If there’s one economist who has seen it and skilled all of it, it’s Dr C Rangarajan, former RBI Governor & former Chairman, Prime Minister Financial Advisory Council. Whether or not it was the monumental reforms of 1991 or the 2008 world monetary disaster, he was on the forefront. He spoke on India’s current financial disaster throughout a dialog with Raghuvir Srinivasan, Editor, BusinessLine, on the BusinessLine Data Sequence webinar on ‘Is India’s Financial Restoration Sustainable?’. Excerpts:
Quite a lot of indicators level to a restoration. Is the continued financial restoration sustainable ?
Initially we have to perceive the character of the present downside. The financial disaster that we face is completely different from the financial disaster that we’ve confronted earlier.
That is the primary financial disaster which has been triggered by a non-economic issue — a pandemic. It’s the try to forestall the unfold of the virus by such measures as lockdown which has resulted within the financial exercise coming to a grinding halt.
To me, the elimination of lockdown or decreasing the restrictions to a drastic extent is a essential situation for financial progress.
Within the first quarter, the GDP fell by 23.9 per cent and that’s the interval through which we had probably the most extreme lockdown. Now, as we transfer away, it’s fairly potential for the economic system to select up.
My view is that, presumably the second quarter may also have detrimental progress. Maybe, it might be half of what it was within the first quarter.
Through the subsequent two quarters, I consider the economic system will begin choosing up and we could finish the yr with a charge of progress, which can nonetheless be detrimental for the yr as an entire, however lower than what has been projected in some quarters like minus 10 per cent and so forth. Possibly minus 6 to 7 per cent is a risk. The massive query, nonetheless, is that there needs to be no resurgence of the virus.
Our economic system was not within the pink of well being in run-up to the pandemic…
I agree with you. That’s the reason I’m utilizing the phrase ‘restoration’ in a really cautious manner. Restoration is just not actually past the 2019-20 stage. Even that yr had a slowdown with solely a four.2 per cent charge of progress. Now we have misplaced one half of the yr however the second half yr, we might be able to compensate a little bit bit and attain the extent of 2019-20.
What do you suppose the Centre ought to do to make sure that restoration sustains not only for the second half of the yr however into the subsequent fiscal as nicely ?
The same old argument is that in a weak demand scenario there’s a position for the federal government. That’s to extend the federal government expenditure which is a standard Keynesian argument that’s at all times put ahead and I suppose it’s right.
In truth, the normal Keynesian argument doesn’t make any distinction between one sort of expenditure from the opposite. That’s the reason the well-known saying ‘digging the holes and filling them again up once more’ additionally grew to become well-liked.
However I believe we have to transfer away from that. I believe there’s a want for presidency expenditure to maintain the demand at a specific stage.
Right here, I’ve a view that the federal government ought to increase capital expenditure.
Capital expenditure has stronger ahead and backward linkages than different forms of expenditures. Authorities of India ought to come ahead with good programme of funding expenditure of not solely authorities but additionally of PSUs. That may truly pull the economic system far more than the rest.
The federal government has already introduced an infrastructure pipeline and I believe there needs to be a pipeline by PSU models and put collectively could also be 2 per cent of GDP have to be spent on capital expenditure. I believe that would be the actual step ahead in pulling the economic system.
The trajectory of inflation is now trending in direction of 6-6.three per cent. Are you proud of that?
The inflation that we’re seeing now must be seen not simply within the context of demand-supply imbalances but additionally within the context of what we’re doing general so as to have the ability to push the economic system ahead.
One factor that the federal government is speaking about is to extend the liquidity of the banking system in order that it might be ready to offer credit score. Afterward, the RBI has to assist the federal government if it’ll borrow to maintain the excessive ranges of expenditures.
Subsequently, a variety of liquidity is being pushed into the system. I consider that inflation will come down a little bit bit however to not the extent of four per cent.
Pumping liquidity doesn’t essentially imply the cash provide additionally will increase as a result of all of it relies upon upon what the banks do with the liquidity that has been given to them. In the event that they actually lend and if they’re ready to provide credit score in a bigger manner then cash provide will enhance in any other case it will not. I have no idea at this level how aggressively the banks will lend or the financial institution themselves will discover enough debtors.
