'GDP to Shrink Over 10% by March, India Faces Financial Crisis and Likely Investment Crisis'

In conversation with former chief statistician of India, Pronab Sen.

In an interview that throws buckets of cold water on any optimism created by the Q2 economic results announced on Friday, one of India’s most highly regarded economists has raised serious questions about the claim manufacturing has grown by 0.6% in Q2. India’s former chief statistician, Pronab Sen, says when the full facts are known we could find that manufacturing contracted and did not grow. He also says manufacturing in Q3 will see negative growth.

Read the full interview below.

Karan Thapar: Hello and welcome to a special interview for The Wire, supported by Glenlivet. The Q2 economic results released on Friday have provided great cheer because it has led many to believe that the economy is doing better than they had feared. But are there concerns and problems that haven’t been taken into account, and when they are, could the picture alter? Those are two issues I shall raise today with one of India’s most highly regarded economists, the former Chief Statistician, Pronab Sen.

Dr Sen, let’s start with manufacturing, which after declining by 39.3% in Q1, grew in Q2 by 0.6%. But I noticed that the index of industrial production has gone the other way. The IIP shrank in July by 10.4%; it shrank in August by 8%; and in September, it only marginally moved on to growth by 0.2%. So, is there a contradiction between manufacturing GDP and IIP?

Pronab Sen: Not necessarily, no. You see, the IIP captures all forms of manufacturing. The bulk of which actually are raw materials and intermediates. All of that is a part of manufacturing. But what the GDP will capture is production of final goods. So, there can be a consistency problem in terms of the composition of the IIP basket. So, if you have a situation where intermediates and raw materials have recorded negative growth but final goods have recorded positive growth, then you could get this kind of a result. There’s nothing alarming about it. This, of course, can’t stay. It will reverse because what…you cannot have production of final goods in the absence of an adequate supply of raw materials and intermediates.

KT: Which leads me to the question: if the two look as if they contradict each other, which is presenting a more accurate picture of manufacturing?

PS: Well, you see, the final goods capture the value that has been created in all prior stages of production. It’s built into the final value. So, the GDP is a better measure. The IIP is giving us a handle on what is happening to the various parts of the manufacturing value chain. So, the two are giving us different pictures – one is telling us what is happening in the value chain, the other is telling us what’s the final value that is being created.

KT: In which case, let’s focus a little on that manufacturing GDP figure which shows growth in Q2 of 0.6%. I am told that 75% of the GDP manufacturing figure reflects corporate sector performance on the basis of balance sheets given to SEBI which show inordinate profit because expenditure on salaries had markedly come down, largely because of layoffs. So, we are here, talking about companies that may have shown profits but their production and sales were actually, markedly down.

PS: Yes. They are down by about 11%. But, again, we need to be very careful on this. There is no direct correlation between corporate profits and GDP estimates. GDP estimates are corporate profits plus salaries and wages. So, if profits have been generated by cutting salaries and wages, it would neutralise. The way it would show up in the GDP figures is if profits have gone up, essentially by cutting raw material usage. So, in a sense it goes back to what I was saying during the IIP discussion – that, if the companies have been using up stocked-up raw material and intermediates and have not been buying, then it’s going to show in these kinds of figures.

KT: You’re saying a very important thing, which I’ll repeat so that the audience can follow it completely. You’re saying if profits have gone up, both because salaries have been cut but also because you’re reducing purchase of inputs and raw materials, i.e. you are relying on inputs and raw materials that were purchased earlier, then in fact the production element is actually not great.

PS: No, that’s…that’s precisely the point. But think of it in a different sense. That if this recovery is sustained, then what you should expect to see is a huge amount of restocking of raw materials and intermediates happening in the future.

KT: That we have to wait to find out?

PS: That we have to wait to find out.

KT: But at the moment, we have a picture where profits have gone up, because salaries are actually not being paid and because inputs are not being bought because they were stocked earlier, which also means that this GDP picture does not reflect actual production.

PS: No, it does not. It does not.

KT: This is very important, because the economy is not producing; it’s actually profits being made because people are not being employed or because inputs are not being bought.

