Chief Economic Adviser Krishnamurthy Subramanian says impact of second wave on economy won’t be ‘as large’ as first wave, asserts India will see impact of recent ‘phenomenal reforms’ from FY23, and explains why he is against unconditional cash transfers like ‘disastrous’ farm loan waiver. The session was moderated by Special Correspondent Aanchal Magazine
AANCHAL MAGAZINE: What’s your outlook for the Indian economy given that a lot of GDP projections have been scaled down to single digits, despite a statistical benefit from last year?
The economic fortunes over the last one year or so have been linked to the pandemic itself. Last month, the GDP numbers for the full year came out. While there was a lower decline of 7.3% compared to 8% (as projected), it is still negative… What’s important is that if you look at the composition of the GDP, I would take note of the Gross Fixed Capital Formation (GFCF) in the fourth quarter. At 34.3% of GDP, it was a 26-quarter high, in other words, a high in six-and-a-half years. What was the impact of this on other aspects of the economy? The construction sector grew by close to 15%. There were other spillover effects — consumption, after reducing for three consecutive quarters, grew by 2.7% in the third quarter. Even travel and tourism and some other contact-sensitive sectors, though these had declined at high double digits in the previous three quarters, registered a de-growth of only 2.3%. This is evidence of the philosophy that has driven the government’s plan for economic recovery, which is this cycle starting from private investment and thereby leading to consumption in the first-round and then consumption feeding on to investments. So that’s the good news. If you look at the overall macro itself, where you plot GDP growth or the high-frequency indicators like e-way bills, power demand or GST, you clearly see the V-shaped recovery that I had talked about after the first quarter. Recovery was very well on, the momentum of the recovery has been impacted by the second wave undoubtedly, but there are some very important differences.
First thing we have to recognise is that last March, when the first wave hit, we were in a situation of unknown unknowns. Everyone was learning, finding out. In contrast, the second wave was a situation of known unknowns. We knew we had to reduce some of the economic activities without really shutting everything down. The second key aspect of the second wave is that the decline has been as sharp as the rise itself. The duration of the wave was much shorter. Also, because the policy this time was implemented by states, they were heterogenous and asynchronous as well. As a result, in April, 30% of GDP by geography was impacted but even there, essentials and inter-state trade was not impacted. Similarly, in the month of May, close to 60% of GDP geographically was impacted, but again, essentials and inter-state activities were not impacted. So given the lower duration and the lack of synchronicity, what happened is that around the last week of May, a lot of high-shaped indicators started their V-shaped recovery. In the economic monthly report that we will bring out for June, you will see an illustration of that. So overall, the impact of the second wave is not that large. From a health perspective the second wave was quite devastating but the economic impact will not be as large. So India will still grow at a high rate and as we have discussed before, starting from FY23 onwards, rating agencies and other international agencies are starting to project this, India will start seeing the full impact of the phenomenal reforms that have been undertaken in the last one-and-a-half years.
AANCHAL MAGAZINE: A lot of concern has been raised regarding the rising debt and inequality levels. Why are we still seeing a lot of reluctance in terms of fiscal push?
When we talk about fiscal measures, we have been conditioned to think about unconditional transfers or benefits to everybody, which has been the pattern in India. When there is a loan with guarantee…There will be those who are not very distressed, people like you and me; then there is the second category who are temporarily distressed now but who will not be when it is time for the loan to be repaid. And then there is the third category who are permanently distressed… Unconditional cash transfers go to many who are undeserving as well. That category self-selects out when you have a loan given with a guarantee.
Secondly, because there are costs from default and financial institutions record your default, there is a direct and indirect cost. As a result, those who are in a position to repay will repay. It’s the third category who are not in a position to repay, for them, because of the guarantee, it effectively becomes a quasi-cash transfer. So this design ensures that the cash transfer goes to the most distressed… I will give you as a contrast the farm loan waiver that was implemented in 2009 — disastrous. Close to Rs 80,000 crore of expenditure by the fiscal, but the multiplier was tiny because it was just being cornered by those not deserving of it. I don’t think wastage of that kind of taxpayers’ money is what the economy needs… These are fiscal transfers as well, except they are for those who are really deserving. As a design mechanism, they are far better because they really utilise the information from the financial sector.
ANIL SASI: While you cannot have large-scale transfers across the board, why can’t focused transfers be considered? That’s something the US, UK have looked at. You said you would look at consumption kickstarting investments. How will that happen when there is a household debt issue?
