggest risk factor is the cascade, the spillovers, which will be much quicker because all it takes is a stroke of the keyboard for money to be pulled out. If a particular player is facing a balance-sheet issue in one asset class, they will try to take profits or reduce exposure in other areas to meet commitments to their bankers, to meet margin calls. That is how the cascade begins.

As they say, when the tide withdraws, those who are swimming naked will be exposed. That will happen even in other countries, because leverage has its own way of exposing participants when it withdraws. Some markets, like gold and silver, have prices set internationally. If those prices collapse or jump, margin calls shift accordingly even in domestic markets.

It is a system of financial flows needing to cover losses in one place by taking profits elsewhere. Globally determined commodity prices will naturally have spillover effects on domestic values and domestic margins. That is how a financial cascade happens. That is the big risk. That is what I allude to when I mention circular financing in the AI industry as a risk factor.

Swarajya: In a similar context, you have spoken about a general discomfort with fiat money. Can you expand on that?

Dr V. Anantha Nageswaran: If you look at one of the charts in Chapter 16, which I attribute to the fund manager Alberto Gallo, it shows a flow chart of how the world of finance has contributed to some of the socio-economic phenomena we are witnessing today. There are five boxes which refer to populism, military conflicts, trade restrictions, negative real yields, and financial repression as the consequences of what was set in motion in response to the 2008 financial crisis.

When you talk of negative real yields and financial repression, you are seeing that, for example, in the United States there is a constant clamour for the Federal Reserve to lower interest rates. Japan has been reluctant to raise interest rates even though inflation has picked up materially. It has put the deflationary era behind it, but there is reluctance to raise rates because the system has taken on so much debt that higher interest rates would be hugely problematic.

So when paper currencies are not giving you the kind of yield or returns you should be getting, when savers and households are not allowed to earn enough even to meet inflation, there is naturally a growing discomfort.

There is also a general discomfort with the amount of risk in the global economy, whether economic or political. That is why there is a concern about fiat money: how much independence will central banks get in a politically difficult world? That is a big question mark.

That is the reason commodities have been lapped up in a big way, both by central banks and non-central bank actors. When central banks pick them up, it could be for geopolitical and geo-economic reasons. When normal investors pick them up, it could be because of the discourse about central bank independence and what economists call fiscal dominance, where fiscal challenges influence monetary policy.

These are the concerns in the minds of investors, particularly in advanced economies. That is the reason precious metals have been on a tear in recent weeks.

Swarajya: Just to briefly go back to AI usage. Do you think one effect of AI's growing popularity might be that jobs which cannot be done by AI see a rise in their value and in wages as well, such as carpentry, plumbing, or culinary skills?

Dr V. Anantha Nageswaran: It is a huge possibility. Of course, it will take time for society to adjust because we have always valued university degrees and working in glass-and-steel, air-conditioned buildings.

That is why I am gratified that the Finance Minister focused on these areas in the Budget. It is important to see them as part of addressing the AI challenge to job creation. The emphasis on the care economy ecosystem, the creation of allied health professionals, tourist guides, the orange economy: all these are areas which will create opportunities in an AI-independent manner, particularly the care economy.

While we have to train our youth to participate in AI and allow it to complement their skills, we should also create opportunities where AI will not necessarily replace humans. That is exactly what the Budget has done by emphasising these areas. For a labour-rich country like ours, for the next 10 to 15 years, we need to do both things in parallel.

Swarajya: Chapter 16 of the Economic Survey says that advanced manufacturing is a stress test for both the state and firms. What do you mean by this?

Dr V. Anantha Nageswaran: Advanced manufacturing is important because it creates ecosystems much faster than traditional or low-tech manufacturing. For example, the announcement of the seven high-speed train corridors or the East-West Freight Corridor may not be examples of advanced manufacturing, but they could be examples of advanced engineering, because that is what builds the ecosystem which is then useful in other areas.

In semiconductors, while the fab could be the final capstone destination, investing in assembly, testing, and packaging, alongside design where we already have a significant presence, will create the ecosystem. Advanced manufacturing is important for developing intellectual property, which is then portable. The accelerator of the multiplier effect of advanced manufacturing is much higher than that of traditional manufacturing. That is why both the state and the private sector have to recognise its importance.

In concrete terms, for instance, taking advantage of the ANRF and the RDIF fund, where the government has committed Rs 1.5 lakh crore over five years, the private sector has to make it successful with its own participation and contribution.

Swarajya: Why is the services sector not able to have a similar effect on the state?