PS: That’s right. It’s mainly inputs not being bought.

KT: So, it’s only when you dig further that you realise that the underpinning of the 0.6% growth in manufacturing in Q2 is not because production has increased, it’s because profits have increased because salaries have come down and inputs are not being bought.

PS: No, I mean, you know, this comes from the final consumption, expenditure figures that came along with the GDP. That’s down quite seriously. So, that kind of correlates with what you’re saying – that it’s not that output has been growing very much but the composition of output has changed. It’s favouring finished goods and even then it’s not meeting the levels that it would have had last year.

KT: But it also means that people who supply the inputs to the corporate sector – people who supply the raw materials – have not been selling it during this period.

PS: They have not been selling it. But, hopefully, the expectations will be there that they will do so in the future.

KT: But if you look at the input providers, they actually are in a sorry state. They are not selling.

PS: They are indeed.

KT: Let’s look at a second aspect of this 0.6% growth in manufacturing GDP. To what extent does it reflect – and you’ve hinted at this – a sharp buildup of stocks prior to the festive season, which may or may not continue thereafter? We just don’t know whether it will continue, but at the moment, it’s a reflection of sharp buildup prior to the festive season.

PS: Yes, because usually the festive season demand is a spike that happens within a very short period; that happens within a month. And it’s a very sharp spike…

KT: And that’s Q2?

PS: That’s Q2. It’s October-November. That period. Normally companies start building up stocks from May onwards. So, they have their regular sales going on and they’re building up their stocks. What happened is that process got aborted and started only at the end of June. So, two months had gone. And so, those two months’ work of inventory buildup had to be concentrated in the remaining three-month period.

KT: Absolutely. But, if this 0.6% manufacturing growth because of building up of stocks prior to the festive season, then are big question marks whether they’ll continue after the festive season.

PS: Oh, it won’t.

KT: It won’t?

PS: Let’s be very clear of this. I mean, you know, historically, post-festive season our manufacturing output always falls. Always.

KT: Because people have spent their money?

PS: People have spent their money and the manufacturers are going to go back to their normal consumption…demand levels. So, it always comes down, this time it may come down much sharper than the earlier years.

KT: I’ll come to that in a moment, but let’s stick for now to this manufacturing growth of 0.6%. To what extent is it also a reflection of the fact that in Q2 of last year manufacturing shrank by 0.6%? Is there a base effect that’s helping us a bit?

PS: There is a base effect and this base effect will, by the way, continue to play on for the rest of the year. Because the numbers…GDP numbers last year GDP numbers last year just kept going down, down, down. So, the base effect certainly is there but it isn’t a very large element.

KT: This is an important point: there is a base effect; it’s not a very large base effect but it will continue for the few more quarters, which means for a few more quarters…

PS: For two more quarters.

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KT: For two more quarters we will feel that growth is a little bit more than it actually is because the base effect is boosting.

PS: That’s right.

KT: Finally, as you know better than me, something like 45% of manufacturing happens in the MSME sector and it’s not easy to judge the performance of that sector. To what extent is that adequately and accurately borne in mind when we calculate that 0.6% growth in manufacturing in Q2?

PS: Well, you see, in MSMEs you need to break them up into two sub-groups. One are those MSMEs which are registered under the Factories Act. Those are actually adequately captured by the IIP – the Index of Industrial Production. However, of that 45% you’re talking about about 15-18% are unregistered manufacturing units.

KT: Almost half?

PS: Almost half. Those are not getting picked up. So, what the CSO does is it uses the IIP as a proxy to estimate what the value would be of that missing component.

KT: In this instance, when the IIP is used as a proxy to measure the missing component, is it measuring it adequately and accurately or do you think, in fact, it’s exaggerating?

PS: Well, you see, what would happen is that for this component they would be showing you roughly -6%, which is what the IIP would show you, right? Now, the question is was it better or worse? And the general feeling is that the smaller units have fared much worse than the larger units…

KT: And that may not be reflected in the IIP?

PS: And that may not be reflected in the IIP.

KT: And when that is accurately reflected after a lag of time, we may find that Q2 growth was not 0.6%, it may be less?

