On the pandemic and what makes the crisis worse for India
I want to set out five thoughts that should inform everything that we think about. This is a very unusual cycle that the world and India face. It is very severe, sudden and new territory. So the first point is that there is so much uncertainty on everything — how the pandemic is going to evolve, how people are going to respond, what policies are going to happen. We are really shooting in the dark and that is something we must all keep in mind. A corollary of that is, in this business, today, for governments around the world, there are no good choices. The choices span from bad to the very, very bad or disastrous, so we should be a little bit careful about how we assess all these things…Because of this uncertainty, every country is responding very differently, both in terms of health and economic response. But I think there is a growing consensus that regardless of how advanced countries are weighing this trade-off between lives and livelihoods, especially as it informs how the exit from the lockdown should happen, those trade-offs are different for developing countries like India. The hardship is greater, the ability to protect them is weaker, in countries like India, the health capacity is not that good, the ability to even enforce severe lockdown policies is more difficult.
Therefore, the trade-off for countries like India, it is only fair and appropriate that it should err more on the side of prioritising the present and preserving livelihoods and so on.
So as we talk about the exit discussion we should keep that in mind. However, something we can categorically say is that any exit from the lockdown, however we do it, different states are going to do it differently. I think that backing it up with comprehensive and ramped up testing is absolutely essential. That is what is going to determine how much we can, where we can ease and how we can sustain it.
Lastly, what is different about India in this crisis is that although of course it is going to be severe around the world, but even before this crisis hit India, our economy was weakening quite substantially and our financial system was naturally quite fragile. This crisis in a sense comes on top of an already weakening economy which is what I think makes the Indian situation even a little bit more difficult and challenging than other countries. The last point I would make is that with this crisis, the states and the Centre have a lot of coordination to do, the states are on the frontline of the response on the health side, social safety side, managing the migrants, which we should talk about. Therefore I think Centre-state coordination and cooperation is of utmost priority in India and we should not forget this while talking about it.
On where the economy is headed
If we look at what the IMF is forecasting for the advanced countries, it is on an average a slowdown of eight-and-a-half percent… it roughly means that the IMF is saying that for all the advanced economies, one month of GDP will be lost. Firstly, India was already weakening, secondly, the kind of lockdown policies in India have not been any less severe than in the advanced countries, and finally, India has a fiscal response of less than one percent of the GDP whereas, on average, the advanced countries have an estimate of eight-and-a-half percent of the GDP so far. If you put all this together, even allowing for the fact that India is a more dynamic economy, I cannot see how India’s growth rate cannot decline by orders of magnitude that the IMF is projecting for the advanced countries. The IMF’s forecast for India is absolutely mystifying and bizarre. I would say these are very imprudent basis on which to plan the response. Almost kind of lulls us into false complacency. I think we should plan for negative growth rates in this financial year.
On how to deal with the crisis and the need to spend
First, about the magnitude. Let’s look at it first from the need point of view, rather than the affordability point of view. What we have said is that supposing you look at the health care response that is required, then the social safety net and then maybe the stimulus. So these are the three things that we may need to do. And the number that Devesh Kapur (of Johns Hopkins University) and I came up with is a very conservative number, which was that the extra spending would need to be something like five percent of the GDP. So we need to find about five percent of GDP or Rs 10 lakh crore. Affordability, because as it is that the economy is weakening, revenues are going to come down, so it will translate into substantially higher deficits, and so let’s confront the affordability question. You will notice, what is very interesting is that all our former central bankers have come down on the side of saying that look if you do too much down the lane, our ratings go down, our debt gets out of control and so the economy is in trouble.
So my response to that is, in this case, we should be driven by need and we can afford it. And let me take some of the broader concerns. One is that our credit rating will go down and that is going to hurt us going forward. Now remember that this is a situation that all countries are confronting. Secondly, remember that the whole deficit financing and all these issues arise if people think that suddenly we have become irresponsible. In this case categorically around the world we know this as an exogenous shock nobody was responsible for. Finally we have to be clear of how we are perceived after the crisis and will depend upon how we behave after the crisis. If government policy is reasonably responsible going forward, which I think it will be, then affordability is not an issue. So I think we can afford this. Then the second question is — finance. Where should it come from? I think it should come from a variety of sources. Devesh and I set out five things. One is from abroad — NRIs, multilateral institutions. Then we also said cuts in expenditure, which many states have already done. Then of course the two things are printing money and issuing more bonds to the public. So we need to do everything so as to not burden any one sector.
