Thursday, April 30, 2020

Questions submitted by Seasonal Magazine and Economic Times: My Answers


1.       The world is in a dilemma - with medical experts calling for an extension of the lockdown and the business community calling for its end. As an economist, where do you stand between this life-and-livelihood debate, especially in the Indian context?
Ans: Lockdown as necessary Shock Therapy for India (viz Japan). It has to be phased, possible at different speed in different parts of the country. Explore Range of options between zero and 1 and think of phasing over Sectors (manufacturing, mining, construction) and Geographies (States, Districts, Urban, Rural). Physical Distancing will continue
2.       You have recently opined that the current lockdown has been unprecedented in human history, not even seen during World War II. What all will be the lasting or at least lingering effects of this lockdown on the economy?
Ans: Yes! The effect of Lockdown on Indian economy if to reduce GDP by ~-5% of annual GDP/month (EG&S, Contact Services, ROE). The after-effects depend on policy. (1) Legal Asymmetry compounded by State’s direction on employment and wages. (2) Reduced personal saving of those on the margins.
3.       How do you think that the economic sentiment prevailing in the country can be bettered in the short-term? How will a mandatory or voluntary cut in the prices of all essential products and services by government as well as private companies, by say 15-30%, work in bettering the sentiment?
Ans: This suggestion sounds to me like a (ideological) solution looking for a problem. Essential Goods economy is functioning, with State Govts ensuring that the poor, who do not have savings to fall back on being provided with food and/or cash transfers. Economic sentiment is depressed because many companies in the Locked-down sectors face Bankruptcy.
     Even after lock-down Pandemic fears will ensure that public is wary of travel, tourism, hotels and Restaurants and Retail outlets. However, the resumption of economic activity (production, employment, sales) in the Rest of the economy, will have a big positive impact on sentiments.
     Except for industries in which there are supply chain disruptions, inflation will decline sharply relative to 2019.
4.       Do you think that Direct Cash Transfer can be substituted with in-kind transfers of essential food and toiletries, with companies being encouraged to supply such goods at a discount to the central and state governments?
Ans:  I have been hearing for the last 30 years or more that Fair Price Shops should be expanded to supply other essential commodities besides grains and sugar. Its not happened because its administratively infeasible, wasteful and inefficient.  We have argued for Direct Cash Transfers (DCT) to replace in kind supply and dozens of subsidies and transfers, each with its own leaky bureaucracy (high cost, corruption, inefficiency).   Paying Direct cash transfers directly into cell phones linked to Aadhar numbers and loaded with mobile accounts and payment systems is the most efficient and corruption-free system imaginable. A complete shift to such a system will have the dual benefit of putting more purchasing power in the hands of the poor, lower middle class and farmers, while freeing additional funds for rural infrastructure.
5.       Do you think India should be moving more towards being a welfare state, to brace itself against these kinds of crises in the future? It is said that countries with benefits like unemployment benefits and universal insurance are expected to fare much better in tackling the economic side of this crisis.
Ans. India was the first country in the World to publicly proclaim in 1960s the objective of “Garibi Hatao.” In 1970s the announced objective changed to “Poverty Alleviation”.  We continued to bemoan the existence of poverty in the 1980s and 1990s, even though poverty started to decline in the 1980s and the decline accelerated in the 1990s, In a paper published in 2006 I showed that Poverty could be eliminated, using the funds budgeted for the three largest Central Govt Poverty alleviation programs. This remains, largely true today.  The UID linked poverty elimination system that I proposed, can be instituted over the next 4 years. This can be extended to include all citizens, by making it part of a Net Income Transfer or Negative Income tax (NIT) scheme
6.     For revival of economy: What are the steps that the government should take to revive the economy, especially for MSMEs, automobile, aviation and real estate?
Ans: I have not come across any evidence that MSMEs are more affected by the Lockdown, or even the Pandemic w/o lockdown, than the Corporate or large sector, in either absolute value or in % terms. However, to the extent that MSMEs and Start-ups, have lower cash reserves, are more indebted or are concentrated in the heavily affected sectors (eg tourism, restaurants, retail trade), they will suffer more!