PS: Well, even Q1.

KT: Even Q1 may be worse?

PS: May be worse. In fact, I suspect it will be. And I think it’ll be much worse.

KT: You’re saying a very important thing. When we accurately and adequately reflect what’s happening to that 18% of the MSMEs that are not covered, we will find that, in fact, growth in manufacturing in Q2 will be less than the 0.6% announced on Friday and even whatever happened in Q1 will be worse than what we thought it was. Both will be worse.

PS: That’s right.

KT: In which case, let me ask you this: what do you expect will happen to manufacturing in Q3. I noticed that on the one hand, the core sector has shrunk in October by 2.5%, considerably more than September. But on the other hand, high-frequency indicators like the PMI index have gone up up to 58.9 which is allegedly its best in 13 years. And GST collections have crossed one lakh crore. So, what do you expect would happen to manufacturing GDP in Q3?

PS: Let’s first dispense with the PMI. I mean, a lot is being made of it. The PMI is giving you a month-on-month picture. It’s not a year-on-year. So, what it means is we’ve been through the worst crisis, not in 15 years, I’m our history. So, the PMI just doing better in the last 13 years, doesn’t signify, really. Because you’re coming out of that massive decline.

KT: All it shows is that this month is better than the last month was better…

PS: …was better than the last month was better than last month. That’s all it’s showing.

KT: Not this year is better than last year?

PS: …than last year. So, let’s get that out of the way. Now, as far as the other lead indicators are concerned, I don’t think they are painting as rosy a picture as you’re saying. So, if you look, for instance, the other high-frequency data which is credit. Credit is going downhill sequentially, even after the crisis was over; after the lockdown was lifted. Credit continues to slide. So, I think there’s a little bit of cherry-picking in terms of   what kind of high-frequency data people look at.

KT: In which case, let me repeat that question: what do you think would happen to manufacturing GDP in Q3?

PS: It will be worse. Almost unquestionably.

KT: So, this 0.6% in Q2 is going to get worse in Q3? Could we slip into negative territory?

PS: Yes, very, very likely.

KT:  Very likely?

PS: Very likely.

KT: So, whatever optimism we feel as a result of Friday’s figures is going to be dashed when we see Q3?

PS: Yes, that’s right. Because, you know in Q3 you’re going to have roughly about a month and a half where the festive demand would have gone off and everything depends on whether or not people switch off their buying, having spent all their money prior to the festivals.

KT: And your hunch…?

PS: Is that it’s going to be very sharp.

KT: And in fact, Q3 manufacturing will be in negative territory.

PS: Most probably.

KT: Let’s at this point come to some of the other aspects…

PS: …but. But, again to take you back to the IIP point. You might actually see IIP improving…

KT: Because inputs are coming in.

PS: Yes, inputs are being bought.

KT: But one thing again: it will be deceptive because inputs are coming in, output isn’t happening.

PS: That’s right.

KT: It’ll be the exact reverse of what we’ve seen at the moment.

PS: …what you’ve seen in the second quarter.

KT: Let me at the point, come to some of the other economic results that were released on Friday. Let me begin with what has happened to services, which, as you know, constitute almost 60% of our economy. Most people believe that the contraction in services in Q2 was greater than they expected. Is that a matter of concern?

PS: It is a matter of concern. Look, services were affected, very, very adversely. And we know they continue to be affected. But those are mainly services where there is a direct contact between people.

KT: Hotels, restaurants, airlines…

PS: Hotels, restaurants, airlines, spas… you know, salons, so on and so forth. So, all these contact services were badly hit, continue to be badly hit and will continue to be badly hit while the fear of COVID lasts. So let’s leave those aside and that’s bad news anyway and that has very little to do with government policy. It really has to do with our sense of fear.

KT: And therefore there is nothing the government can do about it either.

PS: There’s nothing the government can do about it and certainly the government should not be actually trying to encourage people to do this because they might be making the pandemic problem worse. So, the government is probably better off doing what it is doing which is playing things down.

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KT: What about other services?

