Pronab Sen talks about the impact of the government’s economic stimulus, highlights the need for traders to have access to credit, assesses why the new method to calculate GDP is better, and says lockdowns in towns to control Covid will hurt due to supply chain disruption.The session was moderated by Special Correspondent Aanchal Magazine.
AANCHAL MAGAZINE: The government announced the third tranche of the economic stimulus recently. In your views, what has been its impact?
The Indian economy has already suffered a loss of about Rs 18 to 20 lakh crore relative to last year. Of this, roughly about Rs 7 to 8 lakh crore is the loss that the government has taken on its tax revenues. The rest is the loss that households have suffered, whether directly through loss of jobs or indirectly through a sharp decline in reserves of various companies. So coming back to any semblance of normality would require that this magnitude of loss be made up. If you look at what was happening last year around this time, we were seeing a quarter-on-quarter reduction in growth rates. So, the first quarter of last year was a lot better than the last quarter of last year….
What we witnessed in the last three months is completely expected. Once the retail side of the lockdown was lifted, there was bound to be a spending boom based on pent-up demand because people hadn’t been allowed to spend on anything other than essentials. Combined with that was the festival season… As a result, what we are seeing is an improvement in the economic numbers. But does that mean we will cross last year’s figures? No. Both the second and third quarters are going to show negative growth… And if things continue as one would predict, the fourth quarter may show us positive growth….
Now, with heightened uncertainty will come the natural response of households to keep their savings up. This is to be able to provide for unforeseen eventualities. If that happens, the pace at which consumption demand will grow will be slow, and many production entities will fall by the wayside. Until now, they have been holding because of what the RBI and government have done. But all of those measures are rapidly coming to an end. So their survival depends on their production and sales. If demand continues to be sluggish, then the next year is probably going to be fraught.
AANCHAL MAGAZINE: You mentioned that consumption and demand would be sluggish. Does this indicate that the situation might get worse next year?
It’s unlikely to be worse than this year. But it could be. The real question is what’s going to happen in the second and third quarters of next year. The problem of trying to project that is extremely sensitive to what the government does in the budget.
This year, the government didn’t have a choice. They are going to violate the FRBM (Fiscal Responsibility and Budget Management) limits. They have also permitted states to go beyond the FRBM limits. Next year, that is going to be a decision. The government cannot simply put it down to an occurrence (and say) that it has happened despite best intentions. The budget will have to provide. If it doesn’t and, in particular, if the states are forced back to their FRBM limits, which is 3% of the GDP as compared to roughly 4.5% to 5%, which they would probably do this year, then we are going to be in a situation where the contractionary effect of government action will be adding to an existing contractionary effect.
BANIKINKAR PATTANAYAK: How do you see the divergence between retail inflation and wholesale price inflation? It’s not just food inflation that has gone up. Even core retail inflation is going up despite the demand compression in the economy.
Supply disruptions are certainly there. Supply chain disruptions are even larger. But one of the reasons why you would see this happening is a situation where traders, the community which intermediates between the producer and consumer, have a serious problem with resources. There could be a situation where they are demanding less from the suppliers and supplying less to the consumers. This would depress the supplier’s price and push up the consumer’s price. Now, the problem is that as a system we don’t pay enough attention to what is happening to traders. Given the sort of problems that the banks are facing, and the fact that they are cautious about lending, the trading community may not be getting the kind of bank finance that they were getting earlier. That is the root cause of the problem. It can be solved relatively easily provided that there is a dialogue with the financial sector. But I don’t see a dialogue of this kind happening yet.
SANDEEP SINGH: Investments are a concern in terms of growth. How long can the government push its constraints and revenue targets, that it has not been able to meet?
Look at what has been happening in the economy lately. The MSME sector has been hit hard; the corporate sector not so much. What is happening is that the corporate sector, in a reduced market, is gaining market share. Now, what we witnessed post demonetisation, for instance, is that the MSME sector crawled its way back within about a year-and-a-half. And then they started clawing back some of the demand that the corporates had enjoyed for that year-and-a-half. When that happened, corporate investments started dropping. They (the corporates) started witnessing excess capacities… Given this kind of experience that the corporates have had, they are going to be wary before they put fresh funds… (There will be) Completion of projects. They are probably trying to speed it up to forestall the MSME sector from coming back.
