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In an interview to TOI, the professor-turned policymaker, talks about the stimulus package, the options being considered to raise funds and how the Jan Dhan-Aadhar-Mobile trinity had helped in providing immediate relief to the vulnerable sections hit hard by the pandemic.
How long do you think Covid pandemic will last and what is the estimate of damage to the economy? What is your estimate for GDP growth in 2020-21?
If we go by the Spanish flu pandemic, which is a good proxy for the Covid pandemic, it is possible that the effect may last at least for a few more months, if not more. Whenever you talk about a pandemic, the parameter that becomes crucial is R0 (R-naught), which captures the number of people that an infected person in turn is likely to infect.
For the Spanish flu, it was about 2.2-2.3 (estimated by epidemiological researcher Larry Brilliant), and about 2.4 for the Covid-19. In contrast, R0 for common influenza is about 1.2-1.3, while it is more than 3.5 for Ebola or smallpox.
If you look at the economic effect of the Spanish flu, there was a decline, followed by a V-shaped recovery. This is despite the fact that the Spanish flu was a far more devastating pandemic, at least till now, than Covid.
Right now, less than 1% of the population is infected with Covid. In contrast, one-third of the global population was infected by the Spanish Flu. The mortality rate for Covid on average globally is 3.4% and for Spanish flu it was 10%.
For many people, a V-shaped recovery may seem optimistic and that may partly be because behavioural economics has highlighted that we all tend to have what is called the saliency bias. We tend to focus more on recent evidence in arriving at our judgements. That said, we all have to keep in mind that there is significant uncertainty about the future.
You have pegged the GDP growth estimate for this year at 1-2%. Former CEA Arvind Subramanian had said the IMF projection of 1.9% is highly optimistic. What is your reaction?
Careful research for the Spanish Flu shows that geographical regions that implemented lockdowns early and for longer periods benefited both in terms of lower mortality rate and sharper economic revival following the pandemic. India has been very strict in enforcing restrictions, starting with screening passengers at airports when the first few cases showed up in January. The overall magnitude of the numbers itself is lower than other countries. As a percentage of the population, it is extremely low. Therefore, one can expect the economic recovery to be better for India.
The reason that the evidence from 1918 for the US can still be used in India now is if you look at the per capita GDP for the US at that time, it was about $8,000 and for India it was about $7,000. If you look at the urban population, it was about 40% of the US then and for India, different estimates put it anywhere between 35% and 45%. The US then had about 5% more in agriculture; we have about 5% more in services.
Even if you compare with the US now, we have benefited enormously from the infrastructure of JAM (Jan Dhan Aadhar and Mobile) trinity. They are sending out these cheques for transfers to the vulnerable sections of the population, which take time for the benefit to reach.
In contrast, for us it’s just one entry and the amounts goes directly into the bank accounts. Therefore, we have been able to take it to the vulnerable sections immediately and that helps. When you look at all these, there is some evidence based reason to think that India may not be as badly affected as some of the other economies.
What is your sense of the size of the stimulus that the government should announce? There are various figures which are floating around.
First, people are using some numbers like 15% of GDP for the UK (size of stimulus), 10% for the US. It is important to get these numbers right. If you take the UK package, for instance, that included 350 billion pounds of loans, which were guaranteed. The actual cost of that would be fraction, at the most, about 35 billion pounds. So, the actual package is about 3.7% of GDP. We cannot be adding apples and oranges.
Two, when you compare with the US or UK, look at their tax-GDP ratios, which are much higher. In the US, about 40% of the population pays taxes. In India, less than 10% of the population pays taxes. That fact has to be kept in mind. For the US, the dollar is a reserve currency; therefore, it gives them space that no other other country has.
The last point is that if you look at the magnitude of stimulus among countries that have a sovereign rating similar to India, that number is far lower. One has to take all these differences among countries into account to do a proper comparison.
In terms of revenues we know that it is going to be a very difficult year. What are the options to raise revenues?
There are ideas that people have talked about. Market borrowings is certainly one of them. And the measures that were announced in the budget, to be able to be part of the sovereign bond index, that can actually bring a significant amount of supply.
About $4 trillion of money tracks these sovereign bond indices and India is expected to have a weight of about anywhere between 1.5% to 3% in these indices. At 1.5%, that translates into $60 billion and, from a completely new clientele. That is about the amount of gross borrowing that we had last year. That translates into a 100% increase in supply from a completely new clientele. This can bring down the cost of financing and provide avenues for raising finances. Remember these borrowings are in rupee terms.
What is your view on raising a surcharge on tax payers to raise revenue? States are increasing levies on petrol, diesel and alcohol. What is the trade-off that one can do in terms of taxing the super-rich and taxing petrol and diesel?
Let’s keep in mind that the actual price (for fuel) that the consumer pays will not increase. Oil prices have declined significantly and so the increase in the duty will not really hurt the consumer. Some of the costs that are involved in spending is recouped and because oil prices have declined significantly, it is to enable some of the spending that is required. It shouldn’t have an inflation impact either.
Would you support an increase in the fiscal deficit limit for states and also how you see the fiscal consolidation roadmap of the Centre?
There is a case for this, to provide some scope for them to accommodate their expenditures. This is an unusual year with an unusual pandemic that we are living through. There will be an increase in the fiscal deficit this year. However, it is crucial to note that India’s debt will remain sustainable despite the increase in the fiscal deficit this year.
Our analysis shows that even in the worst-case scenario, debt consolidation will not be a problem for India because even at 4% real growth rate, general government debt will decline going forward in most scenarios.
There is talk of RBI monetising the deficit. What is your view?
For any policy, there are both costs and benefits, which need to be taken into account when considering the policy option. It is the same with this option as well.
There have been suggestions that the government should issue Covid bonds and using foreign exchange reserves. What is your opinion?
All these suggestions are being looked at and the government will take a considered view.
Former finance minister P Chidambaram has suggested a pay cheque protection programme for the low salaried segment? What is your view?
The government has already taken many measures for the vulnerable sections. The JAM trinity has helped in reaching the vulnerable sections very quickly, unlike in other countries, which are struggling to reach the benefits to the vulnerable sections while maintaining social distancing. The government is doing the needful for the vulnerable sections.
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