India has ever seen, Ahluwalia said. A contraction now and an expansion by an equal margin next year is basically gaining back the same demand and investment needs of 2019 in 2021. Here, the usual rule of thumb approach doesn’t work and the country will need to think beyond the textbook solutions, according to Ahluwalia.
Concurring with him, Subbarao said growth of 5-6 per cent in 2019-20 and a contraction of 5 per cent in 2020-21 would mean that the economy will actually dip by 10 per cent. That kind of depression is very difficult to handle even for a rich country. But India’s external sector remains very stable. Oil prices have crashed, so the fall in exports would get balanced with a fall in imports. The Indian rupee has depreciated, but in relative terms, it is still stronger than many others. India also has a bumper crop this year, which will take care of food security.
“This is not a natural disaster. Our factories are up, infrastructure is up. As the lockdown is lifted in phases, we can ramp up very fast,” Subbarao said.
Both Ahluwalia and Subbarao praised the RBI’s steps in handling the crisis. Where they differed though, is the extent to which the government has taken fiscal measures.
While Subbarao saw the fiscal response as adequate for now given the fiscal constraints, Ahluwalia sees space for providing another 1 per cent of the gross domestic product as a direct stimulus, particularly focused on health.
Ahluwalia said the drop in tax revenue is going to be low, disinvestment targets would also remain unmet. “We must realise a 5-6 per cent drop in GDP doesn’t mean 5-6 per cent drop in everybody’s revenue. For the low income and unorganised sector, the impact would be huge,” Ahluwalia said, adding, even with a good agriculture produce, the farmers may not be able to realise the full benefit considering the logistics has been hampered. Businesses are going to witness a hit in margins, small businesses depending upon loans from non-bank financial companies (NBFC) will find it difficult to get loans.
“The stimulus is actually quite small,” Ahluwalia said. There is already a debate whether credit availability will necessarily mean credit of-take and growth. India is considering opening up when the cases are not going down, rather Covid-19 cases are going up. “Businesses are not going to ramp up their production till they don’t have clarity on what the government does,” Ahluwalia said, adding the government must come clear if they utilised the lockdown to improve health care facility and by how much.
Even before the Covid crisis, the conditions of India’s financial system was quite worrisome. There were huge non-performing assets, and after the crisis, analysts are talking of the NPAs to double from 9 per cent to 18 per cent, Subbarao said, even as he expected that after the asset quality review (AQR) done by the RBI, the rise in NPA won’t be so high. But all the parameters would get worse. The economic packages announced by the government was done to ensure survival, but once the lockdown opens up, Subbarao expects more stimulus measures.
Subbarao saw in the stimulus measures a clear message by the government that not only short-term, but the government is also concerned about the medium term and he saw the measures as adequate. “Within the constraints of the government, I think they have done a reasonable job.”
According to Subbarao, there is no harm if the government borrows more to spend more, and certainly he expects more extra borrowing in the current fiscal, but “I don’t support that the government should borrow as much as needed to spend more. It is good that the government has set a limit.”
Ahluwalia said the government has to create space for extra spending. Goods and services tax (GST) must be reformed, but by taking feedback from businessmen, top economists, and experts in the field. There is also no need for such a multiplicity of subsidies. Importantly, if the government is serious about getting into the global supply demand, it must consider getting into the Regional Comprehensive Economic Partnership (RCEP).
“We cannot seriously expect to join the global supply chain if we are not joining the part of the world that is still not protectionist,” Ahluwalia said.
The present crisis is not like 2008-09 global credit crisis where the central banks
were at the forefront of the battle. In this context, the RBI has done much more than what it was required to do, but the RBI can’t do much, said Subbarao. The present crisis is not of financial stability, but that of risk aversion. That’s why the government has a much bigger role to play. But “the issue now is that fiscal policies have no room, but has traction, and monetary policy has room but no traction.”
In this crisis, the government must focus on the governance reforms as much as they should in structural reforms. Importantly, the centre must realise that the states are now running the show and the policymakers at the centre has a limited role to play in fighting the Covid-19 problem. Therefore, the centre must improve coordination and relastionship with the states to fight the issue, Subbarao said.
“You need to put money in the hands of the people. We can get over the crisis much more quickly, our growth story is strong. It is possible, probable, but not inevitable,” Subbarao said.