PS: Now, it’s the other services which are a little more worrying, because…you see, if you look at construction; construction has done better in the second quarter and this again was expected. Simply because a lot of things which had got frozen because of the lockdown, restarted. So, I think, construction was permitted from the end of June to the middle of July, something like that. So, I think there was a spurt in construction activity. But that’s a good thing.

The problem, really, is going to be what are called professional services. And professional services are services which are essentially delivered to production enterprises, which are mainly manufactured. Now…and the results of the manufacturing sector are going to feed in to the demand for professional services. And how that’s going to play out, we don’t quite know yet.

KT: And one reflection of this is that credit has been sliding steadily.

PS: That’s right.

KT: This brings me straight to two sub-sectors where actually in Q2, their performance was worse than Q1. The first is the financial services sector. How much of a worry is that?

PS: A huge worry. See, the financial services sector was not doing great to begin with and through a sequence of government orders – the banking sector, in particular and now the NBFCs as well – have actually been hiding the bad news.

KT: The bad news being the buildup of NPAs.

PS: The buildup of NPAs.

KT: Particularly, I presume, MUDRA loans?

PS: MUDRA loans, certainly. MUDRA loans started last year, September. But from March, this year…April, this year, they’ve not been recognising all other loans as well.

KT: The moratoriums that have steadily…

PS: That have steadily been given…

KT: …have just pushed the problem down the road?

PS: Well, yeah. It has put a lid on our knowing about the problem.

KT: Come back to your thought. You were saying before I interrupted that the financial services are sitting upon a problem that hasn’t been recognised as yet.

PS: That’s right. Now…so, the bad news has been suppressed but it’s showing up in the performance of the financial sector, which is the growth rate of the financial sector. What’s happening there is if loans have turned bad, you haven’t recognised them as NPAs but you’re not getting the interest. EMIs are not being paid, that’s why they are bad loans. Now if EMIs are not being paid, you cannot count that as your interest income. And the way services…the GDP in the services sector is measured is primarily based on what is called the net interest margin. Which is the interest received from borrowers minus the interest paid to depositors.

KT: And that’s coming down?

PS: That’s coming down. So, you’re continuing to pay the depositors,  you’re not getting the money from the…

KT: Which means the profitability of the financial sector is diminishing?

PS: …is getting squeezed…is squeezed.

KT: And, in fact, you’re saying two things: A – interest that you should get from loans that have not been recognised as NPAs but are effectively NPAs, is shrinking, in fact it’s probably not coming in at all. And at the same time, you haven’t got new people coming to take credit from you so there is no new source of making money.

PS: Well, I don’t know if it’s no new people coming or the financial system itself does not want to risk any further risky exposure.

KT: Because of the NPAs, it’s become risk-averse?

PS: That’s right.

KT: So, on both fronts, the financial sector has got a problem.

PS: It’s got a serious problem and the country has a problem.

KT: Of the professional services, would you say the financial sector is perhaps the worst affected?

PS: It could be the biggest drag on the economy going forward.

KT: Now, very closely connected to what happens to the financial sector is what happens to investments and investments for a country like India is a critical factor. I noticed that gross fixed capital formation shrank in Q2 to just over 7%. How much of a concern is that?

PS: That in itself, Karan, is not a big concern. In fact, -7% would probably cheer a lot of people up. The real concern is elsewhere. It is that what you’re seeing in terms of investment at the moment – ones that are coming out in the Q2 results and in Q3, as well – are really investments which were on the ground when the lockdown was declared. So, these were in the pipeline, being implemented, got shut. Now that’s opened, there’s a tearing hurry to get them opened and on the go.

The real question to note is that this particular pipeline will last maybe a year. Maybe up to the end of the first quarter of next year. If new projects don’t come in then next year we are going to see an investment-driven slowdown, rather than a consumption-driven one.

KT: This is very interesting. So, this figure of 7.3, you’re saying, first of all, should actually cheer people because many thought it will be worse. But it’s only at 7.3 because old investments that were in the pipeline are going through and they’re being pushed through rapidly. But there are no new projects after that. So, once the old investments are pushed through, there’s nothing else. People are not willing to start new projects.

