Fiscal Deficit: Govt, for now, must not worry about fiscal deficit or debt: Rakesh Mohan

Mythili Bhusnurmath: We were discussing the various aspects of the pandemic and what can be done in terms of fiscal and monetary policy. You spoke of the need for more fiscal support and I could not agree with you more because monetary policy has been in overdrive but fiscal policy has really been lagging behind. Yes, the government has announced a number of measures but this amounts to barely 1% of GDP which is nothing compared to even what other developing countries are spending. What do you think is holding the government back? Are they worried about the fiscal deficit, public debt? What is your best case because you have been in the government and so you know how the government works?

I am very surprised by what is holding them back. I certainly would not be worried in the present time about the fiscal deficit or the debt because this is an exceptional situation. The US has announced a 2.2 trillion dollar bill that comes to about 10% GDP. There is a similar announcement by Germany and it is important to note that because Germany among all the countries in the world has been the strictest on keeping fiscal deficit. They even have some constitutional safeguards on that but they have clearly decided that this is again a complete exception. And as far as I understand, their potential package which they are ready to use amounts to almost 13% of GDP. I am not suggesting we should go to those kinds of numbers but it is absolutely imperative that we become much more active. And some of the measures we need have been done.

The first priority, of course, is to keep all the food supplies going in India. One huge difference between the developed countries and developing countries, and certainly India, is that food suppliers are in the organised sector in developed countries. It is much easier to keep them going because there is a finite set of distributors in terms of large supermarkets, a finite set of companies that supply to the supermarkets etc. In our case, of course, the food suppliers are highly disaggregated. This is about the time for the spring or rabi harvest and therefore it is absolutely imperative that the government take measures right down to the decentralised levels to make sure the harvest is successful. This needs a lot of transportation activity, from loading to processing and then the distribution and unloading etc, for all of which labour is required; so there could be fiscal measures to make sure of this.

One of the unique things we have done in the world is the Jan Dhan system. This indeed is the time to use the equivalent of UBI through the Jan Dhan account and we can do this much faster than the United States. We can also use the information, the accounts we have for labourers, who have used the MNREGA, to distribute cash to them. And what I noticed from the reports about the prime minister’s call with chief ministers is a very welcome kind of a discussion. It was very encouraging to see report of the prime minister and chief ministers discussing the possibility of a phased withdrawal to the lockdown and concentrating on testing, tracing, isolation, quarantining those areas that are much more affected, lifting the lockdown in those areas that are much less affected, identifying hotspots and searching them etc. That is the kind of approach where we quite understand that the economic imperatives become extremely important so that we do not have deaths through hunger rather than the virus. And this is the kind of approach that the prime minister has reported to have emphasised and the chief ministers have welcomed.

Also, intensified efforts to coordinate down to the district level, can go down even further to ward and mohalla levels in cities and panchayat levels in rural areas. We must use all such methods for administration as well as communication and similar activities with regard to medical supplies and food supply chains are absolutely necessary.

Mythili Bhusnurmath: Another advantage that we have, of course, which you really forgot to mention is that buffer stock with the Food Corporation of India. In the past, we used to always bemoan it but now it might come to our rescue. Another aspect on which we have some level of comfort is our forex reserves. Today we have forex reserves of about $450 billion; can this come to our rescue? Is it a source of comfort or does it really make it worth building up such huge forex reserves because this, as you mentioned, could be used for the sops? There is a price but does it still justify building up high reserves?

Well, firstly, I do not believe that it is a costly exercise; it is an absolutely essential exercise. Also, we tend to forget that the central bank has to have a balance sheet of appropriate size and it consists of forex reserves and domestic treasuries, domestic G-secs and we have done a good job in terms of building forex reserves. And once again, you need to use them when there is a withdrawal of foreign exchange from the country but foreign investors’ outflows are not that large. We had almost $300 million 10 years ago, $450 billion is not that large. Nonetheless, I am glad that we do have $450 billion and that we have built up to that amount and that we can use them. The new repo window is useful and this where the reserves come in. And since we have the reserves with relatively large US treasury holdings, it will be very easy to use the repo window.

Mythili Bhusnurmath: We have not seen the kind of coordinated response that we saw post the global financial crisis. Is that only because of the kind of presidency that we have in the US today or is it because it is much easier to close physical borders than to close borders to capital? So in some ways was the financial crisis easier to handle than a crisis in the real sector?

It is a real pity that the G20 system has not worked this time and mainly because of the differences that have risen in the last few years, given the US president’s attitude to multilateral organizations and also the particular differences between the US and China. The world is quite different today than it was 10 years ago. The world would have gained with much more multilateral cooperation. I am glad, however, to see that despite these tensions, the US Congress immediately doubled the new arrangements to borrow for the IMF and so the IMF now has a trillion dollars to be able to lend and it opened new facilities. In that sense, its system is still working but it is at a highly lower level of international cooperation than before. Secondly, this pandemic is global and we did need a much higher degree of global cooperation in containing the pandemic both in terms of information dissemination as well as in terms of learning from each other how to control it because we have had very different kind of methods of controlling it, with successful countries like Korea. We would have gained as much as we did in 2008 from much more rapid global cooperation than we have seen this time.

Mythili Bhusnurmath: In the past whenever we have had a crisis, we have turned to the NRIs. This time we do not need NRIs to support us in terms of dollars. We have enough dollar reserves but they could support the government’s expenses and government programs. So is it a case for some kind of NRI bond for instance?

The kind of ramping up of fiscal spending that is needed, you would not get much from foreign borrowing whether it is NRI or anyone else. We can do that just from the central bank and this is the time to do it. If you get some marginal money from NRIs, there is nothing wrong with it but it does come at a cost in terms of forex risk, although, I would not eliminate it as one of the measures that we can take. But given the volumes involved, we will have to rely much more on domestic activities. But I want to say one more thing which is extremely important and that is the connection between the whole financial sector and the real sector. One thing the Reserve Bank and the government must do jointly is to understand that supporting the corporate sector in terms of making sure that there are no bankruptcies that happen because of this crisis because if they are real sector bankruptcies, then we will immediately have a backwash effect on the banks and NBFCs. Given there are already difficult situations, we have to make sure that we retain the current health of the financial sector.

We would also have to think of in terms of the small and medium enterprises, restaurants, transport operators, hotels construction, etc, all these will need assistance because if we do not do this, then we will have these large new NPAs coming in, which given the already high stresses in the banking system, we just cannot afford. We need to absolutely make sure that we do not have bankruptcies, we cannot afford them leading to bank failures. We must keep up the employment and the food supplies and I would just emphasize that keeping food supplies from the supply side and then the distribution so that people have enough to eat. We can extend much more credit guarantees through the credit guarantee co-operation, through MUDRA, etc. All of these things have to be set in motion.