Former Chief Statistician Pronab Sen spoke to Karan Thapar in an interview for The Wire extensively about the fall in GDP growth, collapse in demand, farmer distress and much more. Read the full transcript of the interview below.
Hello and welcome to a special interview for The Wire. The recently released economic results were disappointing but could it be the case that, in fact, the hidden reality is possibly worse? And, if the answer is yes, what are the steps the government needs to take? Those are two key issues that I shall discuss today with India’s former chief statistician and one of the country’s most highly regarded economists, Pronab Sen.
Professor Sen, as I said, the results that were announced on Monday show that the economy, during the first quarter of this financial year, has shrunk by 23.9%. Now, was that something you anticipated, or is it worse than you expected?
No, in fact, it’s pretty much on target, it may actually be worse, but that I will come to shortly. See Karan, I think one of the things that people tend to miss out is that the economic impact is directly related to the severity of the lockdown. So everybody’s getting very worked up about the fact that the de-growth in India has been larger than the negative growth in other countries; well, the fact is, we knew for a long time that our lockdown was more severe, more draconian than in most other countries.
And, since the two are totally linked, this is no surprise at all. In fact, I would have been surprised if it had not been so. What this particular number is telling you is that the lockdown was effective, that Indians obeyed the lockdown. Now, that, I think, is important and the government should take heart from it. The lockdown may not have had the desired impact on the spread of the disease but there, again, people, I think, have got it wrong. Again, you know, there were some half-baked statistical models which suggested that if you lockdown for forty days, the disease would, somehow, miraculously vanish.
Well, even the Prime Minister suggested, “Yeh Mahabharat ikees din mein jeeti ja sakti hai.”
Yes, but epidemiologists have been saying all along that the lockdown is for flattening the curve, the disease will play out later, and it’s giving you time to ramp-up your health capacities.
Unfortunately, we haven’t even flattened the curve, but let’s not get into that.
Well, we don’t know Karan. We don’t know.
Well, it’s rising – eighty thousand a day.
No, it is. But this is now later, which is what the epidemiologists had already said, that you’re delaying the onset of the disease – and it’s been delayed.
That I understand. Delaying the peak because it gives you time to ramp-up your health system so you that you can cope with the numbers which, otherwise, you wouldn’t have been able to do. But, actually, the numbers are rising; so you haven’t flattened the curve, you’ve delayed the peak, but the curve is still going upwards.
But let’s come back to this. You’ve said in that very first answer that although you expected the economy to shrink, 23.9% may be a bit worse than you actually thought would be the case.
No, not at all. In fact, my own estimate was 32%. I have a feeling this minus 24% is actually better than what the reality is; because it doesn’t capture fully what has happened to the informal sector and, by all accounts, the informal sector has been hit much worse than the formal.
So what’s your estimation? If you take into account what, you think, has been much worse for the informal sector, what would 23.9 become?
Somewhere around 30-32%.
So, in actual truth, the economy has shrunk, you believe, by somewhere around 31-32%?
We just don’t, as yet, know how to accurately measure the informal sector – which is why we’ve extrapolated.
And that extrapolation brings in what is, essentially, a misleadingly lower figure of 23.9?
Well, it’s not misleadingly lower because, you know, what I am talking about – my estimate – is not based on hard data, it’s based, essentially, on one’s observations. But on the whole, on the balance of probability, minus 24% is a better figure than the reality.
A better figure than the reality. The reality being closer to 30-31?
What is it that worries you most about the components of this 24%? I notice, for instance, that construction has fallen by 50%; hotels, trade, and transport by 47%; manufacturing by 39% – do these worry you? Or are you particularly disturbed by the fact that private consumption – which, I believe, is something like 57-58% of GDP – has actually fallen by 27%?
Well, the two are different. One is, you’re talking about the production side; the second is what’s happening on the consumption side. The two are related but, you know, you can’t really mix them up. No, there are two surprising features on the production side. Construction, manufacturing, trade, hotels, and restaurants – so, the service at large – pretty much along expected lines. With a successful lockdown, this was bound to happen. There are two surprising numbers. One is mining. Mining has recorded a fairly substantial negative growth.
Twenty-three percent, I believe.
Something like that. And mining was not locked down.
So this is a little inexplicable.
It is a little inexplicable. What happened to mining? Why is it minus 23%? And the second, which is an even bigger surprise, is a minus 10% in public services. And that’s what really needs to be looked into carefully because, one would have thought, over this time – with the whole problem of people getting laid-off, migration happening, disease management having to be done on scale – public expenditures, and therefore public services, would have gone up.