PS: Well, people are not willing to start new projects; state governments have cut back on infrastructure investments. So, a whole…no new project…in fact, state governments are cutting back on existing projects, let alone plan new projects.

KT: So, this is particularly worrying. Because when there are no new projects, it means animal spirits have disappeared; it means that investors don’t have confidence in the future that they want to invest in.

PS: They are all…I think, investors are by-and-large in wait-and-watch mode, which in their shoes I’d certainly do. You know, things are just too uncertain at the moment to take a call of this kind.

KT: They clearly need someone to encourage them, and I’ll come to what the government should be doing right at the end but at the moment, I want to signal, the government is not doing that. The encouragement needed is not happening.

PS: No. As I said, at the moment on the investment front, the only part of government which is doing anything are the states, and the states are cutting back.

KT: Because the states don’t have money.

PS: The states don’t have money, they’re having to divert their money to disease management. So, the only thing that they can do is to cut back on…

KT: And the Central government isn’t making it easier for the states to get that extra money that they badly need.

PS: That’s right.

KT: So, this wait-and-watch could continue for the foreseeable future?

PS: That’s right. That’s absolutely correct.

KT: So, on the investment front, both in terms of what is happening to the financial sector but also what’s happening to investments, it’s actually a deeply worrying picture.

PS: It is a deeply worrying picture. My personal reading on this is that the rest of this year is going to be essentially driven by the consumption story. So, you’ve seen the boost happening in the second quarter because of the festivals and that’s going to start tapering off over the next two quarters. Next year, my real worry is next year, because that’s going to be the investment story.

KT: And there will be no investment to boost growth and that’s why…

PS: We don’t know…I hope there is but as of now, it doesn’t look like it.

KT: And that’s why you’re worried, because that would be an even worse problem for us than the consumption one we’re going through at the moment.

PS: It’s a much worse problem because reviving investment is not quite as simple as putting money into people’s pockets. You’re really dealing with sentiments; you are dealing with the level of the willingness to take risks

KT: This is the animal spirits that have completely disappeared.

PS: Keynes talked about, yes.

KT: Let me come to a second sub-sector, where in fact performance in Q2 was worse than Q1. This time it’s what’s called public administration I noticed that it seems expenditure on this sector fell from 19.1% in Q1 to 11.9% in Q2. To me this is, almost the opposite of what should be happening when an economy is slowing down. So, what’s the explanation?

PS: This is a good question. You know, the…now remember, it’s public administration, defence and social services, personal services, actually.  I suspect a lot of this is really the personal services part, because that’s where the hotels…well, no, trade hotels, they come in another category. This is things like schools, hospitals, salons – all of those kinds of things, which are services that are given to the individual. There because of COVID and COVID fear, you may have a slowdown happening. But, the  bad news, I think, is that the government is itself in a shrinking mode.

KT: The government itself is?

PS: In a shrinking mode. So, if you look at the CGA figures that have come out, after a spike in June and July, government expenditures are now lower than what they were in the first half of last year.

KT: Isn’t this the opposite of what the government should be doing?

PS: This is the opposite of what the government has said it is doing. The government has announced 30 lakh crores worth of support, right? But if you look at the actual expenditure, it’s lower than that.

KT: So, in other words, this gives out the lie of the government. It’s saying one thing, it’s doing another.

PS: Well, that’s right. It’s given us the impression that a huge amount of expenditure is taking place but when the figures come out they’re saying you’ve spent less than last year. Not even…we’re not even comparing it to comparing it to the budget; we’re comparing it to last year. The budget was a significant step up over last year.

KT: And this again will have a dampening impact on investment because investors, when they realise that the government says one thing but actually does another, are going to say to themselves, ‘well, that’s another good reason for us to keep waiting and watching, because the government isn’t increasing demand. Why do we want to start investing?’

PS: Well, that is…it’s worse than that because a lot of public investments actually go into creating the conditions for private investment to come in. It’s putting together the infrastructure, it’s putting together the industrial parks – all sorts of things.

KT: And that’s not happening?

PS: That’s not happening.

