Some sectors, worst hit by pandemic, 'require special love and care': Sanjeev Sanyal

The government is considering relief measures for sectors which have been the worst-hit by the COVID-19 pandemic, Principal Economic Advisor Sanjeev Sanyal told Moneycontrol in an exclusive interview.

He said there may be a case of positive GDP growth in Q4 FY21 and a substantial uptick in FY22 due to a low base effect.

However, Sanyal warned that traditional solutions like providing Goods & Services Tax (GST) relief to sectors like hospitality and tourism - which have been the worst affected - may not help in their revival as that isn’t the reason why people are not eating out or travelling.

Edited excerpts:

Q: The Parliament has recently passed some crucial legislations related to agriculture. What would you say to critics of the government who are saying that anyways more than 90 percent of India's farmers were not under APMC? The charge that this just brings in private sector into a sector of the economy, which needs more government support.
A: This is a set of reforms, both the Agricultural Produce Market Committee (APMC) and Essential Commodities Act, which have been debated and discussed for decades. The problems of the old system were documented repeatedly by researchers.

There were demands for changing it from across the political strength spectrum, as well as from agriculture experts, and from a variety of policymakers. The fact that this set of reforms have now got done should consequently be celebrated rather than condemned.

Now, if you think that it is indeed going to cause problems, then the fact that those were criticising it are themselves saying that a very sizeable portion of the market was already open, and that sizeable part of the market continued to function. Surely they are contradicting themselves because if something that is good for such a large part of the agricultural sector, without the dire consequences that they are predicting, then why should not the same benefits be extended to the remaining farmers?

Q: Does the government need to probably have a bigger outreach to the farmers who are protesting to explain to them the benefits of these reforms?
A: There is always a case for reaching out to those who have been misinformed and to present the benefits. Both the finance minister and the prime minister have personally tried to make the case. In my own interactions with farmers and agriculture-related groups, I have almost entirely been given feedback that this measure is popular.

Q: Where do you expect the Indian economy to be this year? Private economists are still saying that all four quarters will see contraction, while the CEA has been speaking about a V-shaped recovery.
A: In an evolving situation it is difficult to assign numbers. Obviously, the first quarter saw large contraction. My guess is that the contraction for the second quarter will be substantially smaller. And by the third quarter it's difficult to say whether it will be contraction or small expansion, but we will be coming back to quite close to where it was last year.

The September numbers for manufacturing and many other indicators suggest things have come back. But there are service sectors that are now being opened up. So, it's difficult to say exactly at what trajectory they will recover.

By the Q4 FY21, you will see that numbers are maybe even moving into positive territory. And obviously that depends a lot on the global situation, vaccine and other things.

I think people are under estimating the numbers for 2021-22 and we could see a huge expansion. One reason for that is of course is a low base effect. When you had a very large contraction, simply not having a lockdown will mean you will see a very large growth number. And these growth numbers can be very big.

My own guess is that the more the bigger the compression in this year, the larger the statistical de-compression next year. So that is very important. Anybody who is looking at the growth rate going back to trend, simply is not accounting for the statistical impact of a decompression.

You cannot, for example, end up with six-seven percent growth next year, unless there is another epidemic of some sort. You will get a very high number, maybe 12-13 percent. Then you will go back to a headline number that can be actually a normal reading.

Q: In that context, how important is this festive period for the Indian economy?
A: This particular festive period is good in an absolute sense because obviously some buying will come back and it is coming back. So, just when we open things up, you get a little bit of an extra fillip.

But on a year-on-year sense, obviously, there is a problem. All these festivals will be held in a much more muted way than would have otherwise been. So, if you're looking on in terms of absolute jump, it will obviously be of some help.

But in terms of a year-on-year growth, there will be some impact. Durga Puja and Dusshera, which involve large gatherings of people, will be muted.

Q: A lot of analysts and commentators have been saying that there is no need for the government to keep its powder dry. What are we expecting in terms of another stimulus package?
A: Announcing of any stimulus of any kind is the prerogative of the finance minister. So, I cannot comment on what or how will it be done. All this while we did focus on providing a cushion or a safety net to both the very poor as well as to vulnerable sections of the business community like micro, small and medium enterprises (MSMEs).

We were so far, unlike many other countries, not attempting to re-inflate the economy because our view was that there was no point in pressing an accelerator with your foot firmly on the brake. Now that we have taken our foot off the brake, to a large extent, there is a case now.

If you provide a stimulus now, this will have the demand feed through that, which would not have been the case a few months ago. So, there is a case that if you did want to provide a demand push, this would be a good time to do it.

Q: Will the focus be just on job creation and infrastructure or will there be a focus on specific sectors?
A: Details can be worked out, but one important part of it will be the infrastructure pipeline. It is something that the prime minister has already hinted in his Independence Day speech and the finance minister has also repeated. Rebuilding or infrastructure build out will be an important part of this.

There may be certain sectors that require special love and care. And in this context, the travel and tourism and hospitality industry is a particularly difficult one. These particular sectors have not only been hit by the lockdown but very directly hit by the pandemic itself.

If we removed all restrictions, people may rush out to go for a holiday. International travel etc may remain disrupted for prolonged periods of time. These are sectors where giving it an easy, general revival in the economy may not easily translate into anything.

Consequently, this is something that we may have to look at. Although let me also say that given the heterogeneous nature of these sectors it is very tricky to do anything.

Some people will say, why don't you give them a GST holiday Now, do you know anybody who is not going to a restaurant because of GST? No. We may lose some revenue, but giving them a solution which is not relevant to them will it help the sector? Probably not.

We need to be very careful of simply coming up with a set of solutions which sound like they are going to but actually have no real effect. If you do provide directed support for a sector, then we need to be clear that the support we are providing is meaningful.

Q: The government has already announced a lot of measures, so has the Reserve Bank of India (RBI). The government might also announce a few more. Is there a concern regarding inflation?
A: I don't think there's any issue with inflation because there is no spiralling up of demand that we are having. Inflation is clearly not due to demand. Just look at the gap between the Wholesale Price Index (WPI) and the Consumer Price Index (CPI). That tells you that this is due to supply chain problems. For non-food items, in any case, there is a clearly depressed demand compared to where we were last year. We have the capacity to produce a lot more. I don't think that demand driven inflation is an issue in this economy.

Q: While the decision to put IBC on hold was something that was required at this moment, there have also been concerns that the focus now would shift more from resolution to recovery and probably the gains that IBC had made, since its inception, might be lost. What is your take on that?A: One thing needs to be recognised here is that the Insolvency & Bankruptcy Code (IBC) is an extremely important reform that this government brought. It remains the overall framework in which we think about this economy. However, we do have a very special circumstance here, where creative destruction may not be applicable because you had a shock, that maybe indiscriminately taking out both the good genetic material along with the bad genetic material.

The point of Darwinian creativity is that the good companies thrive and the not so good ones are taken out. In an environment where you are having mass extinction, then there is no benefit because it's indiscriminate.

The IBC-National Company Law Tribunal (NCLT) process itself needs to be protected from getting jammed by a cascade of defaults. What will happen here is that we had a legacy of normal net performing assets (NPAs) and there was a system that was still quite new, it was just dealing with it.

Now, if we suddenly load it with large numbers of pandemic-caused NPAs, then you would overload the system. Therefore, we are just holding it in abeyance. We are not holding it in abeyance for legacy cases. We are very clear on this. For the pandemic period, we are keeping this out.