It’s gone down instead.
It’s gone down by 10%.
So this is counterintuitive.
This is completely counterintuitive. So, these are the two areas which came as a surprise. Agriculture is no surprise, we knew it would be three-and-a-half percent. None of the other sectors are really a surprise.
So on the production side, the two real surprises are what’s happened to mining and what’s happened to public administration, public services.
But how concerned are you on the demand side by the fact that-
Not particularly at this stage. Because remember, again, one of the features of the lockdown was that the retail – except for essential commodities – was completely stopped.
So even if you wanted to-
If you wanted to buy, you couldn’t. And how much more of essential goods would you buy? There’s only so much you can eat.
But it also does suggest, doesn’t it, that the challenge now, for the government, is to revive personal consumption back to normal limits? Because otherwise something like 57-58% of your GDP is not going to pick up. Demand is critical.
No, this is true but one has to be a little careful when one says this. So, if over a two and a half-month period, I have had the resources to spend and have not been able to spend, moment the retail end opens up – which it has opened up now – I will spend that money. So, you should expect to see consumption bumping up immediately post lifting the lockdown, which appears to be happening now, but this is not going to be a sustained increase in demand. This is that repressed demand, is coming back onto the market; after it’s over, we are going to go back to the demand that will originate from the incomes that were generated.
In fact, in a very real sense, that is what seems to be happening when you look at quarter two.
So far we have been talking about quarter one. quarter two is the months of July, August, and September. Now, the RBI – in its own annual report published recently – has accepted that whatever green shoots were visible in May and June started to shrivel in July and August because either pent up demand had got exhausted, or because of these haphazard lockdowns that were being declared by state governments. As a result, August GST is 12% lower than last year’s August GST.
This is right.
On the other hand, today’s papers suggest that purchasing managers’ index seems to have crossed fifty for the first time since the lockdown, and automobile sales – in Maruti in particular – seem to be doing rather well. So, what’s your sense what is going to happen in quarter two? Will the economy suddenly improve? Or will, simply, the rate of shrinkage diminish?
Well, it depends on how you define improvement. Because, if the rate of shrinkage diminishes – so if from minus 24% I go to, let’s say, minus 10% – that’s an improvement, that’s a massive improvement.
But it’s still minus.
It’s still minus, but it is an improvement. Now, one needs to be careful about the indices that one uses. So, if you look at the PMI, for instance. The PMI looks, really, at the last month; that, will production be higher than last month? Yes, of course, it will be higher. The pent-up demand is going to be met. The question is, is it sustainable? Will it stay?
And it’s not a reflection year-on-year, it’s only August versus July?
And obviously August has to be better than July, but if you look at it year-on-year, it’s a different perspective.
It’s a different perspective but the PMI doesn’t do that.
So, do you believe quarter two will still be minus 10? Is that your figure?
Well, my figure was – because I had, actually, when I worked it out – I had actually assumed that the pent up demand would come primarily in the second quarter.
It’s come earlier
I think it’s come a little bit earlier. So, my original estimate of the second quarter was minus 5%.
Now, I would say it’ll probably be closer to minus 10. Because a part of the pent-up demand has already gone away in the first quarter itself.
Now, as we talk – and this, perhaps, effects quarter three – COVID is raging; we’re increasing by eighty thousand a day, if you accept the Time of India‘s figures. Professor Ashish Jha of Harvard had said that come Diwali, in two-and-a-half months’ time, India will have a total – both the detected as well as unreported – of two hundred million cases, and we still don’t know when the peak will happen.
This is right.
What, then, will be growth in quarter three?
Well, you see, again, the thing is, Karan, that nobody actually has been able to draw a direct link between the disease itself and economic activity. The effect has always been mediated by the policy response. So the lockdown was a policy response, the sporadic lockdowns that the states are doing are policy responses. So, I would be thinking more about if the disease instance is going to continue to go up, what will be the policy response of the government? Will they continue the sporadic lockdowns? Would they go for another national lockdown? That’s an unknown, it’s unknowable. But-
If they go for sporadic or, another national lockdown, obviously, growth will collapse.
Will completely collapse.
But if they don’t, and let’s operate on the assumption we continue as we are – and, actually, we start unlocking increasingly – then, with the disease raging, what do you expect quarter three to be?