KT: And that’s another deterrent to private investment?

PS: That’s right. It’s a block on that.

KT: Finally, let’s come to private consumption which essentially represents consumer spending, which is roughly somewhere between 57 and 60% of the economy. That in Q2 shrank by 11.3%. Now, admittedly it’s a lot better than the amount by which it shrank in Q1, but still it does represent depressed demand.

PS: Karan, the picture is actually a little worse than that. If you look at what the private consumption demand has been in Q2, relative to disposable incomes, that is, incomes with households, right? The households have actually spent more than they have earned. They have eaten into their existing savings.

KT: What does that mean?

PS: It means that even this -11% you’re talking about is the result of households having spent not only all the income that they have, but a chunk of the savings as well.

KT: That means, they have less savings to eat into in future, it also means less savings for industry to use for investment.

PS: That’s right…for investment.

KT: This will compound the investment problem we’ve been talking about. So, this is again very bad news.

PS: It is bad news.

KT: I have to point out to the audience that as we began to dig deeper into the results that were announced on Friday – whether we’re talking about the manufacturing picture, whether we are talking about services such as the financial sector or investments, now when we’re talking about public administration – which is government spending or consumer spending – on all fronts, it seems when you dig deeper the news is actually, not just worry, in some instances of great concern and depressing.

PS: Yes and you know, in terms of how one thinks about the future…I think there are a lot of pointers that can come out of the data that has been released and as of now these pointers don’t look good. But as I said that at the end of the day, it is really the health of the financial sector which is of the greatest concern because even if everything else turns; even if investors return, even if consumers say we’re willing to borrow to consume, the financial sector may not be able to meet that need.

KT: On the financial sector, at some point they are going to have to accept that a whole host of earlier loans – not just MUDRA but other loans – have turned into NPAs. What then? Who takes a haircut? Does the government provide money? What happens?

PS: No, the government will have to provide money because if it doesn’t…so there will have to be a massive – and I use the word advisedly – a massive recapitalisation.

KT: We’re talking of lakhs of crores.

PS: Yes, because otherwise what’s going to happen is when the recognition of the NPAs takes place the banks are going to have to make provisions for that from their reserves. And if the results fall as dramatically as I believe they will, almost all the banks will be under what is called ‘prompt corrective action’, which means they will not be able to lend even if there is demand.

KT: Which means – to use layman’s language – they’ll be perilously close to bankruptcy.

PS: Pretty much.

KT: And the government will have to suddenly stump up lakhs of crores.

PS: Yes.

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KT: And that would create a problem for the government. Where does the money come from?

PS: It would if it has to be done in a lump-sum. The sensible thing to do is to actually do the recapitalisation in a graduated manner.

KT: From now onwards?

PS: From now onwards.

KT: Which there’s no sign of?

PS: There’s no sign of it at all.

KT: How much time does the government have before this whammy hits them?

PS: Well, you know, if you look…as I said, the financial sector results are very worrying because what it’s saying is that the financial sector’s viability is being steadily impaired, right? And this is without the recognition of the bad loans. These are the income effects arising from the bad loans. This is just going to get worse, it’s not going to get better. So, the quicker the damage is recognised and corrected, the better off the country will be.

KT: In other words, it’s not a question of how much time does the government have before the whammy hits them; time is already running out.

PS: Whammy has already hit. So, even if you talk about investors wanting to come back, I am almost certain, other than the really triple-A, prime investors, banks are not going to lend money to anybody else.

KT: In other words, the government should’ve started acting yesterday.

PS: Yes.

KT: This is one area where the government is either refusing to act or its asleep and won’t recognise the problem, but either way the problem is getting worse.

PS: The problem is getting worse and it will continue to get worse because this is a cumulative problem. This simply keeps adding up.

KT: And getting worse with everyday?

PS: And getting worse by the day.

KT: I have to say once again, we began by an introduction where we said that the presentation of economic results on Friday cheered people up because it suggested the economy was not doing as badly as many people thought. Now that we’ve dug deeper, the problems that face us are actually hugely worrying and what’s more disconcerting is that in the critical instance of the financial sector, in the government shows either no recognition of the problem or no desire to act and with everyday that it fails to act, as you said, the problem gets steadily worse.