Pandemic Crisis      

7.     Do you think Covid-19 is a greater crisis than what India faced in 1991? If yes, then is it time for even bolder reforms?
Ans. Having dealt with Global Financial Crisis as Chief Economic Advisor and with post-GFC problems as ED in the IMF, I can unambiguously yes. The Pandemic affected both demand and supply simultaneously shutting down large parts of the economy, while the initial effect of the GFC was to reduce demand.  Having a part of a broad range of economic reforms from 1990 to 2003, I can also unambiguously assert that the Pandemic presents both the highest necessity and the greatest opportunity for radical reform.
8.       Many economists including you have remarked that a business-as-usual approach is not going to work in reviving the economy from a crisis as deep as this. According to you, which are all the most radical economic reforms India should be undertaking now on an urgent basis?
Ans: Policy makers and advisors have to think in three phases: Phase1: Lockdown (ensure human survival). Phase 2: (Business survival). Phase 3: Quick recovery. Ensure that economy recovers quickly and then returns speedily to its long-term growth potential. (a) Tax reform: GST, DCT (direct tax code) & Personal Income tax (SMEs), Agricultural Trade (domestic & Exim), SEZ, CEZ (land, labor, Tax Terrorism, EoDB), External (Dualistic policy of free trade with free market open democracies (EU, USA, Japan, UK), Import substitution with respect to authoritarian, mercantilist countries with NTBs (through Import substitution Zones- ISZ)
9.       You have called for helping the most hard-hit industries like travel and hospitality. How do you think the government should go about it? Will reforms like allowing even multi-year advance bookings in flights and hotels help put in this regard?
Ans. After lockdown, restrictions on these sectors will remain longer than in mining, manufacturing and Construction services.
10.   Most economists including you have called for temporary suspension of conventional fiscal and monetary targets. Do you think this will be the principal way in which the economy can bounce back from this crisis?
Ans. Conventional Fiscal and Monetary targets are irrelevant in a crisis, but prudence in Government expenditure and prudence by banks in providing Credit, remain relevant. Govt expenditures have to be focused on helping those affected directly by the crisis, including self-employed hawkers & Household enterprises, and on sectors directly affected by the pandemic(Contact services) and the 2019 growth slowdown (real estate, autos, capital goods). Once the immediate crisis has been addressed, revenue negative tax reform which increases the buoyance of tax revenues in medium-long term is ideal for providing a boost.
11.   Do you think there is further room for interest cuts in the Indian economy? Some experts have called in for providing even loans at 0% of interest to MSMEs and other such hard-hit sectors for a short term. Is it viable? Do you think the rates can be cut further so that bigger businesses can avail loans at at least 4%?
Ans. In a crisis of this magnitude, the real rate of interest should be negative. As world-wide and domestic deflation intensifies, nominal rates will have to be reduced. RBI has to take on call on whether it should be done ahead of the reduction in inflation. In the meanwhile, its imperative that RBI insure there is adequate, short, medium, and long term, liquidity in all segments of the Financial system, including credit for MSMEs. Govt should back-stop the RBI by providing Collateral guarantees for lending to sectors like MSMEs if Banks consider them too risky.
   As interest rates on Govt securities are the risk-free anchor on which more risky private lending/borrowing rates are built, RBI must ensure that rates on Govt securities do not rise, if necessary, by purchasing Government Securities directly.
12.    Tax revenues and foreign remittances will continue to be a concern post-Covid. Do you think this will hit us badly?
Ans. Tax revenue growth is closely related to GDP growth.  In a crises, this is a good thing not a bad one. We call it an automatic stabilizer. In the Global Financial Crisis, which I handled as Chief Economic Advisor in the Finance Ministry, this contributed about 1/3rd of the stimulus.  Another third was contributed by accelerating payment of subsidies, which were questionable to start with, but could be accelerated quickly and turned out to be highly beneficial in the crisis. The final 1/3rd was contributed by tax reduction.  Revenue negative (in short term) tax reform of GST and PIT/DTC can still provide a boost to the economy in H2 of FY21, while raising tax buoyancy and raising more revenues in the medium-long term. 
13.      The recent tussle between Russia and Saudi Arabia has highlighted the need for becoming self-sufficient in oil & gas? What should be done to achieve this? If not this, then what should be done to save us from external shocks?
Ans. On the contrary, the dramatic reduction in oil prices reduces the pressure for and incentive for self -sufficiency in Oil and Gas. It is positive shock for our economy, and we welcome it. Reduction of oil prices will be accompanied by a reduction of remittances from the oil producing Gulf States. However, the reduction in current account deficit due to lower prices is generally larger than any reduction of exports to these States and remittances from Indians living in these States.