Well, now this is the thing, in quarter three, what I do expect is that the pent-up demand will have vanished, alright? By the time, we would have lost, roughly, somewhere around fifteen to eighteen lakh crore worth of incomes.
This is by the start of quarter three?
By the start of quarter three. Now, the fact is, with that kind of loss of income, you’re not going to get back up. So, quarter three I expect to be worse than quarter two. So, if quarter two is about minus 5%.
Minus 10, you said.
Oh, I’m sorry. Well, I was going back to my old figures; minus 5 and minus 8. If it’s minus 10, it will probably be minus 10, and, maybe, again about minus 10. Because, as I said, the whole backlog effect has-
Just to clarify, if one goes by your old figure for quarter two – that it would be minus 5 – then, you expect quarter three to be minus 10. But, if quarter two – because pent-up demand got exhausted to quarter one – actually comes in at minis 10, then you expect minus 10 to be retained.
So, in other words, there’s going to be no real improvement between two and three; there could, in fact, be – depending upon two – a dip downwards.
A slight dip downwards.
But, the interesting thing is, in an interview you gave yesterday to The Hindu, you see, what you called, a modest bit of growth in quarter four.
And I noticed, that in that article in The Hindu, you were the only top economist who was saying that. The others who were cited saw nothing but consecutive four quarters of decline.
Where do you get confidence from quarter four? Particularly what you’ve just said – if quarter three is worse than quarter two, how does quarter four improve?
Because, quarter four of last year was very long.
So it’s a base effect. So, you’re not comparing the same levels last year. Last year, quarter four got depressed because the lockdowns actually started in the beginning of March, and then you had the nationwide lockdown from the twenty-fourth.
So, if quarter four this year looks, or shows, modest growth because quarter four last year was so bad, is that a bit of an illusion?
It is completely an illusion.
A complete illusion.
Yes, because the overall level of incomes will still be lower.
And there’s something else you’re saying, that if pent-up demand is exhausted and if, by the start of quarter three you’ve lost – and I think your figure was somewhere in between fifteen and eighteen lakh crore of income – then demand has completely disappeared because if people aren’t earning, they can’t buy.
In which case, this problem that we’ve seen in quarter one – of personal consumption falling by something like 27% – will be much worse when we get to quarter three.
Well, you know, Karan, it can be even worse than that because we don’t really know how people will behave. What has happened is, the poor – who didn’t have that much discretionary expenditure to begin with – they’ve drawn down their savings just for survival.
And now they have none.
Okay. Now those savings have gone. Now, even when income flows start happening – production starts picking up, employment starts picking up, and income flows start happening – so long as the disease is there, their levels of uncertainty are going to be very high. They are going to be worried about tomorrow; will the government lockdown again? In which case, we starve. So, their first charge on their new incomes-
Will be savings.
Which is worse for the economy.
Which will be worse for the economy because that will depress demand even further.
So, in other words, the situation with which you begin quarter three – pent-up demand exhausted, fifteen to eighteen lakh crore of income missing, demand, therefore, at rock bottom – could steadily get worse because if the disease is raging and fear is growing, whatever little people have they’ll save. So, actually, quarter four could be pretty terrible except for the fact that the base effect makes it look good.
So, in other words, the prospect for the next three quarters is a pretty grim one.
You’d agree with the word grim?
Yes, it is grim.
So, come the end of this financial year – thirty-one March, twenty twenty-one – how much will the economy, as a whole, have shrunk during that year?
My original estimate was twelve-and-a-half percent. Now, depending upon what happens to these sporadic statewise lockdowns, it could be somewhat worse than that but not a whole lot – may be about minus 13-14%.
Minus 13-14%. Now, on these sporadic lockdowns, the guidelines issued by the Home Ministry to state governments is that they cannot be declared without the Home Ministry giving its permission. But, I notice, Mamata Banerjee has already announced a very peculiar, haphazard collection of lockdown for September – regardless of this requirement for prior permission – and, no doubt, she’ll continue to do that. Gurgaon is threatening lockdown, Punjab has got a lockdown – admittedly with permission from the government, they say. So these sporadic lockdowns are continuing, they’re not stopping.
Yeah, and I haven’t been able to understand the logic of these lockdowns. You know, the whole idea of the lockdown, as I said right at the beginning, was not to eliminate or control the disease but was to slow down its progress; that’s all it does. Now, a sporadic lockdown does not even attain that purpose; the epidemiologists are very clear about this.
But it, nonetheless, affects the economy.
