‘We are facing an economic collapse and GDP is likely to fall 3% to 5%’
The finance minister has essentially given tax consideration. These are deep structural reforms the finance minister has announced. Those are good and important and may even be compared with 1991. But in the short term, the priority is to stimulate demand. By just increasing the expenditure by 1%, that too in the second half of this year, do you think demand is not going to come back? What is your sense on the complete package now?
You are absolutely right. Demand is not going to come back; this is not a stimulus package. A stimulus package is something that would increase GDP. Pronab Sen’s latest forecast says that GDP will fall 9%. I would say perhaps not that much; maybe it will fall 3% to 5%. But whatever is happening, we are facing an economic collapse. So you call it whatever but please do not call it a stimulus. You might at best call it sedated. You might say that when the patient is crashing, I am trying to ease the pain a little.
But aggregate demand is collapsing even at the time when supply itself is collapsing because the lockdowns have interrupted all kinds of production chains. So I would say the outlook is very grim. I am glad that Modi has ceased this opportunity to try and push through long-term structural reforms which the country badly needs and I am glad that he is not wasting a crisis but if you ask me what is going to happen in the rest of this financial year, this financial year may be one of the worst in Indian economic history.
So where do we go from here? On one side you have got a short-term challenge but the medium-term visibility and the long-term challenges at least on the supply side are getting addressed. You have always argued that India had an inherent disadvantage because of the high cost of capital and no land and labour reforms. Are things progressing in the right direction; which is, you will have to go through the short term pain in order to increase your immunity and for a better long term? Is that the way we should look at it?
This is what I have been recommending for a long time. Finally, it seems that Modi-Sitharaman are going in that direction. Whether they will be able to follow through, I do not know. In many of the cases, there is no point. Saying for instance, I am suspending labour laws for three years; what happens after three years? What is the point of suspension; you will need to change the law. Again, what happens if the opposition comes to power and reverses it? So in some sense, after the 1991 reform process started by the Congress party, everybody else followed in the same direction. Right now Modi is trying to start a similar process. We do not know whether everybody else will go in that same direction. We can only hope that he does.
I would simply say that in the short term, the world is facing an enormous huge recession and India cannot escape unscathed despite whatever it does. So whatever it does, there is going to be trouble. This particular package of Rs 20 trillion is a highly exaggerated figure by adding pledges, promises and long term things. The actual fiscal stimulus as you said is perhaps not more than 1% because they are afraid of downgrading by foreign rating agencies. I simply say that if you say atma nirbhar or self reliant, a self reliant country cannot be in total funk of foreign rating agencies. At the end of it all, we are better off than a whole lot of other emerging market economies that have not been downgraded. So I would certainly have gone for a much larger immediate fiscal stimulus. I would not have been afraid of letting the RBI one way or the other monetise that particular deficit.
I would have stood up to the risk of downgrading and even say that if I am mainly trying to attract FDI, it is not dependent on credit rating and I do not want hot money. so I would certainly have said that we needed to have a bigger fiscal stimulus. Modi has turned out to be too cautious on that particular front because of which we are going to have a deep and painful recession and there is no way this so-called stimulus package is going to stimulate this. The patient is being sedated and there is no silver lining in the medium term reforms which might not have happened without the crisis.
So perhaps at the end of it all, we are going to have a terrible year. I do not guarantee that it will be a quick snapback next year either but if you look beyond that. you know the prospects have become better. Modi has decided that the incrementalism of his first term was not enough this time. I am going to go for more radical reform; that is courageous and the right direction to go in even if it takes some couple of years for the results to begin showing up.
As a percentage of the GDP, we are only spending 1.2-1.3%. Given that 60% of Indian economy is a consumer-driven economy and we are not China which is an investment-driven economy, 60% of the economy needs help and that is where the money is not going to come.
Exactly. You are echoing in fact my sentiments that the government should have gone for a much larger spending package; sending money directly out which could be spent to sustain and improve the economy. Because it has not done so, the recession is going to be much deeper than otherwise. So we are taking a big hit in the current financial year; much bigger than what it needs to be. I think partly it is out of fear of a downgrade which I would have taken the risk of.
I think in fact Modi is saying I am spending so much money on helping all of you out and he hopes that the public will take this particular punch on the jaw. They will say, it is not Modi’s fault; it is coronavirus’s fault and after that things will get better. Now it is a risky political move for him to take but he does not have any state elections coming except the Bihar election where the opposition is so weak. I think it is a foregone conclusion they will come back.
So I think Modi is taking a deliberate risk; instead of going for a spending move right now which might affect my debt to GDP ratio in the next year, let me take a very-very big hit this year. I will take a very big hit this year and then bounce back later. I think this is the calculation and it is a political calculation no less than an economic one. Some might say it is a courageous thing that I will take a really big hit this year and then bounce back much better later on. All I can say is, I personally would have gone for a much bigger spending package this year.
The ratings downgrade; I know it is crucial because we are a capital-starved economy and we need capital. But if countries like Italy and Spain where the bond ratings are not great and if Greece can attract capital, do you think this entire obsession of what rating agencies would do is very crucial and frankly in the equity market, MSCI benchmark is an important benchmark but fund managers are not obliged to follow that benchmark. If you are a foreign investor, you know that you can come to India and invest irrespective of the rating downgrade or upgrade because India has forex reserves and the balance sheet tells you that India as a country will not go belly up.
I would entirely agree to that. We are being unnecessarily funky on that particular part. If you go back to the taper tantrums of 2013,at that particular point of time, the Indian economy and the macroeconomics was haywire and inflation was sky high. Our current account deficit was 4.5% of GDP and in those circumstances, we took a terrific hit. Today that is not the case. Inflation is under control and our foreign exchange reserves are stable. We are more resilient than the vast majority of developing countries. We are in a position to take that hit.
Not only that, the IMF projections by now have become out of date but when they did their revision and said the world economy is going to be sinking. Everybody will go down. In India, we will go down from whatever that was expected 7% to 1.9%. The IMF estimate of 1.9% at that particular point in March was the fastest of any major economy in the world. In other words, the IMF is giving its own certificate that even when things are very bad for the globe as a whole, India will be one of the best performers. Given that, where else are the foreign investors going to go? Is he really going to rush into America where the treasury rate has gone down to zero? Is that where you are going to go speculating that it will become negative. I mean some of that money has to come to India. Anybody with a global portfolio cannot ignore the strengths of China and India in this critical position and money will go into those countries regardless.
Even if we have negative growth all over, negative growth is going to be there everywhere. So I would say we have funked this particular test and to talk of atma nirbhar and be so afraid of Moody’s or Fitch is not a sign of self reliance. It is not a sign of courage. At best, you could say that it is a very cold calculation that if I take a bigger hit this year, I will have a bigger bounce back next year and then there is no political damage because there are no elections to be lost. I think this is possibly a defence of what they have done.
I certainly would agree with you that we should not be worried about what the rating agencies say and in any number of cases, we have seen in the past, even when the rating agencies have been dubious, investors have rushed in. The prime example surely is Argentina. Here is this country which has already defaulted eight times in a row and is now going to default ninth time. Two years ago, they were able to raise 100-year bonds, believe it or not. Why? Because they offer higher yield and international investors are desperate for yield. So investors who are willing to invest in 100-year bonds in Argentina, can they possibly ignore India even if we go for a big fiscal boost? No. So in my view, we have completely made a mistake as far as foreign exchange and the rating agencies are concerned.