As I said before, if you look at the fourth quarter numbers, GFCF as a proportion of GDP at 34.3% is investment. There is a significant contribution from government CapEx but there is also private CapEx. If you just look at the overall GDP or fiscal math, CIG (consumers, investment by businesses, government spending), C is close to 58%, I has hovered around 30%, G is at best 10%. So whenever we talk of C or I, if that rises by very large numbers, there has to be the private sector component to it. Right now, data on the exact contribution of the public sector vs private sector on I is not available, but I can tell you that there is a contribution of the private sector to this as well. The manufacturing sector PMI (Purchasing Managers’ Index) ever since September has been in a significant expansionary phase even in May, which is indicative of private sector activity. Similarly, if you look at orders of engineering goods, it has significantly increased and that’s capital formation by the private sector…
The second point about demand measures, I will reiterate that rather than just sticking to jargons about fiscal demand etc, when there is increase in construction activity and when informal sector jobs are created, that is a demand side impact as well. On other economies, there haven’t been many well-targeted measures. In India if you want to target the urban poor or the migrant labourers who are really impacted, so far, good data on that does not exist. And that’s why we have used on-lending by microfinance institutions (MFI), because MFI caters to two crore urban poor… I do not subscribe to unconditional transfers. As my research showed, 75-80% of the farm loan waiver was cornered by large farmers who did not really deserve it… So the question is, do we want to repeat the mistakes that have been done post the global financial crisis and pay for it in the form of the taper tantrum — fiscal and current account deficit increasing and very high inflation, which will happen if you are not careful? Or do you want to be careful in how the money is spent? The recovery that we saw last year itself is clear evidence that the policy we are working on is showing on the ground. Undeniably, there is impact on the labour market, but the ILO report that got released last week came up with a statistic that 350 million people are impacted across the world because of the pandemic. We have to be cognizant of the fact that this is an exogenous shock of very large magnitude. What governments across the world have tried to do is lessen the shock.
KARUNJIT SINGH: Is the government targeting higher revenues from fuel than stated in Budget to boost growth?
When people talk about taxes, UK, Germany, every large country — except for the US where fuel taxes are low because the automobile lobby there is a far stronger one — taxes are close to about 70%. So India is not an exception. In fact, when we talk about inflation, as an economist, my worry is food inflation because almost 50% of CPI inflation comes from food inflation. Last year as well, when inflation continued to be above 6% for several months, it was because of food which was caused by supply-side inflation… On revenues, we are not looking at anything more than what we budgeted for.
SHOBHANA SUBRAMANIAN: If you look at the FY21 growth data, the numbers largely capture the organised sector. If you were to factor in the unorganised sector, the growth numbers are likely to be much lower and weaker. So what is the real growth in FY21?
The question is secular and must be asked for every year of GDP. By definition, it is called the unorganised sector because you do not get quantifiable measures for activities. There is wide variation even among economists on the estimation of how much activity in India is contributed by the unorganised sector… I want to make a broader point here. The pandemic year is something we should keep as a signpost to keep reminding us why growth is so important for the economy. When growth happens, you’ll find a lot of people saying inequity is a problem, but the fact is that there has been a decline in GDP and this has resulted in large firms doing well, it’s the smaller firms that got impacted. Even at an individual level, the richer people have not been impacted as much as the poor. What does that tell us? We must frame in mind that if you have a GDP decline, the impact of that is felt far more on the vulnerable sector — whether it is the corporate sector or the individual. The reason I am saying this is that we have this debate often in India — that growth and inequality are conflicting with each other. We wrote a chapter in the Economic Survey saying that in India, it’s not. It’s in convergence. When you get higher growth, you lift a lot of people out of poverty.
SANDEEP SINGH: How fair is it to compare a pre-poll political announcement — the farm loan waiver — with a pandemic where many lost lives and many others lost jobs? Secondly, while the government is pushing for credit guarantee schemes, there hasn’t been much growth there. The biggest spurt is in gold loan growth. That’s a reflection of the stress in society. How do you see these aspects?
If you look at credit this calendar year, non-food credit has grown in double digits, starting from January. If you look at food credit, it has grown at more than 20%, so the premise that credit has not grown is not quite right… There’s been far more growth on personal loans than on corporate loans… On the financial sector, undoubtedly, there are some hidden bad loans now which will come about later but the existing NPAs have gone down both on a gross and net basis. Secondly, our PSU banks have had profits for the first time in five years this year.
BANIKINKAR PATTANAYAK: Is the government open to more relief measures apart from the ones announced by the Finance Minister?
I think we have to make a difference between last year and this year. So many of these requests are actually conditioned on the periodic measures that were announced last year. I already mentioned that last year was a situation of unknown unknowns. More importantly, last year’s Budget was presented before the pandemic, and therefore we had to actually come up with additional measures. In contrast, in this year’s Budget, the 6.8% deficit is actually significantly fiscally expansionary. (The Budget) has incorporated the impact of the pandemic and the necessary measures that need to be taken for recovery. We will continue to do so as we assess further.