It affects the economy terribly, it affects supply chains, and, most importantly, it affects the level of certainty in the system. Uncertainty increases.
And that, again, makes people want to save rather than spend.
So, in other words, if these silly, sporadic, seemingly pointless lockdowns continue – particularly when you have haphazard ones three days a week or weekends only – then, you’re into a, sort of, vicious downward spiral as far as the economy’s concerned.
That seems to be what’s happening, you know, and if the logic of the lockdown was to give you time to build up your healthcare capacities, you know – we have built up our healthcare capacities now sufficiently – when we started we weren’t producing masks, we weren’t producing PPEs, we weren’t producing sanitizers, we didn’t have enough hospital beds, we didn’t ventilators and so on. All of that.
Now we’re exporting. We’re exporting PPEs and masks.
And in the originally infected areas, these are now in surplus – in serious surplus. The challenge at the moment is actually to move all of this to new areas where the disease incidence is growing rapidly. Now, whether that process is happening or not, I don’t know – we don’t have information on that – but that should be priority one.
Meanwhile, these sporadic lockdowns are having precisely the opposite effect on the economy and on people’s perception of their future, which affects their demand. And the more you worry them, the more you breed uncertainty in their minds, the less they are likely to spend, the worse demand will become, production will fall, and we’re into this vicious spiral downwards.
I want very much, in part two, to talk to you about – given the situation, and it’s a very grim one – what the government should do. But before I come to that, let me pick up on two or three things you mentioned. You talked about agriculture, and there’s no doubt that agriculture is one sector – perhaps the only one – which has actually grown by 3.4% and that’s largely because of a robust Rabi harvest as well as very good Kharif cropping. But, I notice that agriculture GVA – which, last year was 8.6 – has fallen to 5.7. Does it mean that farmers’ incomes may not have commensurately grown with the growth in agriculture?
That is certainly true, in fact, I think it’s going to get worse. This figure that you are talking about builds in the very, very strong procurement that was carried out this year on the Rabi. So, the prices that are getting reflected in these numbers are actually pretty high. If you look at the data that’s coming from the mandis now, they are really worrying because it’s negative across the board.
So, what does that mean? They’ve sold their harvest but they haven’t earned that much from it?
This is not the principal harvest, these are the intercrop thing. So it’s really, mostly, horticulture, milk – that kind of stuff. Chickens, the prices have crashed; milk, prices have crashed; horticulture, the prices are crashing now.
So does it mean-
So, the farmers are not in an as good a shape as the harvest suggests.
But that also suggests that farmers won’t, then feel that rich and won’t spend, therefore, the demand that you think rural India can give to the economy may not be there.
It’s actually worse than that. If this trend in price declines continues, you may actually see farmer distress becoming even worse – and it was pretty bad, to begin with.
So, there are two consequences you’re talking about. One, whatever demand boost you’re going to get from rural India may not happen because farmers will be feeling poorer and spending less and, secondly, farmers’ distress could be growing which also suggests you could see a small uptick – hopefully it’s only a small uptick – in farmer suicides.
Well, we don’t know about that. But, what we do is that with the migrants having returned home, one important source of rural demand – which was remittances – that’s vanished. So, rural demand – where the bulk of the intercrop are sold – is going to be depressed.
And just for the audience, a sense of how important remittances were to the states – and to the rural areas of the states in particular – comes from an article Christophe Jaffrelot wrote two months ago for The Indian Express. He said that 35% of Bihar’s state GDP is actually remittances from urban India to rural Bihar. That’s gone.
So, Bihari farmers will be 35% poorer this year-
No, not the farmers. Bulk of the remittances go to non-farm families.
But they are poorer.
But they are poorer so their demand for the local products will be depressed.
And this will, again, feed into the problem.
Will feed into the problem of the farmers. It’ll feed into the prices that the farmers get.
Let me come to the other matter that you mentioned in an earlier answer. You talked about how public administration had contracted by just over 10%; I notice that government consumption had gone up by just over 16.4%. Is this, therefore, explained by the fact that the Centre has increased its spending but state have sharply cut it down?
I think it’s the opposite.
I suspect it’s the opposite.
States have increased, Centre’s cut down.
Centre’s cut down.
Let me, then, ask you; as far as the economy’s concerned, whose spending is more beneficial? State spending or Centre spending?