We’re basically in a scenario the place liquidity is growing however output is just not growing. That manner we’ll find yourself with some inflation however could not essentially be at this stage. It could be at 6 per cent stage.
Would you be comfy with 6 per cent inflation stage?
None would favor that stage of inflation and in the long term it isn’t coverage. Maybe one must tolerate the extent of inflation which isn’t preferrred however a lot larger. Subsequently, we might be able to reside with that contemplating the very particular scenario that we’re positioned in.
Are you comfy with the accommodative stance of financial coverage of the RBI?
Accommodative financial stance is probably warranted by the scenario through which we’re positioned.
The economic system goes down. We’re even speaking a couple of detrimental progress charge which is remarkable within the current interval. Subsequently, to some extent we actually need to maintain the scenario and I don’t fault with an accommodative financial coverage. However I’ve two considerations: One is the influence on inflation.
The financial authorities ought to take a stand on how far they are going to be prepared to let the inflation go. Secondly, the rise within the Reserve Cash (RM), which is what the actions of the central cank leads to, will result in a rise in cash provide solely when the banks start to lend.
There are two factors right here the financial authorities needs to be cautious of : After we require all of the banks to lend, I believe we have to be considerably cautious about it. I believe there’s a want to make sure that banks lend on this scenario however we additionally need to watch out as a result of it mustn’t grow to be a burden. Loans of as we speak mustn’t grow to be NPAs of tomorrow.
The place do you see the fiscal deficit by the tip of this yr?
The Authorities indicated a fiscal deficit of three.5 per cent of GDP in its Price range. Many individuals, whereas discussing the Price range, had some doubts about even the credibility of that quantity. After that Covid occurred. A colleague of mine and I did a calculation. You’re actually taking a look at 14 per cent of GDP. It is extremely excessive however I’ve come to a reluctant conclusion that it’s unavoidable and we actually need to reside with it this yr. We have to see how we are able to slowly slide it down with out harming the economic system.
If there are three fast reforms that the federal government ought to embark upon within the subsequent six months to a yr, what ought to they be?
I’ll checklist three units of reforms. One, within the monetary system, significantly with respect to banks.
I personally suppose that the banking system can not carry ahead with this load of NPAs and subsequently recapitalisation must be checked out extra exhaustively in a extra expanded manner.
On the similar time, the important thing query is why are we moving into this case? Now we have been recapitalising yearly from 1991 onwards so we should always not get into this case.
This raises a vital query, what’s the relationship between public sector banks and the federal government. What’s the type of relationship that we should always set up to allow the general public sector banks to perform independently?
The second suggestion is that we have to take a look at reforms of particular sectors somewhat than normal in nature.
For example, reforms for the facility sector, telecom sector. These are the areas the place some appreciable thought must be given and we principally want to use the precept of liberalisation to each sector.
Third, is what I name governance reforms. Authorities at all times talks of ease of doing enterprise however what’s ease of doing enterprise with the federal government, which is equally vital.
I actually suppose that we moved away from the system saying that controls are coming in the way in which of effectivity however we should always not transfer to a scenario through which laws merely substitute controls.
Too many laws are available the way in which of innovation and too little laws creates instability and subsequently we have to strike a steadiness between the 2.
Allow us to take some questions from viewers…
Radhika Merwin: How can we deal with the difficulty of misplaced GDP?
Misplaced GDP must be compensated by larger progress within the subsequent years however so far as the person models are involved, if they’re closed, it’ll be very troublesome to reopen them. I believe the time has come to revive the type of growth banks that we had earlier than.
We thought the bond market will exchange the event banks and the long-term capital will come by the bond market however that has not occurred.
Tony: If decreasing the GST for a short time may also help consumption and restoration, what’s the federal government’s concern for this strategy?
I believe the federal government’s concern is that it doesn’t have sufficient income.
Compensation has are available due to the very fact that you’re not gathering as a lot income as you might have collected earlier than and individuals are saying there’s a shortfall.
It’s not that the federal government is now gathering extra income by GST than what was current earlier than GST. Subsequently, the entire query of decreasing GST additional doesn’t come up.