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What is your assessment of the economy?
This is an extremely uncertain period. The global financial crisis was a period of uncertainty but that was all completely economic phenomena, so one could make estimations. Here the economic impact is clearly tied to the pandemic as well and the health side, so its far harder to estimate. There is a lot of uncertainty, unknowns that we are dealing with. With that caveat, I would say that if you look at the previous pandemic of this order, which was the Spanish flu of 1918, it was a far more devastating pandemic because the percentage of infected people was 33%. As of now, in Covid-19, the number is still less than 1%. The mortality rate was 10% in the Spanish flu, its about 3.4% globally for Covid, so one-third of the mortality rate. Despite there was a V-shaped effect in the output, so a decline followed by an increase. So, the overall growth rate for the medium to long run actually stayed.
I would highlight that the research in behavioural economics points out that all of us tend to be susceptible to salience bias, which is that we tend to overweight recent evidence and especially evidence that seems to be more alarming, a lot more than evidence that may not be that salient. You have to keep that in mind. I don’t think anybody, for certain, can say that it’s going to be a certain percentage, we have to continually re-calibrate. But I would say that overall if we go by the Spanish flu episode, and by the way, the reason I am using it is because if you use the RO parameter, which is the number that is used to measure how many people are likely to be infected by one infected person, that parameter is about 2.4 for the Covid pandemic. For the Spanish flu, it was about 2.2-2.3. For the general flu that comes every year, it is about 1.3 and on the other side of the spectrum, small pox or Ebola is about 3.5. So, 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. I would say that there would certainly be, 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, 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.
Cost of lockdown is going to be much higher than avoiding the consequences of Covid-19 and, increasingly, countries are reaching that conclusion. Do you think we would also have to make that choice sooner or later that, at some stage, we cannot have a complete lockdown and things will need to be a lot more towards normal and we will need to live with the disease?
There are two points here. Firstly, you have seen that starting yesterday (Monday) there have already been relaxations. So, I think, part of the answer to your question is already there in the actions that have been taken since yesterday. A deeper point I want to make is that this particular thesis is based on the trade-off between flattening the pandemic and, as a result, exacerbating the economic effects. That trade-off certainly exists in the short run undeniably, but what we also have to keep in mind are the medium to long run effects. And here, I would rather go by carefully done research, which shows, for the United States 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, were the ones that recovered far more. 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. This is also a perspective we need to focus on. Not just on the here and now but on the long run, and the evidence is very clear. We must keep in mind along those lines, firstly, we were very quick to impose those measures which we stared doing, thermal temperature scanning at the airports as soon as the first few cases in Wuhan came to our notice. We banned flights from infected countries and then we went in to a lockdown. I think it’s also reflected in the numbers, compared to other countries, its far lower and especially the mortality rate is lower.
So far, we have taken the necessary actions, which are consistent with what one observes in the medium to long run, which is that measures that reduce the effect of the pandemic are also those that enable economic recovery, so I think that is something which we should keep in mind.
In terms of the lockdown itself, we are gradually removing these and the lockdown has given us that time to bring the supply of infrastructure closer to what the demand would be and now we are in a process of gradually lifting those restrictions, thereby enabling more and more economic activity. But, I think, we have to do gradual lifting, its like crossing a river by continually feeling the stones with one leg, sensing it and then taking the next step That is how we have to actually proceed.
What are the kind of support measures the economy needs in terms of percentage of GDP? Industry said its needs as much as 10% and the government should monetise. Is India in a position to afford a currency printed stimulus at this juncture?
The statistics that are floating around in the social media, saying UK has done 15% of GDP, US has done 10% of GDP, I think those number need to be more carefully examined. If you take the UK package, it included 350 billion pounds of loans, which were guaranteed by the government. I am sure our readers recognise that the actual cost of that loan guarantee is certainly not going to be 350 billion pounds, its going to be a fraction, its going to be, at most, 35 billion pounds. So now, if you add that 35 billion instead of 350 billion, the actual package is 3.7%. Similarly, for the United States, the package is about 6.7%. Number one, the claims of 10% of GDP and others are not based on correct statistics. Number two, I think what industry and others needed to remember as well is that there are important differences we need to take into account. The tax-to-GDP ratio for India is far lower than that for economies like the UK or US where about 40% of the population pay taxes. In India, less than 10% pay taxes and as we all understand, money does not grow on trees. Thirdly, if you take a country like the United States, their currency is the reserve currency in which all reserves are held by the reserve banks and that gives them a space few other countries can command. The last aspect is also related to the sovereign rating. 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. So, we have to be very careful in ensuring that we are comparing apples and oranges, and the expectations that are created, are created rightly. This is a time when we have to get the actual stimulus package right, we cannot get carried away by incorrect numbers. These are important considerations that we must keep in mind. Let me emphasise again very strongly that the goverment is really committed to doing its very best but, at the same time, recognising that there are costs. One of the first things that anybody learns in economics is that there is no free lunch. If you are going to monetise that will have some impact on the macro fundamentals. If you go to the numbers like the ones you are talking about, those will have their cost. We cannot pretend to do policy as if there are no costs. Industry has to be realistic and look at the numbers carefully when they make these kind of claims.
Then, should we not be guaranteeing more of corporate loans, which don’t have such an upfront cost and should we borrow overseas where the funds are much cheaper right now?
On your second question, that is something that requires a larger debate. There were a lot of opinions that were written on both sides after the July 2019 budget and, I think, readers will recall that there were two sides, some people who felt it was a good idea and others who did not. And so, this is a question that demands a far more intensive debate, I will leave it at that.
In terms of what should be there in the stimulus measures, yes there should be certainly some stimulus and combined with that liquidity as well. In times like these, firms need working capital to be able to run their business. The average firm turns over its inventory about 4-5 times a year. So, if they get working capital increase of about 20-25%, that can enable them to actually tide over their difficulties for at least a quarter. This is also something that is important. 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.
One idea is on Covid bonds that government should raise special funds that can be spent. What is your view on this?
I think there are many ideas that we have received inputs on. The Covid bond is one among them. Today, there is also an idea of pledging some of the shares, like doing a repurchase, just like promoters basically do. And the government is also a promoter. So, there are ideas and each of these ideas have their pros and cons, and we are evaluating them.
How soon is the stimulus coming?
Soon.
How is the government placed on policies to attract companies moving out of China?
In some ways, what we wrote in the Economic Survey on exports, the assemble in India for the world, now looks prescient because we laid out a very clear strategy that is driven by careful research focusing on network products and sectors where global value chains are very intensive. This is a sector which is labour intensive and, therefore, India can offer the same competitive advantages that China has. India offers a deep market and at the same time a large labour force as well. So, all the recommendations we have talked about, they are very pertinent now. The steps we have recommended there, we just need to take those and implement it and focus on utilising this opportunity.
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