Well, it depends on what it is that you’re looking at. At this particular point in time, the principal burden is being borne by the states. So the entire disease management, disease control, humanitarian assistance – all of this is being done by states. The states are rapidly running out of money. So, what has happened, the reason you’re seeing that increase in government consumption – the 16% increase – is that a lot of states have actually front-loaded their expenditure. Which means that, given that they are facing a very tight situation in terms of their finances, in the second half of the year.
They’ll have no money.
They may have no money and state expenditures may collapse, in which case, that will add to the contractionary effect.
But there’s an implication here for the dispute between the finance ministry and the several state governments over how GST dues are to be cleared. If the states are bearing the brunt of the humanitarian, the economic, and the health expenditure – rather than the Centre – then, what’s the best way of sorting out this dispute? Presumably, you’ve got to give the states the money and do it in a way that’s suitable to them. Is that a logical corollary of what I’m saying?
Look, this dispute is, really, thoroughly pointless. Frankly, why we are having this dispute, I don’t understand because, given the fact that COVID is a national problem – it’s not a state problem, it’s a national problem – leadership should be taken by the Centre. This is not something which is localised to one state or the other; every state has it and it is spreading across states. It is a national problem which needs to be handled at the national level. But, after doing the lockdown, the central government seems to have, pretty much, given up any role in the matter and has left everything to the states.
So, when you say, “COVID is a national, not a state problem,” does it also follow that the borrowing that needs to be done must be done by the Centre and given to the states-
Rather than tell the states, “you borrow”?
Yes, because the states – in this particular case – should be seen as agencies. The Centre should be financing a nationwide response which should be physically carried out by the states.
So, the Centre borrow and, I presume, the Centre should overcome the problem it has borrowing because it claims this will affect the yields of government securities, it also has, I presume, implications for the Centre’s financial deficit. You’re saying those are not important concerns at the moment?
You know, there are two ways that the fiscal deficit can go up. One, is you leave your consumption – your expenditure – where it is, and when the GDP collapses because you’re not doing the right thing, the fiscal deficit goes up.
Because the GDP’s collapsed.
The denominator is going down. The other way, is you increase your expenditure, the GDP contracts but doesn’t contract by that much, but then your fiscal deficit goes up. The point is, in terms of national wellbeing, the second increase in fiscal deficit is far to be preferred to the first.
And the second also carries with it the hope that as the fiscal deficit increases, GDP will improve, and therefore, the fiscal deficit won’t look so bad.
And, over time, once the GDP continues to improve and growth starts happening, the fiscal deficit will come down by itself.
So, on this dispute, that is on the front pages, your advice to government is: bear in mind COVID is a national, not a state, problem; secondly, you can borrow cheaper than the states; thirdly, the states are the ones whose spending is effective, they need the money. So borrow, give it to them and get the money to the people who need it.
It’s, really, quite a very simple solution.
But this is the logical solution in any proper federated state.
Except that it doesn’t seem to be that logical to the finance ministry today.
No, because, you know, I think that the finance ministry is overly hung-up about the size of its fiscal deficit. Why? I do not know.
But, also, you don’t accept the distinction the finance ministry’s making about between ‘Act of God’ created losses in GST revenue, and GST system itself creating losses.
Well, unless the government of India thinks that it’s God. Because the loss in GST revenue is the direct consequence of the national lockdown.
So, national lockdown is not an act of God. COVID is an act of God. The national lockdown was the act of the central government.
Quite right. If there had been no national lockdown, the economy would have continued; it’s just, possibly, more people would have died.
More people would have died, yes.
But the economy would have continued.
That’s a very important, interesting point. Let’s take a break at that point. When I come back, against the background of what you yourself said was a very grim situation stretching out right until the end of the financial year, and the possibility that, in fact, by March 31, 2021, the economy could have fallen by something like 13-14%. Against that background, I want to ask – what is it that the government needs to do? But first, a little break.
Welcome back to a special interview for The Wire. My guest is India’s former Chief Statistician and one of the most highly regarded economists in the country, Pronab Sen.
Professor Sen, against the background of what we’ve discussed in part one – where you said that the future for the rest of this financial year looks grim – do we need an immediate fiscal stimulus? And, if the answer is yes, how large should it be?
Well, we need a fiscal stimulus. The real question is when and what should be the time path over which the fiscal stimulus is given. Let me try and give a certain amount of perspective on this. As far as a fiscal stimulus is concerned, the government can give a fiscal stimulus by either increasing the direct income transfers, you know, like the payments into the Jan-Dhan accounts, stretching out the free rations, and so on – that’s one kind of fiscal stimulus.