ANANT GOENKA: What we are seeing in India and around the world is a complete dichotomy in what data the economy is giving us and what the stock market is showing. What are your views on it?
It’s a concern. There has been a huge increase in liquidity across the world and in India. When liquidity is infused into any system, it has to go into some kind of transactional law. The question is where are the transactions happening? If the transaction is happening in the real economy, then the money moves in that direction. And you can get a little bit of inflationary impact because people are demanding more than supply can provide. But in the absence of transactions in the real economy, those funds will move to the asset segment. And as there is no additional supply side, what you will get is essentially more money chasing a fixed stock of assets because the supply of assets is not changing. Now, the situation could change if new assets were coming into the market. But if companies do not wish to invest, you’re not going to get IPOs (initial public offerings), which are essentially the increase in asset base in asset markets. So, if IPOs come, you will see the stock market self-correcting. This is because the stock on which the transactions happen would have grown. But if IPOs don’t come, then we have a problem… If entrepreneurs see this booming stock market as an opportunity to issue an IPO, a few of them may come in. But until that happens, the stock market bubble will exist and continue to go up.
HARISH DAMODARAN: Neelkanth Mishra (Co-Head of Equity Strategy, Asia Pacific) of Credit Suisse has argued that upper-income households and big corporates will exit the pandemic with higher financial savings. The lower-income households will end up with lower savings, more debt and fewer assets. Would this income and asset inequality be permanent?
During the lockdown, when incomes were seriously affected, the lower-income households, particularly those who had lost jobs or witnessed serious cuts in their earnings, had drawn from their savings for survival. The upper-income households didn’t suffer that kind of loss of income. Secondly, since they were unable to spend, they accumulated undesired savings. Some of that is getting expanded right now in the pent-up demand story.
Now think of what that means in terms of access to investable resources by different categories of companies. The upper-income groups would tend to favour putting money into assets which would flow back to corporate India. The MSMEs are far more dependent on bank finances or informal finances, which too have been negatively impacted. So, the permanent effect would be on the relative positions of corporate and non-corporate India. That is going to last for a while. But Indian non-corporate sector, particularly the unorganised sector, has shown surprising resilience in the past and may show it again. But it’s going to take time, about two to three years.
SUNNY VERMA: Do you see Covid positively benefiting any sector? For instance, the residential housing market, as people are now working from home.
I don’t see it (benefiting) other than the healthcare sector. And the problem of the healthcare sector is that there is a physical limitation on how much they can expand. They are driven by the availability of medical professionals… And our rate of production of these professionals has not changed and is very slow…
Certainly, the demand for office premises is going down. Will it translate into greater demand for residential property? That’s not clear. It isn’t as if you need a bigger flat to sit in front of your laptop….
P VAIDYANATHAN IYER: We have seen so many disturbing commentaries on data integrity, particularly on the GDP. Has there been a change in the way data is calculated?
There have been a series of changes. But the big one is that earlier, we used to focus on volume indicators, like how many vehicles were produced etc. The value-added was taken as fixed. So, you got growth in physical volumes and you assumed the value added to be constant. Therefore, the growth in physical volume was equal to the growth in GVA (gross value added). What is being done now is you’re taking the gross value added figures directly from the balance sheets. Growth can come from two sources — from higher volumes, or greater efficiency… Both are legitimate. The earlier system missed the efficiency component. This system picks it up. If we assume that the economy is improving in terms of its efficiency year-on-year, it will give you higher growth. But that does not mean the growth is illegitimate. So, in that sense, what we have now is better. But this creates a different problem. When we were doing the volume indices, what we needed were prices that could scale up to the current price level. But now, we need deflators… These deflators are problematic. And it is still a work in progress. However, we are by and large better off.
The problem that has cropped up is that in the quarterly estimates, we do not have full balance sheet data. The only data we have are the quarterly returns filed by companies listed with SEBI. This means that the quarterly data is picking up the performance of the largest corporates — the listed companies only. Therefore, it is even less representative of the economy than the data we used earlier. However, this is not a problem with the annual estimates, which use data from all companies registered under the Companies Act, most of which are not listed.
P VAIDYANATHAN IYER: One of the enduring features of the pandemic was the movement of migrants. Do you think that workforce availability will become a problem in the future?