PS: Yes.

KT: Let’s at this point, because we’re coming to the end of this interview, try and look down to the future. What sort of GDP growth do you expect in Q3, will it be better than Q2 or worse?

PS: No, it’ll be worse. It’ll almost certainly be worse.

KT: Almost certainly worse than Q2?

PS: Yes.

KT: In other words, in Q2 we shrank about -7.5, you’re saying we will shrink by more than -7.5 in Q3?

PS: That’s right.

KT: What about Q4?

PS: Q4 would look better but there the base effect becomes very important.

KT: Because it had done so badly the year before, it’ll look better this year.

PS: It’ll look a lot better this year.

KT: But will Q4 be in positive territory or still negative?

PS: As things stand, I suspect it will be in a small negative territory. It could be positive. My original guess was that it would be positive.

KT: But now you are saying negative?

PS: It could be negative.

KT: Which means every single quarter of this financial year we have been in negative territory.

PS: That’s right. First quarter of next year, you will certainly see handsome growth.

KT: But that’s the next financial year?

PS: That’s the next year.

KT: Every single quarter of this financial year, ending on March 31, 2021, will be negative territory. This also means that the feeling that we’re getting – of a V-shaped recovery – and everyone saw the charts on the front pages of the pink newspapers – that V-shape is likely to become a W shape as we enter Q3 and possibly again in Q4.

PS: That’s right.

KT: Come to March 31, 2021, when this financial year ends. How much will the economy over the expanse of the whole year have shot?

PS: It’s getting increasingly difficult to say. But I would imagine it would still be in the low double digits.

KT: Low double digits?

PS: Yes. 10-12%.

KT: So, you believe over this whole financial year, economy will have shrunk by something like 10-11%.

PS: Yes.

KT: That’s actually a very sizeable reduction in the economy for a country like India.

PS: Well, these things feed on itself. But Karan, as I keep saying, a 10-11% shrinkage given the pandemic, given the lockdown is really nothing to be embarrassed about. The really big question is what are our expectations about next year? If you think of the scenario I’ve been trying to sketch out in front of you, I am more worried about next year than I am of this year.

KT: Particularly because you could then have investment-driven problems.

PS: That’s right.

KT: The failure of new projects to come upstream means there is less production, less salary, less demand and it’s a vicious circle.

PS: And worse. Less capacity for the future which means that your growth trajectory in the future can move up only very, very slowly.

KT: This is beginning to sound like one of the forecasts made – I think it was Oxford Analytica, but I may be mistaken in the name – who suggested that for the next five years India’s economy would be growing around 4.5 and 5%. This is beginning to feel as if that could have a certain truth to it.

PS: No, in any case…in any case, I think the…and this is I think, pretty much across the board in the economics profession – people like us who work on the sorts of things – that there was a time when the, sort of the expected trend growth of the Indian economy was around 7.5%. By last year, I think, everybody had reduced to 6%.

KT: And now?

PS: Now everybody has reduced to 5.5 or less.

KT: So, for the foreseeable future – and I am saying the foreseeable future for 3-4 years – the trend growth will be around 5%?

PS: Or less.

KT: Gone are the days of 8 and 10% dreams, even 7 and 6 is not realisable.

PS: That’s right. Unless the investment steps up because you are not creating new capacities.

KT: What does this do to the image of India? Up till now we’ve believed that investment leaving China will come to us, it hasn’t come in any great measure. We believed that we’re a repository for foreigners wanting to tap the huge Indian market, but are they going to be interested in the market that dreamt of growing at 8 and 10%, now can’t make 7, can’t make 6. It’s gonna have to satisfy itself with 5. Won’t it put people off?

PS: Well, maybe. Maybe not. Because it also then represents an opportunity that this is a country which is capable of growing at 7.5%. It’s not that we are not.

KT: But if it represents an opportunity for Indians, it also means that those foreigners coming will be our saviours.

PS: Could well be, yes.

