Moneycontrol Exclusive | Coronavirus pandemic: There is scope for fiscal intervention, says CEA Subramanian

The escalating coronavirus pandemic has wrecked markets and threatening to do the same to the global economy. For India, which has, so far, reported three deaths and over 170 cases, the outbreak couldn't have come at a worse time, with economic growth projected to growth at 5 percent, an 11-year low.

These are uncertain times but the government is working on putting together the right response and there is scope for fiscal intervention, the country's Chief Economic Adviser Krishnamurthy Venkata Subramanian tells Moneycontrol in an exclusive interview.

Edited excerpts:

Q) In the Economic Survey, you projected that India’s gross domestic product (GDP) will grow at 6-6.5 percent in 2020-21. Will you still hold on to that projection which is increasingly looking optimistic as India and the world brace for the economic fallout of the coronavirus outbreak?

A: See, the coronavirus is a completely unanticipated natural disaster and you know it's a period of significant uncertainty. So, I think it'll be difficult to say what will be the actual impact but my assessment is that there will be some impact for sure. In an episode like this, oftentimes the uncertainty stems from unknowns. So, putting a magnitude on the macro numbers is very difficult. For instance, FY-20 will get affected by the March numbers and at this point, my expectation is that, this should get resolved by April but, of course, we have to wait and watch. These are all expectations in a situation that is evolving.

So, the FY 21 numbers, I think, will basically be affected by the April numbers. But to take a parallel from let's say cricket, you know in a T20 match, you can start the first over a little slower but you can accelerate later. When the bowling is tough, you should actually watch and play. So, April maybe that period. I think it's fair to say that every country is going to expect to experience the impact of the coronavirus and we will also. We cannot be an exception, correct? So, in that sense, I think there will be.

Q) What do you think will be the impact of the pandemic on India's trade?

A: In the short run, I think the global value-chain getting disrupted is something that will have an impact. But in the medium to long run, there may be a situation where some of what we've actually described in the Economic Survey, especially on focusing on global value chains and network products, might be an area that we could work on. And I say this because if you look at foreign portfolio investment, it is really well diversified. But with the trade, on the other hand, over the last almost two decades or even more, there has been a situation of concentration of global value chain and I think that the learning from the current episode for multinational entities is not that global value chains are bad but global value chains that are concentrated in one country actually may be very risky. So, like in the case of foreign portfolio investment, I think there would be benefits to basically diversifying in the trade as well. And in that context, I think India offers a natural destination with a large market, with a large labour force. So, in that sense, in the medium to long run, this can be something that we can also be working on.

Q) The coronavirus pandemic couldn’t have come at a more inopportune time for the Indian economy. How much of fiscal headroom does the government have for a fiscal stimulus, if any?

A: What we must remember is that up until February, some of the statistics were starting to look up. For instance, IIP (index of industrial production) was going up. Consumer non- durables if you look at month-on-month basis, after seasonally adjusting it, had gone up for three consecutive months. The manufacturing of capital equipment, which is critical for investment, had also grown by about 10 percent again on a month-by-month seasonally adjusted basis. So, these were some of the aspects that actually one observed till February. The Covid-19 possibly came at an inopportune moment but I think there is scope for intervention and the government, having listened to a lot of quarters, is working on putting together the right response.

Q) In the Economic Survey, you argued for counter-cyclical fiscal measures to arrest the current slide. In times of slowing demand and falling growth, counter-cyclical fiscal policies entail reducing taxes and increasing expenditure to create demand to lift the economy. What are the chances of lowering taxes in the extraordinary circumstances thrown up by the virus outbreak?

A: I think it's important to understand the counter-cyclical measures taken in the Budget. It basically comprised three components altogether, which add to about 2 percent of GDP. That is the total amount of the counter-cyclical fiscal stimulus that was actually planned in the Budget. I think that is important to keep in mind. Together with that, now, for instance, the Uttar Pradesh government has announced that it will make cash transfers to some of the informal sectors. I think there is a case for examining some of the options.

Q) There is also the problem of slowing the velocity of money. Customers are staying away from shops. Production in factories will also probably slow down. It is the informal sector that appears to be worse off because they don’t have deep pockets and their ability to borrow is also low. Are we looking at specific interventions for the informal sector?

A: I think what we have to keep in mind is that this is a natural disaster and therefore, the role of policy will be to try and reduce the impact and the government, as I said earlier, is looking at it from all angles—the fiscal side and the other aspects as well-- to try and minimise or reduce the impact.

Q) Hong Kong is handing out most of its residents 10,000 Hong Kong dollars (about seven million people will benefit from it) to boost the economy. Do you think India should look at a similar cash-transfer scheme, particularly for those at the bottom of the income pyramid?

A: That's one of the possibilities.

Q) The infrastructure sector remains wobbly. Construction activity indicators have slackened. Don’t you think that the government should front-load its expenditure, particularly in the construction sector, and do most of the heavy lifting?

A: I think so. Infrastructure front-loading can generate the benefit because it actually aids construction activity, which creates jobs. And infrastructure also has the impact of, what economists call crowding in of investment. But I think what is important to keep in mind is that the rest of this month and the next month we'll have to be a little watchful. Actually the right time to sort of front-load would be after this episode is over. This would ensure that  optimal response on the health policy side is taken.

Q) A lot is riding on the “Vivaad Se Vishwas” scheme that allows corporate entities and individuals to settle tax disputes. How confident are you of the success of this scheme and how much revenue the government expects to earn from this?

A: It is a scheme that is important because what the scheme really intends to do is to that there are contingent liabilities that are stuck, which affects investment of corporations but at the same time the government also is not able to close it. So, this is a scheme to primarily reduce the contingent liabilities of corporates and thereby, reduce any uncertainty on their part and at the same time also to close those cases and bring in the revenue. That's the intention. We will have to wait for the actual numbers, especially given the current situation.

Q) How do you see the budget math for 2020-21 change in wake of the coronavirus outbreak? Don’t you think, given the state of markets, some of the revenue targets, such as disinvestment, look highly ambitious?

A: So, like with all the other macro variables, which at this point in time are subject to uncertainty, I would say it will be better to wait and watch because it's a situation of uncertainty. I would say, like other macro variables, these may also see some impact but I think, as with the others, commenting on the specific magnitudes would be difficult.