The other kind of fiscal stimulus is, the government actually spends money on infrastructure creation. Rural roads, bridges etcetera – that lot. Now, the reason I’m drawing this distinction and saying that, you know, the two ways it can be done is that the first way, which is a direct income transfer, can be done very quickly; the government can actually do it tomorrow if it so feels like it. All that is means is it goes from the treasury into peoples’ banks’ account and, you know, it’s out. So, for speed, it’s the income transfer. But, income transfers have relatively low multiplier effects because a large chunk of that’s going to get saved.
Particularly because fear is growing.
That’s right, okay. The second one takes time; government processes cannot be subverted, and they will not be. The bureaucracy is too insecure to do so. So, that would take you three, four, five months before you get the money actually on the ground. Because processes take that long. So, you have to really think of the fiscal stimulus as a combination of the two, that is, for the immediate problem, you adopt the income transfer approach; using that time to build up your projects which you would be launching towards the latter part of this year – say, November, December thereabouts. Till then, it would have to be income transfers because the money needs to go out now; now that the lockdown is mostly gone, the money needs to move now.
So you’re talking of a two-state process, if I can use that term, for handling the fiscal stimulus that’s needed. The problem is, the income transfers – whether direct payment to Jan-Dhan accounts or whether free ration – has stopped.
That is correct.
Just when you need it, it’s stopped.
So, that’s a bizarre thing. The government ought to restart it immediately.
Not just restart it, increase the quantum.
Of money or rations?
No, rations actually, the five kilos is, I think, sufficient.
But the five hundred rupees.
But the five hundred rupees is a joke. I mean, that should be at least three thousand, four thousand.
So, you’re saying two very important things. Just when you need income transfers, they’ve stopped – restart it and enhance it. Enhance the five hundred – to Jan-Dhan accounts – to three thousand, four thousand, in other words, enhance it by a factor of six or eight.
Yeah, that’s right.
They show no signs of doing that. Absolutely none whatsoever.
No. And the argument that is being made is that, precisely the argument that I’ve made, that a large chunk of it is going to be saved; of course it’s going to be saved.
The finance minister did identify, I think it’s about a hundred and forty-odd districts, where she believes the majority of the migrant workers have returned to, where projects that have already been budgeted for this year will be fast-forwarded, and work on them will begin. Is that sufficient?
No. But let it happen, you see, the only-
You mean it’s not even happening despite the fact six, seven weeks have passed.
Well, again, as I said, processes to fast-track have to be done. Those processes-
You mean even this is tied up in bureaucratic processes?
I would imagine so, I’ve been long enough in government to know this.
It was an immediate requirement announced six, seven weeks ago and if it still hasn’t started and it’s stuck in processes, then it’s self-defeating.
It is. So, look at what has happened to MNREGA, right? The government came out, provided the funds, NREGA went up, the funds are gone; they haven’t been replenished. NREGA, last month, has collapsed.
So, once again, a measure that kept people in rural India ticking along, just ticking along – and there were so many more people from India who’d gone there who needed it – has just collapsed.
So two critical things that would be essential to keep demand going: transfer of money – rations and money to Jan-Dhan accounts – and NREGA, just when you need it, has ceased to be.
Yes, pretty much.
Well, this sounds not just like bad planning but irresponsibility, or even lack of concern, on the part of the government.
It’s probably bad planning. I mean, you are not looking forward enough, you are not taking into account the leads and lags in processes. Now, if you’re in the government, you should be more than aware of what these are.
Particularly since this government’s been in office for six years, it’s not a new government.
It’s not a new government by any means, and the bureaucracy has been around for much longer.
But, there’s something that’s even more worrying in the context of what you’ve just said – we need an immediate boost of demand, you’ve sketched what the government needs to do, in a sense, the government even committed itself seven weeks ago, in Nirmala Sitharaman’s words, to “fast-forwarding” already budgeted things but, even that, hasn’t happened.
And yet, despite all of that, on July 23, the Chief Economic Advisor said that the right time for a fiscal stimulus would be when a vaccine is discovered, and a week ago – on August 25 – the Expenditure Secretary said that the right time for a stimulus would be when infections abate and psychological fears disappear. Now, neither of those are going to happen in a hurry, may not happen till sometime next year.
And by the time the likelihood is that economy would be on its knees.
If it isn’t there already.
If it isn’t there already.
But then, do you now get the feeling, despite everything you’re now saying – which is so blindingly obvious as you say it – this government either doesn’t care, doesn’t listen, doesn’t know, doesn’t understand? You can take any of those options, but one of them has to be the case.