KT: In other words, our saviours are not necessarily the action we take to help ourselves but the way some foreign investors look at us as an opportunity for themselves.

PS: Yes. There’s nothing wrong with it because hopefully, that will energise the Indian entrepreneur provided that the Indian financial sector is able to cope with it.

KT: And we’re back once again to the crisis of the financial sector and at the moment the government‘s failure to respond makes this concern and even bigger concern. Literally, I’ve come to the end. Let me just put two quick questions to you. One of the clouds on the horizon – mentioned by the Chief Economic Adviser, mentioned even by the RBI Governor – is the belief or the fear of the unknown possibility that there could be a second COVID spike.

The second spikes, the third spikes in America and Europe are clearly worse than the first. Maybe the deaths are not as many but the number of people falling ill is greater and American hospitals seem to be clogged up. And certainly, historically the second spike at the time of the Spanish flu hundred years ago was a lot worse than the first. If there is a second spike in India, how much worse will the situation become?

PS: Well, a lot of the damage we’ve been talking about up to now in the current year has not been the result of the disease in and of itself. It’s been the result of the policy response which is the national lockdown and then the sporadic lockdowns by the state governments. Most of the damage that we’re talking about has emanated from there, except in the contact services. If COVID spikes, contact services are not coming back. Be clear.

KT: Many of those hotels and restaurants may get written off completely.

PS: May have to get it written off completely. So far as the rest of the economy is concerned, provided more lockdowns are not imposed, we would probably just continue on the kind of path trajectory that we are on now.

KT: So, things won’t get worse but they won’t get better. We just continue with the same problem and the same concerns.

PS: That’s right. Unless lockdowns become imperative, as has happened in Europe lockdowns are there now across the board. If those come back then you’re going to see another set of economic jolts taking place.

KT: And in that event the financial crisis that we already call a crisis will get a lot worse.

PS: It’ll worsen.

KT: If, listening to this interview – and I’m being presumptuous – if listening to this interview Mr Modi begins to suddenly realise he has a problem that he hasn’t either recognised or hasn’t responded to and was to pick up the phone and ring you up and say ‘Dr. Sen, what do you think I should do?, what would your advice be?

PS: My advice would be, Mr Modi up to now you have been, fiscally, very very responsible. This is something which is beyond your control. But never waste a good crisis. Take advantage of this and fix the things that need to be fixed – the financial sector, return of public investment demand, all of that, do it now. Because otherwise next year, you’re going to have to come up on the…in Parliament and say that we have decided to violate FRBM. Would you be willing to do that? If not, please start now.

KT: So, you’re suggesting what we need is an immediate and sizeable fiscal stimulus?

PS: Or planned out, at least.

KT: But starting now?

PS: Starting now and certainly these are commitments…

KT: And fairly huge in its size?

PS: That’s right.

KT: When I interviewed on September 2, you said that what was needed most of all was a huge fiscal stimulus and you added that if as a result, the fiscal deficit of the states and the Centre combined rose to 15%, if didn’t matter at this point in time. You stand by that?

PS: I stand by that. It will matter because then the government will be seen to be fiscally irresponsible. At the moment, nobody is going to raise a finger.

KT: But at the moment, the government doesn’t seem to be listening to that advice. It’s doing very little.

PS: Yes, I suspect it will end up doing the opposite. They will do a fiscal stimulus and…

KT: They’ll do it when it looks irresponsible, rather than now when it would be accepted.

PS: That’s right.

KT: So, really we have a government who is not only failing to recognise problems and respond to them – and we’ve discussed all of that – but we also have a government whose judgement over this critical question of do we need a fiscal stimulus, and if we do – when, is highly questionable. Because it could end up doing it at the wrong time, when it will be discredited rather than credited for it.

PS: That’s right, for doing the right thing. Now you do it, I think, you would get credit for doing the right thing. Do it two years later, I think you’re going to be held irresponsible.

KT: So, we could end up with the worst of all worlds.

PS: Sadly.

KT: Dr. Sen, for this eye-opening, though I have to add, depressing interview, I am deeply grateful.

PS: You’re most welcome.

KT: Take care. Stay safe.