Lockdown
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.