I wish I knew.
You mean you’re baffled?
I am baffled. Because frankly, you know, nothing that I have been talking about is unknown, I mean, if there is one area where every economist in India is agreed upon, it’s this.
The need for fiscal stimulus.
The need for fiscal stimulus now. Do not delay it, do not wait until the damage becomes irreversible because it will become irreversible. See, what has, the moratorium that the banks had given is over, right? The banks have now-
Although the government is now talking to the Supreme Court about extending it for two years.
Yes, but in the meantime, what happens?
NPAs will shoot
NPAs, no; in any case, you have been hiding NPAs. So, if you think about it MUDRA loans have had moratorium since last year September, they are, all of them are, NPAs by now. You are simply delaying recognition of that NPA. That’s all you’re doing.
And making it worse.
And, therefore, making it worse. Now, you’re going to be doing restructuring. Now, restructuring, essentially, means you’re giving companies more time to pay back the loans; that’s fine – I’m perfectly with that – but the point is that the longer the process plays out, the longer the demand stimulus is delayed, the weaker will be the ability of these companies to-
Repay or meet any of their obligations.
And the greater the number of NPAs that will result.
NPAs are going to happen and, much more importantly, these capacities will simply shut down.
So, two things are happening simultaneously. One, you are bringing the economy to its knees because you simply refuse to give a fiscal stimulus now and, as you said, if you don’t do it very quickly, it will be beyond repair – it will be beyond reversing.
But secondly, by the moratorium policies that you’ve followed, you’re also extending NPAs – as you said, all MUDRA loans have probably turned into NPAs – and so, at the same time as your economy grinds to a halt, your financial sector will be also buckling under. And its capacity to help you when you need it would’ve ended.
Would’ve ended, pretty much. Unless, you come up with a huge recapitalization package.
But if you’re not talking, this moment, about a fiscal stimulus, they’re hardly going to be talking about that.
Well, they would be forced to. Because this one area where the central government cannot take refuge while pointing to the states.
Let me quote to you what the Expenditure Secretary said to PTI on August 25, as explanation – or justification – for the fact, that he claims, the right time for a fiscal stimulus is when infections abate and when psychological fears disappear. These are his words, “Right now, the evidence is that the problem is not susceptible to stimulation by fiscal or government measures,” I’m just repeating that, “Not susceptible to stimulation by fiscal or government measures. It’s not as if people are waiting for something to be done by the government, and then they’re ready to go out and resume normal economic activities.” What do you say to this gentleman?
I wonder what evidence he’s been looking at. I think, unless they have information we do not about how people think and behave, yes people are going to be going out there. The real question is, will a company restart business until and unless they, say, see the demand at the end of the pipeline.
And you have to create that demand by putting money.
And that has to be created upfront because otherwise, you’re in a chicken-and-egg problem. The businessman will not start production until he sees demand, and demand is not going to happen until the businessman starts production and hiring people.
Which means the government has to step in-
Which has to step in to create the demand.
And put money in people’s pockets.
Or create the demand, actually.
However you do it.
And ideally a combination of the two because the infrastructure creation will take four, five months – processes take that long. So, in the first instance, put money in people’s pockets. Now, I suppose, the one concern the government has is, how do we pay for this fiscal stimulus? They turned around and said, “We can’t pay our ST dues to the states,” and we’ve already seen in quarter one, nominal GDP has fallen by just over 22%, which means tax revenue right through the year will be shrinking.
So, just when you need fiscal stimulus, they haven’t got the money to pay for it. How do you get over that?
Well, the first is, there is a lot of liquidity which is now hanging around in the stock market, the stock market is in an completely crazy bubble, there’s a lot of money which is sitting in the reverse repo account of the RBI, okay. The first step is for the government to issue bonds and take that money out and use it to spend.
But they are worried the fiscal deficit will-
The fiscal deficit will, of course, go up, I mean, the moment – see the fiscal deficit depends on how much you spend, how much is the stimulus. This is only how to finance it, it doesn’t add to the fiscal deficit. This is only a financing matter.
But the worry they have about tapping either the stock market or the repo money that’s lying in bank, is that their fiscal deficit will go up. Issuing-
No, no. Their problem is not that, their problem is if they spend more – if they give a fiscal stimulus – then the fiscal deficit will go up. But say that, say that out loud, but don’t say where do I have the money? Because the financing of the fiscal deficit is, up to a point, not that difficult.