Economic Recovery, Growth & Reforms

14.   You have remarked recently that this lull in economic activity is a good time for the government and GST council to consider more radical reforms including cutting rates. Can the GST rates for all basic essentials be cut to below 5%, and the rest of the goods marked to 7% or 14%, without affecting the overall inflow now?
Ans: Must be very clear about what are essentials (Food, Health services, education). Most of these are exempt and none is above 5%. The problem is with all those non-essential services, which are exempt, because of special interests (eg lawyers). The general GST rate on goods and services which would be revenue neutral is ~15% and everything should be set at that rate. There can be half a dozen goods (e.g. cars) on which Cesses can remain, to ensure revenue neutrality and progressiveness in the incidence of GST.
15. How exactly do we turn this crisis as an opportunity especially for the economy?
Ans. As 60% of the economy is already under lock down, and some of this will take one or more quarters to be restored, any temporary adverse effects of policy change are even less than usual. At the same time the positive effects will start appearing as soon as the pandemic crisis is over. So the benefit cost ratio of reforms is increased and resistance to change will be lower.  Thus this a great opportunity to undertake, agricultural trade (domestic and international), labor, land, taxation and subsidy-welfare reforms to facilitate faster growth of agriculture, mining and manufacturing.
16.  Steps to make India a manufacturing hub of the world – as many countries are already contemplating shifting bases from China.
Ans. The Tariff defense initiated by the US President Mr. Donald Trump viz Communist China, has alerted the World to the latter’s mercantilist policies and initiated a movement towards diversification of supply chains out of China.  The Pandemic and the supply chain disruptions that it created after its initiation in Wuhan city, Hubei Province in Central China, have brought the dangers of over dependence of every country on Chinese supply chains. Almost every country in the world has discovered that it was critically dependent on China for some intermediate good, part or component.  Consequently, the movement for diversification of Supply chains out of China, particularly for products in which China has monopoly or near monopoly of the Global export market. In India the public learnt how dependent we are on APIs from China for our Drugs and Pharmaceutical Industry.  India has a once in a generation opportunity to attract elements of supply chains which are labor or skill intensive and also backward integrate in the sectors such as Pharma & Chemicals, Automobiles and Information Technology where we have demonstrated comparative advantage or in sectors like consumer electronics in which we have a large current or potential, consumer market
17.    What are some specific steps that India can take for greater public-private partnership?
Ans.  The Government must create a competitive environment in which efficient enterprising firms can thrive, by undertaking long pending labor, land, subsidy, tax and external reforms.  Beyond this Government and industry must co-operate to remove industry specific bottlenecks and to attract anchor investors from across the world. Vietnam is better than us in this critical area, despite being lower ranked on all major EODB parameters and has therefor attracted far more supply chains from us during the last two years.  Finally, Govt must also cooperate with academics with deep knowledge of those who have studied the success of East and South East Asian industrial policy and carefully focused and limited subsidies to promote import substitution.
18.   Do you see this as an opportunity to deepen our financial market? What should be done to again emerge stronger from the crisis?
Ans. Financial markets are generally affected adversely in a crisis. The critical task of the central bank and the Govt is to ensure that there is no contagion and to provide adequate short, provide ensure that every segment of the market and ever category of financial institutions have adequate liquidity. 
19.          Do you feel making our gram panchayats self-reliant is the solution, as the PM has suggested?
Ans: Agricultural reform, particularly the decontrol of domestic and international trade in agricultural and allied goods is critical to modernizing the sector, promoting productivity growth and raising farm incomes. Development of skills in agricultural processing and rurally relevant skills is critical for expansion of productive, higher wage employment. Panchayats can play an important role in both these areas by digitizing governance(e-governance), access to technology and its dissemination and raising the quality of education and health services by accessing e-health, e-education and e-skilling services from the web.

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