Dr V. Anantha Nageswaran: It's a fair question and we explained it in the Survey as well. The services sector can operate in its own cocoon without necessarily changing the underlying ecosystem. Manufacturing cannot. It relies on the underlying ecosystem.

As long as you have a computer, backup power, and an internet connection, it doesn't matter what happens to the rest of the supply chain or the talent ecosystem. You can continue to serve your clients as a service provider. Manufacturing, on the other hand, creates far more dependencies. Ecosystem development happens as a result of it.

Historically, other countries followed manufacturing first. Manufacturing creates that ecosystem effect. This is not to diminish or trivialise the importance of what we have achieved in services. Services have served us very well. But we need to go beyond that. It is not in lieu of services. We just need to go beyond them.

Swarajya: In the same chapter, there is meaningful space devoted to East Asian lessons from Japan, Korea, Singapore, and Vietnam. You conclude that discussion by saying that the central lesson is not that the state intervened, but how it intervened. Can you explain this?

Dr V. Anantha Nageswaran: That is what we also call intelligent import substitution. It is not that these countries were simply open to free trade alone. Whether it is today's Western countries or the East Asian countries from the 1960s to the 1990s, none of them really followed free trade when they were in their emerging phases. They all took efforts to support their industries. There is no problem with that.

We therefore cannot be embarrassed or squeamish about Swadeshi or about pursuing industrial policy. It is indispensable. In fact, to become strategically indispensable down the road, it is indispensable to follow active industrial policy now. But the question is how you do it.

Japan, Korea, Taiwan, Singapore, Vietnam, and China give us examples. You do have to create competitive firms if you want to achieve strategic leverage commensurate with your size as a large economy with civilisational aspirations. You must not withdraw behind a cocoon of protection, but use protection to build capabilities and then expose those capabilities to competition.

A lot of people have written about what China has done: subjecting its players to ruthless competition internally. There are numerous EV players and solar panel manufacturers competing against each other. That is exactly what you need to do. You need to allow competition, allow competitiveness and quality to emerge, and hold firms accountable to export performance and quality standards as a condition for continued protection.

I remember Joe Studwell's book How Asia Works well. Speaking of Korea, he essentially says that Korea did not reward performers as much as it punished non-performers. You have to have protection not in perpetuity, but in return for productivity and export performance. That ethos, that mindset, has to come from both the government and the private sector.

Swarajya: If you could pick one lesson from the East Asian experience, what would it be?

Dr V. Anantha Nageswaran: Exactly what we discussed. You support the industry with clearly laid-out performance markers. And the idea that the state alone does not contribute to nation-building is another idea you would take from these countries.

Swarajya: How would you frame that idea in a single line for the general public?

Dr V. Anantha Nageswaran: Each one of us has our share of responsibility. For example, if households take care of their physical health, invest in skilling, and remain aware of the risks of screen time, social media use, and ultra-processed food, they are contributing to nation-building. In one line: each one of us must be aware of our sense of responsibility to ourselves first, not for today but for tomorrow and the day after. Then directly or indirectly, you are contributing to nation-building.

Swarajya: You quote Lenin, who said that there are decades when nothing happens and there are weeks where decades happen, in the context of India needing to run a marathon and a sprint at the same time. Can you briefly explain?

Dr V. Anantha Nageswaran: The geo-strategic world expects you to come up with responses. But the responses for which you would have had a five-year or 10-year window now have to be delivered within one to two years. The strategic nature of the evolution of strategic competition means you have to undertake long-gestation projects but achieve them in a shorter time. You have to run a marathon like you would run a sprint. Not easy, but you have to try.

It is about getting clarity of mind on what your long-term goal is and the steps involved, and then compressing the time frame required to get there. That is where an entrepreneurial mindset in the bureaucracy and an awareness of nation-building in the private sector all have to come together, to be able to run a marathon like you would run a sprint.

Swarajya: Box 16.5 of the Survey is on the RTI, where you make a measured case for a review. Can you summarise it here?

Dr V. Anantha Nageswaran: I have always taught my students that in public policy, two things are important, what I call the iron laws of public policy. One: there is always scope for the law of unintended consequences to play out. Two: the road to hell is paved with good intentions. These are truer of public policy than of any other area.

You want to hold the state accountable [in introducing the RTI]. Accountability is critical. Accountability, authority, and responsibility go together, and information is the bedrock of accountability. There is no doubt about that, which is why the underlying concept is sound.

