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The big change in the oil markets has been the emergence of the United States as a big producer and that certainly in the last few years has upset the tightness of the oil market which has been to our benefit. We have benefited enormously from the decline in oil prices and that has helped our growth. Going forward, given the global economic scenario, it is going to be one of a slow return to normalcy. We are going to see relatively depressed oil prices for some time unless this is a question to keep in mind that some of this disruption causes social turmoil in some of the countries that have low oil prices because a lot of them have survived by buying off their population. If we create social turmoil in some of the oil producers and take them off the grid, that could create problems down the line from the supply side. But for the foreseeable future, the kind of supply cuts that OPEC is willing to make, non-OPEC is willing to make is too small to ensure that the oil price goes back to something that producers and consumers feel comfortable with which is about 50-60 dollars a barrel. It will take some time to get there which is a windfall for us.
According to the IMF, the world economy faces the worst depression perhaps since the Great Depression with output shrinking 3%, though India and China are expected to show positive growth. How seriously should we take these estimates given that we are nowhere near seeing the end of the pandemic and dare I say it could the recession tip into a depression which is a sustained long term decline in economic activities across a number of economies? It is not entirely out of the realm of possibility or is that too dire a scenario?
I am in the camp which has grown progressively more and more pessimistic about the outlook, both for the world as well as specific countries. As we learn more about coronavirus, first we realise it is much more widespread than we think and second it has much more adverse consequences. China is struggling to get back to normalcy. It has brought production back quite a bit but it is struggling to get the high contract services back up — the restaurants, the hospitality they are making efforts, they are dispensing, they have this app which allows them to identify contacts etc but even they are struggling to get to normalcy. And of course, the production side their problem is that the demand in the rest of the world is very weak and so nobody wants to buy stuff, apart from masks and ventilators in a big way. So, the demand is depressed for them. And some industries may come back but it will take time.
Of course, the process of the rest of the world coming back on line is going to be a slow and steady one. The damage in terms of firms that are killed off during this process is going to be there, unemployement is going to go high, come down quite rapidly but stay at much higher rates. It will take a fair amount of time to get back to normal. Now of course, at the end of this, we have enormous levels of debt that has built up in the global economy whether it is government debt or corporate debt or even household debt. We also will have a significant amount of distrust that we have to overcome between countries and kinds of policies that were emerging before the coronavirus crisis.
I am more pessimistic, I think the good news about humans is when things are really down, they find the ability to come back together and I hope that is true of India as well as of the world. But it is a huge challenge and that I was very clear in my piece I wrote in the Times of India that this is the crisis of our times for India.
How do you see the geopolitical dynamics between US and China play out in the post COVID world? Can India leverage the growing distrust between these two countries to our advantage?
It is rarely to anyone’s advantage to enter a quarrel, you tend to actually flack from both sides. India has correctly been staying out of the quarrel between the two countries. It is a quarrel about each country’s image; the US thinks it is still the most powerful economy and military power in the world and does not find the idea that there is another country coming to challenge it acceptable. And both sides Democrats and Republicans in the Unites States do not necessarily believe that they should cede more space to China. Whether Democrat or Republican would think that if China overtakes it on any of these dimensions while it is in power, that would be a failure. They are not willing to accept that maybe they need to share the space now.
And from China’s side, it does not understand that people fear an authoritarian system coming in and are not as happy. They prefer a democratic system. China has to establish its credentials over time and it will but it has to do it in a non-tricky way. The way that it has developed military sort of antagonism, territorial antagonism with all its neighbours is something that a lot of countries around the world look at and get worried about.Each country has to do some lifting, the US to show that it can be reliable once again and China to show that it too can be depended upon and it too will not turn on other countries.
This is going to play out, the issue is can it play out amicably without finding pawns to fight their wars as happened during the Cold War or will it sort of descend into hotter wars across the globe? We have to see how that happens; I do hope that they find a modus vivendi and also we develop new rules of the game. I think the US presidential election is probably the most important event over the next decade because it will determine the identity of the person in the White House as well as the way the US behaves not so much that it will change the US’s views overnight but it will change the tenor of the discussion.
After the 2008 crisis, we saw a great deal of global cooperation in trying to revive the global economy but this time we are really not seeing that kind of an interest from the global community at large. Even the G-20, they have come out with a statement but that is largely just words; is it a reflection of the kind of presidency we have in the US?
Almost surely. Well to some extent, I would not put all the blame on the US. It is a general deterioration in global cooperation and global leadership and that has been some time in building. If you recall 2009, it was Gordon Brown who sort of banged heads together in the G-20 to get a massive response across countries. Today, there is really nobody who can fill that position. Boris Johnson just was ill, the head of the G-20 is Saudi Arabia which has its own problems and many countries are looking inwards and to some extent it is understandable they are trying to catch up with the virus. Many of them are behind the curve and trying to catch up. But you would hope that people would look out for the rest of the world because in times of problems, when the emerging markets and the developing countries get this virus it is really horrendous. In a sense, if it expands at the pace it expanded in Italy and the United States, we have a huge humanitarian disaster that is going to face us as it expands through Africa. We are way behind the curve in preparation but we are way behind the curve in response also.
