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Krishnamurthy Subramanian: ‘Significant uncertainty about growth … after Spanish flu, recovery was V-shaped’

Chief Economic Adviser Krishnamurthy Subramanian said it is difficult to make a reliable estimate on growth given the kind of uncertainty resulting from effects of COVID-19 pandemic.

Written by Sunny Verma | New Delhi | Updated: May 28, 2020 11:50:02 am
coronavirus, covid 19, india lockdown, Chief Economic Adviser, Krishnamurthy Subramanian, Krishnamurthy Subramanian interview, indian economy growth, indian economy uncertainity growth, Atmanirbhar Bharat package, msme loans, msme, indian express news Chief Economic Adviser Krishnamurthy Subramanian said said consumption of discretionary items like cars and houses will get impacted due to the uncertainty resulting from effects of Covid-19 pandemic. (File)

Chief Economic Adviser Krishnamurthy Subramanian said it is difficult to make a reliable estimate on growth given the kind of uncertainty resulting from effects of Covid-19 pandemic. In an interview with Sunny Verma of The Indian Express, he said consumption of discretionary items like cars and houses will get impacted due to the uncertainty.

What is your view on economic growth? Many economists are projecting significant contraction for India.

First thing to keep in mind is that there is significant uncertainty about growth and it’s useful to keep in mind that in the month of January, not a single economists or analysts would have been able to predict that global economy is going to go into a recession, so that illustrates the uncertainty that prevails in general about prediction. And especially about predicting amid the Covid pandemic because unlike an economic phenomenon where one can say that with some degree of certainty that phenomenon may end at this point in time, (but) this is primarily a pandemic and so all responses, like the lockdown is affecting economy. So uncertainty is really about when will we have a vaccine and whether this can be administered to a large number of people across countries. Given all this, it’s very hard for anybody to make a reliable estimate. Also I will mention that behavioural economics talks about this (bias), when we are in normal times we continue to think we will be in normal times, we don’t put in enough probability for a black swan event. And when we are in black swan event, we continue thinking we are going to be in a black swan event, we do not put enough probability on going back to normal times. Here I want to point out about the Spanish flu episode, which was a far more devastating pandemic, (but) we still had a V-shaped recovery.

So in this kind of event, it’s not useful to debate on whether we will have a U-shaped, V-shaped because ultimately we don’t know?

Again you can only use past phenomenon as I was referring to the Spanish flu pandemic that was far more devastating one with almost 10 per cent of the global population being impacted. In contrast, even now, less than 1 per cent of the population is impacted. The mortality rate of Spanish flu was about 10 per cent, in contrast just about 3.5 per cent in the Covid. So mortality rate is just about one third of what it was in the Spanish flu and the percentage of infected population is about one by thirty third (now), and yet in the Spanish flu the economic recovery was V-shaped one.

Much of the Atmanirbhar Bharat package relies on aggressive lending by the banks and financial sector. Will it not expose them to higher Non Performing Assets?

No. Keeping that in mind, lot of the lending has been guaranteed by the government. Take the Rs 3 lakh crore loans to MSMEs, it is 100 per cent guaranteed by the government. It’s effectively like a risk free loans, banks can write it like a risk-free product compared to them earning 3.5 per cent by putting the funds in reverse repo with the RBI, which is also a risk free investment. Here it’s like a risk free investment where they can earn a higher interest rate. It makes sense for banks therefore to be able to utilise this. If I remember right about Rs 8.5 lakh crore was actually parked with the RBI’s reverse repo operations, which earns about a 3.5 per cent. By giving 100 per cent guarantee, the loan has been made completely risk free.

There have been reports that global credit rating agencies may change their rating outlook or downgrade sovereign credit ratings for India. What is your view?

We are very clear that if you look at debt sustainability in Indian context, debt sustainability depends primarily upon what is called the R minus G differential, which is the difference between the nominal rate of GDP growth and the nominal rate of interest at which borrowing happens. Historically for the India the R minus G differential has been -4.3 per cent. In other words actually the nominal rate of growth has been 4.3 per cent greater than the nominal rate of borrowing. And this one of the key aspects especially from a debt sustainability perspective, when your R minus G is negative, debt remains sustainable. If you plot the R minus G differential for India since 1990, except during a short period of Asian financial crisis, R minus G has always been negative. That’s because growth has been greater than the nominal rate of interest. Also if you split the differential R minus G, the variation comes primarily from growth and not as much from R. In other words, debt sustainability in the Indian context is primarily dependent on growth. And what our estimation clearly suggests that even with a 4 per cent real growth from next year onwards (not this year), debt remains sustainable. The reason we actually care about the fiscal deficit is because finally we care about debt sustainability. Looked at in another way, even with a R minus G differential of say -1 per cent — which is less than a 1 per cent probability event using the past values — and were it to remain at that level for next 5, 6, 10 years, even at that actually debt remains sustainable. That’s the key aspects, across many different scenarios my office has looked at, as long as the growth remains 4 per cent plus, as long as R minus G differential is more negative than 1 per cent or so, debt will be sustainable.

India’s growth story has been consumption-led, which has been hit now. Does the government need to do more boost consumption?

See it’s important to understand the nuanced relationship, there are interdependencies between supply and demand, especially if you look at in the case of Covid, it’s basically MSMEs which account for a large proportion of employment. If you look at less than 100 employees (companies) and take that as the threshold, almost 85 per cent firms are MSMEs, and they account for a large proportion of employment. Now suppose if these firms are not supported, and there has been a decline in demand and because they have to take care of their fixed cost which they can’t change, so they will have to cut down on their variable cost and so there may be an impact on employment. When there is an impact on employment, actually consumption of even essential items can get affected. So by providing extensive support to the MSMEs through the various measures under the Atmanirbhar Bharat scheme, therefore ensuring that the impact on unemployment is minimised, the impact on demand is thereby reduced to a larger extent. It’s important to keep in mind these interdependencies, by taking care of the supply on the MSME side, demand also, especially that of essentials items, is also protected. Other point to remember is that when you think of demand itself, across the world spending on discretionary items have decreased. I was reading a very interesting article on Walmart, (which says) people are buying tops but people are not buying bottoms, and because when they are working from home, on a teleconference, all that matters is the top and not the bottom, Walmart has found this evidence. What this suggests is that people are spending only on what is necessary and not on any discretionary item. This is because there is uncertainty and that uncertainty stems from the pandemic and till the time the uncertainty remains, consumption, especially which requires a lumpy investment like a car or a house etc, people will not be inclined to make lumpy investments.

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