But when deliberative processes that are excluded from RTI frameworks in other countries are exposed here, there is a reluctance, because nobody wants to be held accountable 15 years later for a candid remark.

What happens then is that wherever possible, deliberations will not be on file. They will be informal. So you are not achieving the very clarity you are looking for. The unintended consequence is that people clam up. They won't speak on record. What you get will be bland statements. The quality of deliberations and discussions inside the government will suffer, because officials know that whatever they say can be interpreted, misinterpreted, or quoted out of context by someone selectively using it.

So what do we want? We want the quality of public policy to improve. We want to allow sunshine on decision-making—which is what the RTI is about— so that quality improves in terms of integrity, probity, and competence. But if those very objectives are going to be undermined by the instrument, then what is the point?

The philosophy and the principle behind the RTI are welcome. I held that view a long time ago, and I continue to hold that view. But we need to ask ourselves: has it achieved the underlying purpose? Or do we simply end up conflating the means for the ends? That is the broad debate I wanted this box [16.5 of Economic Survey] to trigger.

Swarajya: Last time, you explained why fiscal discipline is critical and how it percolates down into the larger system. We have now hit 4.4 per cent against a target of 4.5 per cent. But are there causes of worry from the states' end? The elder sibling can be wise in spending, but if the younger ones are careless, the household situation will still be a mess.

Dr V. Anantha Nageswaran: That is a good analogy. I think it came out in the conversation I read between Diksha Yadav and Prof Prasanna Tantri as well.

As with many other things, it is a long-haul process. We need to get fiscal discipline back in shape at the state level through a system of incentives, carrots, and sticks. Sometimes a forced situation itself can be an important trigger for people to get back on track with creating long-term assets and long-term capability rather than relying on unconditional cash transfers.

To the extent we are doing unconditional cash transfers, we should make them conditional, not in the sense that households have to do something for society, but for themselves. For example, if you link the cash transfer to consumption of only nutritious food, it is no longer a cash transfer but a kind of coupon. You can only buy certain kinds of goods. Then you are making households a contractual partner in the nation-building exercise, where what you are doing is directly or indirectly productive expenditure.

If the state invests in capital assets which then create the ability for the state to grow, for the province to grow, and to create jobs, that is what we call 'productive expenditure'. Unconditional cash transfers help to some extent, especially when directed at women. They help restore the family's gender balance, give women some purchasing power, and women are generally more responsible with money. It helps them tide over short-term working capital needs. There are good elements to it.

But as always, the considerations are about proportion and what it does to long-term fiscal health as well as social and economic outcomes down the road. In that sense, there is a lot of room for improvement.

Swarajya: In the Survey, you cite the Lowy Institute's Power Gap Index figure for India, which is minus 4.0, signalling that India is not able to convert its capabilities and resources into influence. How can India climb up on these rankings?

Dr V. Anantha Nageswaran: That is exactly what the Survey and Chapter 16 are about. The power gap reflects the fact that India is not able to project power commensurate with its size and heft. The commentary on the Lowy Institute's website is very clear: India is resilient, India is able to absorb shocks, but it is not able to create influence with its size. That is what the power gap is about.

Singapore, for instance, has a much more positive score. Given its relatively small size, it is able to influence outcomes elsewhere, whether in rule-setting or standard-setting bodies.

The way to close the gap is to convert your recipients into indispensable partnerships. It could be in services, manufacturing, or standard-setting bodies. You have to have a positive agenda, and the confidence for that agenda is engineered by capability-building. That is how you close the strategic power gap.

Swarajya: India is doing well on the growth front. But what about its total factor productivity?

Dr V. Anantha Nageswaran: Measuring it is very complicated in the first place. You could have completely different estimates depending on who computes it and for what reason. But India's total factor productivity is rising. It is natural that when growth picks up, TFP also picks up because growth creates its own positive dynamics. TFP is the residual not explained by labour or capital accumulation.

Post-COVID, India has been one of the few countries to achieve macroeconomic stability and high growth in a relatively non-inflationary manner. TFP is contributing to that. In 2022-23, other countries, including so-called advanced countries, saw inflation rates going towards 10 per cent. India's inflation rate peaked below 8 per cent. That is an important sign of the contribution that supply-side investments have made to the overall growth-inflation mix. That will show up in total factor productivity, if it is not already showing up.

(Note: The full coversation with Dr V Anantha Nageswaran is out on Swarajya's What This Means podcast on Spotify and Apple Podcasts. Listen in!)

Arush Tandon and Diksha Yadav

Get Swarajya in your inbox.