With a federal structure like ours, the bulk of the spending has to be done by states and while there has been an increase in the states’ ways and means advances, this is unlikely to suffice. What work can the union government do? Should it increase the fiscal deficit target? Maybe borrow more and lend to states, more importantly should it allow states greater flexibility to do whatever they can because the ground reality is different in each state? You wrote in your blog post if the government insists on driving everything from the prime minister’s office, it will do too little, too late, is that a fair assessment?
Well I would repeat what I have been saying for some time which is we need to decentralise and use the talents that exist in India. Draw on the private sector to help you in this process, decentralise to the states, we have a lot of able chief ministers who can do more. For everything to be controlled by the centre, determining more minor details is just impossible at this time. You need all the help, you need everybody to be enlisted in this process domestically and that is something that goes without saying. I do hope that we can roll out measures the ones that we have talked about because the longer the economy stays without this kind of support, the weaker it gets; the more that has to be done to get it back in the same place.
One of our strengths really today is our huge forex reserves of close to $470 billion; how can we best leverage this?
It gives people comfort. One reason our currency has not plummeted the way Brazil’s has or Mexico’s has is presumably because people look at our large foreign exchange reserves and our low current account deficit. In fact, possibly, a surplus this year and say on the external front India is okay. That is great and again it goes back to my point, let us not spoil the things that are good. Let us not now say okay we are going to take these foreign exchange reserves and sell them in the global markets so that we can get money back to do something else. Keep it as a reserve, focus on the things that you can do again. I think follow Dr Rangarajan’s principle — spend where you need to spend. Spend what it takes because we may not have all that it takes to bail everybody out like the western countries but we certainly can spend where it is necessary, where it is warranted to keep the economy together and have the structures in place that protect us. They are the things that will allow us to do this while we do the actions that are necessary and we sort of latch on to some of these structures and say oh, why do not we break inflation targeting, why do not we sort of consume our reserves? We are not there yet, let us focus on the other stuff that needs to be done which is probably more important at this point.
What kind of recovery can we expect? will it be V-shaped or will it be a much slower, drawn out recovery?
Anybody who hopes for a V-shaped recovery is probably in a very small minority right now because we recognise, we do not have a vaccine, we do not have even enough testing, we do not know which are the areas that are relatively virus free and there we have to think about more innovative ways of testing. Mass testing for example has sometimes been proposed but we need to essentially ramp up this process. And we need to do a staggered opening that will take time. We will find that there are bottlenecks we did not anticipate. Think about a supply chain running through India if one state opens but the other state does not open. Or the supply chain is in an area which will be opened, geographic or production area which will be opened much later; supply chains cannot function. You need to think through all this. It requires an enormous amount of administrative effort but it means that things are going to open up more slowly. It is U-shaped, is it going to be W-shaped which means another dip as we see the virus pickup again? The reality is nobody knows. We need to do the obvious at this point and keep doing it, keep making sure that we can do everything that is within our powers and hope that, in a sense, we have done too much and eventually we come out on the other side fine. I would say it is going to be bad, it is going to be really bad, we need to worry about whether this moves from just the real sector to the financial sector. We need to do a lot to try and restart the economy as soon as reasonably safe. We cannot be perfectly safe but as soon as reasonably safe and we need to focus on removing the bottlenecks that will surely show up as we open up the economy but it is going to be a process of muddling through, of dealing with challenge after challenge after challenge which comes up in places we do not see. There will be lots of black swans but hopefully we will come through all this.
Even if we go through all this pain, what are the key lessons that India perhaps need to learn from this entire COVID experience, public health certainly but what else?
Well, I mean, public health is the obvious one where we need to ramp up but we also need to think about why we entered this crisis with limited resources, with a more fragile system which then implies that we cannot spend the post COVID period with the kind of low growth we have had in the past, with the kind of financial fragility we have had, with the kind of fiscal tensions we have had. We need to think about a new covenant for India that how do we generate the kind of growth we had in the first few years of this century, how do we go back to strong sustainable growth and that may require significant reforms that India in the old way simply does not budget. And I think thinking about what those reforms will be and how we build the political consensus to make that happen is really the central question because otherwise we will crawl along in a very ineffective way, something which we simply cannot afford given our young population.
When you took over as governor during the days of the taper tantrum and life for an RBI governor, increasingly it seems is a bit like being on a rollercoaster. Are you missing all the action or are you relieved that you do not have to wrestle and lose sleep over questions for which really nobody has any answer, at least not in this moment?
I do not envy the people who are dealing with this, it is extremely tense, it is nerve wrecking, you have no idea whether anything you implement will work and there are more and more problems that hit you every day. I remember after the taper tantrum, a friend saw me in an airport and he said what happened to you, you look as if you have aged 10 years? I mean it does take a toll and I do not envy anybody who is dealing with this, they deserve all our thanks. It is an extremely important job that they are doing, they get a lot of criticism but really it is very important that they do it and they get all the help they can.
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