Now let us take your question of deficit financing head on. Any responsible government cannot just say we are going to print money, etc. But I think here this can be done responsibly. How? The concern is two-fold. It is unprecedented. So therefore does it mean that we are going to break all convention suddenly and become irresponsible. The second concern is of course the difference with advanced countries, which is that they have been trying for 10 years to raise inflation and they haven’t been able to. We are not a very high inflation country but we are also not zero or one percent in the last three years. So it is a concern. We have to be careful about that. And finally, I think there is also a huge overhang of liquidity already in the market which people are worried about. Those are the concerns we should take seriously. My response to that would be, one, it seems like it is going to be a deflationary shock that for sometime at least prices are going to be lower rather than higher. So I think that we should keep it in mind. Secondly, we can finance some part of it responsibly but making clear that it will be one off and will not be repeated again and again.
Finally, the states question…one of the quickest ways of getting money to the states would be to increase their deficit financing via the RBI. So bottomline is, yes, we have to be careful and responsible, but the bigger thing is we save and do all these things for a rainy day. When a rainy day comes, you have to spend. This is not a rainy day. This is a deluge. This is pralay in terms of economic things.
On high food stocks, forex reserves and low oil prices being a source of comfort
There are two dimensions to this. In a sense, if you think about even a deficit financing or monetary financing, the fact of food, the fact that fuel prices have collapsed, and the fact that our currency doesn’t collapse because of reserves, means that the inflationary concern going forward is much less. Because these are the three main sources of inflation. Food prices going up, fuel prices going up, currency going down. So in a sense that is a kind of insurance and buffer that we have, in order to be a little bit more ambitious and bold in our response to our crisis. The second way, in which this is very important, is that our food stocks are turning out to be the most effective, quickest, efficient, equitable social safety net that we have. Because remember in this situation, the two social safety nets are food and cash. Cash is proving to be more difficult to get to people’s hands because of bank accounts, the last mile problem, but because we have both the stocks and this public distribution system, we have been able to roll it out very much. So these are the ways that the three Fs come in handy. But I will say one thing that our stocks have been a boon this year but just like you save for a rainy day, I think these stocks have to come down and they have to be distributed as quickly as possible. I think we can’t come out of this crisis with even more stocks of food because of a combination of not having used it enough and the bumper harvest kharif adding to it. We don’t have the capacity. Everything coming together says push the food out, for the moment give people without ration cards, so that it is actually killing many birds with one stone.
On the need to get credit pumping into the system
Remember we started talking about the twin balance sheet challenge, then in December we spoke about the Four Balance Sheet challenge, now it is almost as if it will be easier to count the balance sheets that are not challenged than the balance sheets that are challenged because the problem is proliferating because of this shock. Helping the financial sector and the corporate sector is absolutely critical. The first issue… This has to not only come from the government but also from the RBI and to be fair to the RBI, they have taken a number of good steps. The problem is the following. Essentially what the RBI has done is to lower rates and make liquidity much more abundantly available. That is necessary and possible. But what we need is actual credit flowing to the entire corporate sector. Small firms, medium-sized firms, large firms, everybody needs credit business because the more you get credit, the more you will ensure that they survive through the crisis and not come away with more permanent damage.
So the dilemma is that more liquidity is not credit, how do you get the credit pumping into the system. To be fair, there are two problems to this. One there was a complete risk aversion even before this began, because of all the problems with the financial system. There is fear of lending because you may be later on investigated. I think some kind of reassurance should be given so that decisions taken now will have a measure of protection. Otherwise, bankers are not going to take them. Secondly, the risk from those decisions should not be with the banks, they should either be with the government in the form of a completely separate fund, or maybe the RBI. That is a tricky call. For example, if the RBI buys corporate bonds directly, some purists will be against it. But again, how we do it is less important than making sure that the credit actually flows to all parts of the corporate sector.