The Modi government recognises that the time for the centre to spend on fiscal measures is now, when the private sector investment is slow, Chief Economic Advisor Krishnamurthy Subramanian told Moneycontrol in an exclusive interview.
“I think this is certainly a time to spend. If you look at international evidence during times of crises, government spending is really crucial, because both consumption and investment which comes from the private sector, go down. I think that there is basically now, the recognition that there may be scope (to spend). I would not be able to comment on the timing, I will say that we are working on it,” Subramanian said.
As Moneycontrol reported last week, the centre is looking to announce another round of stimulus measures aimed at boosting demand and creating jobs ahead of the festival season.
Subramanian also said that while a number of indicators pointed towards a recovery, the pace has slowed down compared to the steep bounce seen in June and July from lockdown-hit April and May. “I think that while manufacturing has recovered very well, services continue to be a matter of concern, because it is one area where social distancing matters the most. For instance travel, hospitality and tourism,” he said.
Subramanian also warned that any economic assessment also depends on the direction of the COVID-19 pandemic during winter months, when more people are susceptible to common illnesses.
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“It is important to wait for especially how this recovery pan out to see that before we can actually make assessments. The pandemic is still on, we are six-seven months into it. And till the vaccine does not come about and people get inoculated in large numbers, everybody will not be back to normal life and economic activity that also depends on each one of us getting back to normal life.”
Q: The Parliament has passed a number of farm-sector laws in amidst protests by opposition and farmers. How crucial are these reforms given the political risks?
A: It is critical to take a step back and appreciate the reforms that have been done. In India there has been this tendency to not appreciate reforms when they are being done. You can go back to 1991 and check the writings then. They were critical. It was the same when the Vajpayee government carried out reforms, and this government did as well after 2014. The reforms being carried out now will have an important impact on the structure of the macro-economy, and productivity in the economy as we go forward. If you take the primary, secondary and tertiary sectors, India has dominated the tertiary sector, which is services. But the primary and secondary sectors have not received as much attention, although those are by far the most important from a job creation perspective.
Now, these reforms are primarily catered towards the primary and the secondary sector, including the agricultural reforms, the APMC reforms and the essential commodities act. For example, the Essential Commodities Act had been passed in the 1950s at a time when there was actually famine and shortage. But successive governments did not undo that and as a result none of the infrastructure relating to storage, warehousing, etc could develop in this country.
Second, if you look at these bunch of reforms on the labor side, because labor reforms have been a constraint, in generating economies of scale and thereby jobs and productivity in the manufacturing sector. So, overall, when you take these reforms, there is an emphasis on enabling the primary and the secondary sectors, which are really critical for the large population that we have.
Q: Given that the April-June quarter showed a 23.9 percent contraction in GDP, and that many analysts expect all four quarters to show a contraction, are you still sticking to your assessment of a V-shaped recovery in the second half of the year?
A: We try and tend to try and be very simplistic in trying to capture all the nuanced phenomena in one letter. What does a V really mean? It means a sharp decline, followed by a sharp recovery. It's not necessary that a V needs to be the same slope. It needs to be a fall followed by recovery, right? And the statistics that I have actually pointed out in several of my media interactions, show that a V shape recovery is happening.
Let's take a few of them, like E-Way bills. In August, it was 98 percent of August 2019 levels. You look at the railways freight data, August was 6 per cent higher year-on-year. Similarly if you look at power consumption and cement and steel production, these are showing healthy trends compared to pre-COVID-19 levels. So, these are all actually what are conveying recovery.
Now, what is important is to keep in mind that there is a nuance there, which we have to know. So, some things have recovered to pre-COVID-19 levels. But obviously the same pace will not remain because the bounce from April and May has already happened. That said, I think that while manufacturing has recovered very well, services continue to be a matter of concern, because it is one area where social distancing matters the most. For instance travel, hospitality and tourism.
Q: But do you agree with some assessments that all four quarters of this fiscal year will see a GDP contraction?
A: This is a period of significant uncertainty. And one has to be a little careful, because oftentimes there is a lot of herding with these estimations. One entity says X and then everybody comes around and says x plus minus epsilon. Given this uncertainty I would not look too far ahead. We have our internal assessments. But it is important to wait for especially how does this recovery pan out to see that before we can actually make assessments. The pandemic is still on, we are six-seven months into it. And till the vaccine does not come about and people get inoculated in large numbers, everybody will not be back to normal life and economic activity that also depends on each one of us getting back to normal life. I would wait for the winter months, when you have higher instances of common cold and flu, and see how that is affecting COVID-19 cases.
Q: There has been criticism by observers that a country like India cannot afford to save fiscal firepower instead of utilizing it. Earlier, the issue was to see how close we are to a vaccine. But, now we need to probably bring forward any fiscal measures. Are we preparing any fiscal stimulus measures? Can we hear something soon?
A: I think this is certainly a time to spend. If you look at international evidence during times of crises, government spending is really crucial, because both consumption and investment which comes from the private sector, go down. That is because the precautionary motive to save and also because of risk aversion. And so, both those gaps the government must try and actually fill. I think that there is basically now, the recognition that there may be scope. I would not be able to comment on the timing, I will say that we are working on it, and that is the prerogative of the honourable finance minister to announce the ‘when.’ But we are working on it.
Q: The automobile sector has been saying that there is a need to relook at GST rates to spur consumption and economic growth. What is your take on that?
A: We look at the entire economy and also take into account the sectors that will generate the maximum bank for the buck.
Union Finance Minister Nirmala Sitharaman
Q: Coming to the financial sector, it was obviously understood that India will come out of the pandemic in a better shape if the financial sector is kept in good shape. But now, we have a situation where the Supreme Court has jumped into the fray talking about interest on interest. The RBI made it clear that waiving off interest during the moratorium period will lead to a hit of Rs 2 lakh crore for the banks. We are expecting not just corporate loans, but personal loans non-performing assets to go up. So, by your assessment, how badly is the financial sector hit by the pandemic?
A: The honorable prime minister has mentioned many times to convert a crisis into an opportunity. I think the financial sector would benefit the most from taking that particular perspective. If you look at the financial sector, for the fifth largest economy that we have, we have only one bank in the global top hundred. We basically punch far below our weight in terms of the banking sector.
What we need is organic growth that happens in a way without the “accelerator brake” phenomenon, where you start giving credit, press on the accelerator, then you basically have to press the brake on that for various reasons. And this requires our banks to really utilize technology because world over financial services firms are heavily data and tech dependent. And if you look in the Indian context, even private sector banks do not use data and analytics for large corporate lending. They use them for retail lending, but not for corporate lending.
For instance, we showed it in the economic survey very clearly that if you look at the 12 biggest NPA accounts, the accounting quality for years before the actual NPA would have shown that they should not have been lent to. If the banks had the data on related party transactions, data on basically their collateral - if banks had used the data, they would have been able to assess the willingness to pay and the ability to pay.
Also, this is another important part that in any economy, the innovation is brought by new entrants, and incumbents typically are not the ones that really innovate that much. So, this is also a sector therefore that is crying out for disruption, which is something that we should enable.