Questions
from Asit Ranjan Mishra, Senior Editor, Mint
Q1-How do you assess the
economic fallout of Covid-19 outbreak on Indian economy?
A1: There is an unprecedented
shock to every economy in the World, including the Indian economy. There are
three aspects. One the Lock-down, which is unprecedented even when compared to
that in the key economies involved World War 2. It practically immobilizes the
work force and thus reduces production to zero in 80-90% of economy. The
#Lock-down in China, the first globally, were also an unprecedented disruption
of production-inputs, the supply of intermediate goods, given China's role in
so many critical Global supply chains and its monopolization of so many
products. The contagion fear before the lock down, which will remain after the
lock down, constitutes a huge demand shock for contact services which involve
dense collections of people like air, rail & bus transport, Tourism,
Restaurants & Hotels, Entertainment, Malls & retail markets.
Q2- From the standpoint
of a shock to the economy as well as the financial market, how similar or
different do you think the Corona virus outbreak is vis-a-vis the global
financial crisis of 2008.
A2: The Pandemic is a Real
Supply cum Demand shock to the economy, which will affect the financial system.
The Global financial Crisis was a financial system collapse, which propagated
into the Real economy. In that sense they are opposites. However, once the
effects reach from one to the other, lots of similarities emerge with respect
to the financial elements of the current crises and how to deal with them. The
real elements are different and so will the fiscal measures to deal with it
have to be different.
As in the previous Financial Crisis, the
Monetary Authority has now to ensure, that the Financial System keeps
functioning smoothly and liquidity issues don’t undermine Solvent Financial
institutions and result in Contagion from insolvent companies and financial
organizations. RBI must ensure that key Institutions (like Banks) have enough
liquidity, critical financial markets, like those for Foreign exchange, have
adequate liquidity and Critical Instruments like Government Security do not show
any upward spikes in rates. The last also requires close Monetary-Fiscal
Co-ordination. RBI has also to ensure undue rise in risk premiums on
undeveloped markets like those for CPs, by ensuring enough general liquidity
and negative real Repo rates. RBI as an institution has sufficient experience
from the Global Financial crisis to deal with these issues.
Q3-Forecasters and rating
agencies like Moody’s have revised downward their growth estimate for India to
2.5% for 2020 calendar year? Do you find such estimates plausible?
A3: We are in the process of
estimating the likely GDP growth in 2020-21. Analytically, it's useful to divide the
economy into three parts and three phases. These are the (a) Essential
Commodities and Services, (b) The Contact Services in which fears of epidemic
will continue to reduce Demand, and the (c) Rest of the economy. The phases are
(1) The lockdown phase and near Lockdown conditions, (2) The phase of gradual
recovery (3) Restoration of economy to "normal" growth.
Right
now, the available forecasts seem to be heavily dependent on assumptions about
when the Pandemic will peak. Uncertainty will remain high, till the SARS Corona
Virus 2 Pandemic has peaked in India, USA, EU and China.
Q4-How do you see the
economic relief package announced by the government and the financial package
by the RBI? Will they be enough under the current circumstances?
A4: Both packages are rightly
designed to deal with Phase 1(as defined above), the impact of the Lockdown,
which covers 80-90% of the economy, and the succeeding 4-6 weeks. The best part
is the assurance that the Govt now has its ear to the ground and using
information to design and modify packages. The challenge is therefore shifting
to effective implementation. As States are responsible for both Health and
Welfare and effectiveness of Health and Social welfare measures depends on the
States, who are present at ground level.
Q5-Do you think India should
announce a large stimulus package including a bailout for Indian companies
affected badly?
A5: Fiscal stimulus is
completely the wrong thing to do in a lock-down, when there is no supply of or
demand for any commodity or service, besides essential commodities. During this
period, Fiscal measures must focus on ensuring survival of citizens, by
ensuring access to free food and health Services, for those who do not have
cash.
Once the lockdown is over and we enter
phase 2 (as defined above). Fiscal measures must be targeted at industries and
sectors which are most severely affected by the Epidemic (Contact Services
mentioned above). Next in line must be industries and sectors which were
already badly hit by the growth recession and whose situation has worsened
because of the Pandemic. In this context, elimination of Cesses & Surcharges
in both GST and Personal Income Taxation, will play an important role.