PRASANTA SAHU: Is there a conscious effort to contain the spending within the Budget target this year? Also, private sector investment has not picked up, even though the corporate tax rate was cut some time back. When do you think that will happen?
There is a difference between spending that actually generates large multipliers for the economy and spending that does not necessarily generate those multipliers. And typically, revenue spending is one that does not generate such multipliers, while CapEx spending indeed does. Therefore, the effort of the government is to try and really limit spending that does not generate as much bang for the buck for the economy.
As for Budget targets, I don’t think there should be any problem in us meeting the fiscal deficit targets that we have set for this year… Immediately after the corporate tax rate cut, we had the pandemic and now it has been close to one-and-a-half years. It’s the uncertainty created by the pandemic that has impacted it. So I don’t think any one of us should really link it to the corporate tax rate cut.
P VAIDYANATHAN IYER: The government seems to have made up its mind about not making cash transfers. But at a time when we are facing a pandemic, a once-in-a-century situation, wouldn’t that have helped the most distressed?
An unconditional cash transfer does not create enough bang for the buck and let me illustrate further. Let’s say we are looking at 20 crore Jan Dhan accounts. Now if you want to give, let’s say, Rs 30,000 to these 20 crore households, that’s `6 lakh crore, and `30,000 is still not adequate. In contrast, take the microfinance loan, which is Rs 1.25 lakh. It is an effective cash transfer to a household that is genuinely distressed… Let’s try and understand in spirit what is it that we eventually want. We want money to actually reach those people that are the most distressed… I hope you are able to see how this is a much better way of really achieving that objective… We think that this is actually a much better way of making a difference to those that really need it in a way that is not fiscally wasteful.
P VAIDYANATHAN IYER: There was an earlier scheme for hawkers. I believe not many people have gone in for the Rs 20,000 loan this year because this year has been very bad. I can interpret the data that people who are very distressed are unable to take the second tranche of loan, so they are out of the credit structure. It’s not just them. People in the middle class, lower middle class do not want to take a debt burden when they are distressed.
There is a difference. That scheme did not have a guarantee as part of it. Think about the scheme of `1.25 lakh loans to urban poor. If suppose there is no guarantee, what will the MFI (microfinance institution) do? It will be very happy to go and scout for the first category of borrowers who don’t need it, but won’t want to lend to the second category who are temporarily distressed and the third who are permanently distressed. But now that there is a guarantee, the cost of the default by the borrower is not being paid by the MFIs, but by the government. So the MFI does not have reluctance in lending to them…
Look at the performance of the ECGLS (emergency credit line guarantee scheme), which also has a guarantee. Banks have gone forward and lent… So I think the comparison to earlier schemes is a little misplaced. The MFI also gets business because there is interest subvention… So (because of this guarantee), at this point in time, between those who are temporarily distressed and those who are distressed for a longer time, for the MFIs there is no distinction. The distinction only comes a year later at the time of repayment… As for this perception that the middle class does not like taking loans… look at the retail loan expansion over the last 20 years….
SANDEEP SINGH: The premise of the credit guarantee scheme seems to be that everything will be fine in one-and-a-half years. We are 15 months into the Covid crisis and say it goes on for two more years, many people will default…
Whenever we make estimations regarding the future, we have to make them based on data. Take the UK. They have vaccinated around 80% of their population, people have stopped wearing masks. Look at the US, where vaccinations have also proceeded. Taking into account their examples and based on the vaccinations in India, where we have given at least one dose to 33 crore people — the size of the US population — and with the supplies expected to be much higher now, there is a good likelihood that by September, that number would be up to 70 crore… If you look at Lancet and other science journals, they tell us that those people who have got infected with the virus and even got the first shot, they have significantly high immunity. Put these facts together, and then introspect on the question.
SHOBHANA SUBRAMANIAN: When the bad bank was first announced, the Finance Minister had said the government will not support it in anyway. But now we hear of `31,000 crore guarantee by the government. Why is the government guaranteeing anything in the bad bank, given that it’s not only public sector banks whose bad loans are going to be transferred to it?
Let me clarify. When we say the government will not be involved, it means the government will not put in its capital… This is to be an asset-restructuring, asset-management company that will be put together by banks. Canara Bank, in fact, is taking the lead on this. Banks will be the ones putting in capital… Bad loans suffer from the uncertainty regarding markets. If this is not taken care of, buyers will not be forthcoming.