I don’t think this is going to affect the supply of workers in the long term because most of these people were coming to urban areas as there were no opportunities (in their native places). That is not changing. The lesson that we should take away from this (lockdown) is how unkind and uncaring our urban area spaces are to migrants.
P VAIDYANATHAN IYER: Do you think the migrant movement will prompt a rethinking on the safety nets for urban poor amongst policymakers?
This is something that should be thought about at the state or municipal level. If the well-being of a geography is dependent on migrant workers, it is the responsibility of the local authorities to take care of them. Otherwise, this kind of thing will happen again. A dialogue of this kind has to be taken up at a wider level as there has to be an emerging consensus.
HARISH DAMODARAN: When do you think the government should carry out the next NSSO survey and census?
First, not until there is enough confidence among the field investigators to go out. And second, till the villages allow them to come in. Neither of these exists at the moment. We had a pilot. What’s happened is that villages are refusing to let an outsider come within the periphery… Moving to a non-contact form of data collection is something we need to do. But to be able to do that we’ll first have to build a relationship with the respondents. Old telephone calls don’t work. People are suspicious of giving information…
ANIL SASI: In the fourth quarter there could be an improvement in the GDP numbers. And in the first quarter of the next fiscal, there could be upward movement of the indices. But does the surge end after that?
That is contingent upon what the government does in the budget. If we assume that the government maintains the current year’s expenditure level, the state governments will almost certainly have to cut… You may start seeing positive growth coming back only in the fourth quarter of next year, and then staying positive thereafter. So, the second and third quarters is where I do expect negative growth to happen.
ANIL SASI: Will the pandemic lead to fundamental changes in the economy?
A shock of this magnitude cannot but leave some permanent scars. However, it’s difficult to predict. There will certainly be a change in labour market dynamics. As far as the corporate versus MSME balance is concerned, and if the demonetisation episode is anything to go by, the MSME seems to have an unexpected level of resilience. They tend to try and claw their way back. The MSMEs are more dependent on the labour market then the corporates. Most migrant labours come to the non-corporate sector… But rural India is going to see changes as it has a growing dependence on urban India for out-migration and remittance. A lot of rural India was taking that for granted. That confidence is going to be shaken.
SHOBHANA SUBRAMANIAN: One reason the government is reluctant to spend more is because debt stands at 70% of the GDP. The government is wary of a downgrade. Do you think the anxiety is valid or should the government just spend?
The question is what is the timeframe?… The trade-off is between high fiscal deficit today and lower fiscal deficit tomorrow because the GDP growth picks up. The other is you try to control the fiscal deficit today and GDP either continues to slide downwards or grows slowly, in which case high fiscal deficit will persist for a longer period. So what is the time horizon you are taking? If it is an annualised time horizon, then you have to cut down on expenditure. If you’re looking at a three-four year time horizon, then you would have to look at it differently. The government is looking at it on a year-on-year basis, rather than taking the overall picture into account.
AANCHAL MAGAZINE: You mentioned that the budget will play a crucial role next year. So what would be the best way for the government to spend?
A little bit of that has already been done in the latest tranche of the Aatmanirbhar Bharat package, which is looking at those forms of infrastructure that are small, local, and can be done quickly. So they have done it this time with the expansion in the NREGA by another Rs 10,000 crore. Now, there is a whole range of schemes which can be expanded. But, in the end, it depends upon the ability of state governments to be able to carry them out because the Central government does not have the institutional structure. For instance, in the NREGA or PM Rojgar Protsahan Yojana, the initial expenditure is borne by states. The Centre reimburses. If states don’t have the money upfront, their ability to implement gets compromised. So there has to be a cooperative movement. And all of this has got complicated by the fact that the Centre has been very tardy in releasing funds that it owes to the states.
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SUNNY VERMA: Some cities are witnessing a rise in Covid-19 cases. Do you think there will be lockdowns again? Or is there another way out?
That is going to depend on the kinds of pressures that come on the government, and people’s fear factor. I don’t think a national lockdown is going to happen. The areas where Covid cases are rising are smaller urban areas. Most of the large cities, which first had the problem, are in retreat. Delhi is the only exception. The fear factor continues there because for them (the people in small towns) this is relatively new. In these places, you may start seeing these local lockdowns. This can be very disruptive because of the roles that small towns play. They are hubs for aggregation and de-aggregation of production… And if lockdowns happen, the supply chain disruptions are going to be massive.x
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