Q6-Do we have to revisit and
reset the self-imposed redlines in fiscal policy such as fiscal deficit and
debt to GDP ratio limits to revive the Indian economy?
A6: The Mantra of "Fiscal
space" is completely irrelevant during the Crisis. The FRBM should be
suspended or reformed to take explicit account of such crises. Ignoring Fiscal
deficits during the crisis to institute temporary expenditure does NOT mean
that irresponsible introduction of, and commitment to, schemes which will sink
the deficit in the medium-long term.
Q7-Should a stimulus be more
effective through direct and indirect tax cuts or direct cash transfers?
A7: Once the economy comes
out of the crises mode and enters Phase 3, the primary policy issue will be how
to speed its recovery back to its growth potential. In this context tax reforms
(Direct Tax Code, GST) are far more important than expenditure reforms. Tax
reduction must be considered as part of these tax reforms, to provide short
term stimulus, while ensuring long term fiscal sustainability through improved
voluntary compliance and higher buoyancy. Direct cash transfers will of course
be necessary for those affected by crisis, but overall increases will be
sustainable if and only if combined with reduction of leakages(inefficiency and
corruption) in major subsidies like fertilizer and food corporation.
Q8-Is it the right time to
revisit the idea of Universal Basic Income and guaranteeing social security to
all the vulnerable people?
A8: The Universal Basic
Income (UBI) concept, though it may be relevant for Developed countries, is
irrelevant for India. A "Targeted" UBI is a contradiction of the term
"Universal". We in India had developed the concept of Direct Cash
Transfers(DCT) to the bottom 40% of the Population in the mid-2000s, pursuant
to which we recommended the creation of a Universal ID (UID) to help target
such transfers. With are Bureaucratic Socialist system heritage of evasion
& corruption and abysmal conviction rates for illegal activity, a
sustainable system requires close attention to incentives. We need a system of
Net Income Transfers, which meshes DCT into the existing personal income tax
system through an integrated, “Negative Income tax (NIT)”. The time to consider it will however be in
2021-22, after the economy is on road to recovery
Q9-Do you think Covid-19 will
accelerate the process of deglobalization already visible through intensifying
trade wars?
A9: De Globalization started
after the Global Financial Crisis and is clearly visible in the declining World
Trade to GDP ratio as well as in reduced Capital flows, particularly to
Emerging Market economies. These trends will intensify and expand to include
greater restrictions on low tech migrant workers.
Q10-How do you think
economies may change the way they work, say two to three years from now? What
policies will guide cooperation and competition among them?
A10: The Partial Economic
Decoupling and Hight Tech decoupling set in motion by the Tariff War will
accelerate. The decoupling will be between free, open democracies which follow
rule of law domestically and accepted rules of country behavior internationally
and those who merely pay lip service to these principles of acceptable
behavior.
Q11-Do you apprehend more
pressure now on global supply chains to withdraw from China?
A11: Yes there will be an
accelerated diversification of Global Supply Chains from China, particularly in
industries which China had monopolized through Subsidies, NTBs and mercantilist
practices.
Q12- What of 2021 and beyond?
Will the Indian economy be stuck in low level equilibrium of 5-5.5% for the
next few years?
A12: That would be a disaster
of unmeasurable proportions for the Indian economy and the Welfare of its
people. Union and State Govts (e.g. GST council) use the current hiatus in
economic activity to prepare a comprehensive calendar of Reforms to be
implemented during H2 of FY21 and H1 of FY22. Besides comprehensive reform of
GST and Indirect Code, it must include reform of External sector & Exim
policy, Agriculture, Skilling (incl Apprenticeship), Regulatory reforms for
promoting Educate in India. Land and Labor flexibility for Coastal/Special
Export Zones & Import Substitution Zones, Electricity Distribution &
pricing for Industry, and Manufacturing subsidies for Industries monopolized by
Dictatorships who don't follow Global Rule of Law.
A tragic once in a century
crisis like this, also provides an unprecedented opportunity to transform the
Indian Economy. We would be compounding the tragedy if we waste this
opportunity.
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Note: A version of this note
appeared in Mint, Monday, 30th March 2020 t.co/TwKlSlWFro ).
