“One of the first things that anybody learns in economics is that there is no free lunch,” he told ET in an interview. “If you are going to monetise (the deficit), that will have some impact on macro fundamentals… We cannot pretend to do policy as if there are no costs.”
Comparisons with stimulus packages in other countries were invalid, he said. He drew parallels with the Spanish flu pandemic of 1918, suggesting a sharp revival.
“From an epidemiological perspective and from the magnitude of the pandemic, the Spanish flu is a reasonable proxy to use… and because there was a V-shaped recovery, I think it is reasonable to say that we can expect the same,” Subramanian said.
Most independent experts expect the economy to shrink in the current fiscal year after the second extension of the lockdown to May 17. Ratings agency ICRA said the economy could contract 1-2% in FY21.
Subramanian agreed there would be a decline in the first quarter, but expects a strong bounce-back in the second half of the fiscal.
‘Global Financial Crisis was Different’
“Q1 there will be a decline, Q2 I think should be better than Q1, given that we are opening up the lockdown gradually. Q3 and Q4 there should be acceleration,” Subramanian said. “So overall, I think we may end up with about 2% in real terms. But this is all with the real caveats that an uncertain episode like this demands.”
Given the nature of the Covid-19 pandemic, there’s very little knowledge about the disease and therefore about its impact.
“The global financial crisis was a period of uncertainty, but that was all a completely economic phenomenon, so one could make estimations,” he said. “There is a lot of uncertainty, unknowns that we are dealing with.”
He warned against calls for stimulus measures as large as 10% of GDP, or ?20 lakh crore, and funding of that through monetisation or printing money.
‘CAN’T GET CARRIED AWAY’
India cannot get carried away by the kind of numbers being floated and industry should be realistic, he said.
“If you look at the stimulus packages that have been given within the sovereign rating category that India belongs, the actual numbers are far lower,” he said, warning against creating improbable expectations.
He pointed to the UK package, which included £350 billion of loans guaranteed by the government. “The actual cost of that loan guarantee is certainly not going to be £350 billion. It is going to be a fraction,” he said. “It’s going to be at most £35 billion. So now, if you add that £35 billion instead of £350 billion, the actual package is 3.7%.”
Similarly, for the US, the package is about 6.7% of GDP, he said.
“This is a time when we have to get the actual stimulus package right,” he said. “We cannot get carried away by incorrect numbers.”
He said the US has the ability to provide massive stimulus measures because the dollar is the global reserve currency.
“So bottom line, I think there has to be some stimulus and at the same time also some liquidity measures to ensure that firms can tide over their short-term troubles,” he said.
Asked about the possibility of Covid bonds, he said there are many proposals that the government has received. “There are ideas and each of these ideas has their pros and cons, and we are evaluating them,” he said.
He wasn’t worried about the recent spike in Covid-19 numbers, saying the percentage increase was slowing.
There was a trade-off between the economic cost and the need to battle the disease in the short run, but the medium to long run effects have to be kept in mind. “I would rather go by carefully done research which shows, for the US during the Spanish flu, that those geographical regions that were quick to implement lockdowns and continued it for a little longer to ensure the pandemic effect was minimised, so focus on the health side, were the ones that recovered far more,” he said.
“The long-run effect in those counties that only focused on the short run, for them the mortality rate was much higher and at the same time, the economic recovery was far more tepid,” he said, explaining how India has managed the issue. “We were very quick to impose those measures… It’s also reflected in the numbers. Compared to other countries, it’s far lower and especially the mortality rate is lower.”