You’re also suggesting that they shouldn’t worry about the fiscal deficit.
They shouldn’t at all.
How high do you think they can afford to let it go, provided the money is used correctly to boost the economy?
If it is done properly, I mean, I see absolutely no problem in letting the consolidated fiscal deficit-
That’s central and state.
Central and states taken together, go up to as high as fourteen to about fifteen percent.
What is it at the moment?
At the moment, it’s, well, budgeted was six-and-a-half percent.
For the two combined.
For the two combined.
And you’re saying you have no problem if it goes up to fourteen, fifteen percent.
That’s right. Because of that additional 8% that I’m talking about, roughly, about a third of that, around three percent or so of that, will be essentially because your tax collections will be lower, right. Now, that’s not a fiscal stimulus, it’s just like you’re not getting tax money.
That’s just making up for what you lost in revenue.
What you now lost in revenue. The remaining is what you’re doing in terms of a fiscal stimulus.
So that, roughly five percent, would be fiscal stimulus.
Of this fourteen, fifteen for the two combined – central and state – what do you believe will be the Centre’s element?
As far as the states are concerned, their hands are tied by how much of their own tax revenues they get and how much they can borrow – which is determined by the Centre. At the moment, the Centre has allowed them to borrow five percent of GDP – as opposed to three percent, which was allowed earlier.
Provided they fulfill four conditions.
Provided they fulfill four conditions. Now, about five to five-and-a-half percent is going to be the states. And the remainder-
Which is around nine percent, should be – and here I’m making a recommendatory statement – should be the Centre.
Now, should this increasing fiscal deficit, just to take the Centre as example, from six, six-and-a-half – which is what it looks, and feels, likely to be after the additional borrowing that she’s done – all the way to, whatever it is, ten or nine.
Should that be monetised?
Not all of it has to be monetised.
Of that additional three percentage points of GDP about, I would imagine, about one to one-and-a-half percent you could get from the market.
Over and above what you have already committed to borrow. So that’s not getting monetised; the remaining one-and-a-half percent you may have to monetise, yes.
We’re coming to the end of this interview but it seems to me, in part two – where we talk about what the government needs to do, it really needs, above all, to have a vision of getting the economy back. A vision that says we need to boost demand, if we don’t the economy won’t grow, and there are various ways of doing it but, in the first instance, we have to put money in people’s pockets. And secondly, it needs to have another vision, to say, we’re a big country, we can afford to let the fiscal deficit go up, let’s not worry about what rating agencies will say because, at the end of the day, they’re more concerned about our growth improving than about the debt.
But that vision, that big thinking – I don’t want to use the word large-heartedness but large-mindedness – seems to be missing.
Well, I don’t know whether it’s missing or there is a strategic playout that’s going on we are unaware of.
I can’t even imagine because no one can work it out.
This is a problem, you know, nobody really has been able to figure out why this reluctance?
I mean, the only strategic playout could be that if we do nothing, we’ll drive the economy down to its knees. Well, that’s the conclusion that will follow.
Well, you know, if you wish to take this at a political level, then what it means, in effect, is that the blame is going to be put squarely on the states because as far as the people are concerned, it’s the states who are bearing the burden and then they say these guys haven’t been able to deliver.
That’s fine in non-BJP ruled states because the non-BJP party will be defeated and the BJP will come to power. But in BJP ruled states, the BJP will carry the can.
Well, I don’t know how it plays out.
This is why, and I’m using your word, you’re baffled.
By the way the government is now handling the situation.
There seems to be no logical explanation for this.
Yes, I mean, you know, if there were even a couple of economists who thought what they’re doing is sensible, then I would have, perhaps, understood.
You can’t find even one?
I can’t find even one.
What about the CEA?
Well, he’s within the government; he has limitations on what he can say.
So, we end this interview with a frank admission, that what needs to be done is clearly obvious, and it needs to be done now, and yet it’s not being done – it’s not even being talked about, there’s no hint the government is even going to think about it, and this is baffling. There seems to be no logical explanation.
As of now, and as I said, you know, the really critical thing is the timing because if you do not move quickly-
It’ll be too late.
It may be too late.
Time is not on our side. Now that’s something else the government seems to not understand.
Yeah, unfortunately so.
Professor Sen, for an eye-opening interview, that – undoubtedly, for many – will be also deeply, deeply distressing and disturbing, thank you very much indeed.
Take care, stay safe.