THE ECONOMICS OF FARM LAWS IS CLEAR, SAYS CEA
You are batting for big government spending. But how will this fiscal expansion be funded?
I said that the fiscal rules should be framed in a way that they enable counter-cyclical policy. Funding would come from a combination of disinvestment revenues and borrowing and of course tax and nontax revenues as well.
About keeping balance between domestic and external borrowings, those are the aspects that the Survey has not got into. The basic intent is to talk about the importance of counter-cyclical fiscal policy as intrinsically every economy has ups and downs, and it reduces the amplitude of these variations. When the economy is doing well, the government steps back and consolidates its fiscal finances. And, if the economy is not doing that well, it fills the void that has been created by the private sector, whether it’s from the consumption or investment. If intrinsically, the cycle is sharper than counter-cyclicality, it makes that cycle much lower and reduces macro economic uncertainties. Then, private agents realise that even if there is a shock, the
government may move in and act counter cyclically to remove uncertainties and that increases the investment.
Are you, in the Survey, suggesting printing more money to finance government debt?
After the global financial crisis, the literature in finance and economics are now coming together and they work more in synergy. Before the global financial crisis, macro economics, for instance, did not have the financial sectors at all in its work and that’s where the American finance association presidential address by Patrick Bolton (professor at Columbia University) fits in. So, his work has been highlighted in this context, where he basically talks about sovereign debt and taking learnings from corporate financing to talk about sovereign debt.
The idea is that if you actually borrow and make an investment and that investment generates a greater return than the interest you have to pay, then that project is worthwhile.
Are you advocating free vaccines for all? Vaccination is very important in enabling demand to come back in contact-sensitive service sectors. The basic idea we are recommending is that vaccination is very important and necessary outlay needs to be made for that to happen.
The Survey lauds farm laws and says they will empower farmers, but farmers do not agree. Why are the beneficiaries not buying the government’s arguments?
The economics of the farm laws are very clear, especially the one related to small and marginal farmers. These farmers, in the current situation, do not have other options. If small farmers have to go and sell to a group in an agricultural produce market committee (APMC), knowing that they do not have another option, then obviously, the group will extract the maximum surplus in that relationship. But if I tell you that look if you won’t give me the right price, I can go and sell it to the other group, then you will actually respond and give me the right price. That is the fundamental that John Nash had shown in his Nobel prize winning work about market-based trades. However, there are other dynamics which are going on like some misinformation in the case of agriculture. Economics is very clear that it will benefit the small farmers.
GDP growth rates predicted by the last three Surveys were quite lower than the actual numbers. What makes you confident that the growth would be at a record 11 per cent as projected by the Survey this time?
This year, all bets were off because of the pandemic. We are facing once-in-a-century crisis. The Survey says the economy is in a V-shaped recovery, but core sector data, released the same day the Survey was tabled in Parliament, showed that it declined 1.3 per cent in December. It was the third straight month of contraction. Given the restrictions that were imposed and since we are still amid the pandemic, the key point to remember is that from 23.9 per cent decline in Q1, which is basically the downward part of the “V”, we improved to 7.5 per cent in Q2. Even after Q1, I mentioned that there is a V-shaped recovery. This basically means that from Q1 contraction, we were gathering some momentum and the prediction for Q3 may be marginally positive or marginally negative and then positive growth in Q4. The uncertainty is not yet over. This is true of not only India but across the world where households face uncertainty. Even some of the service sectors, which are crucial part of the economy, are still affected by contact sensitivity and social distancing. However, as the vaccination programmes proceed, these contact-sensitive sectors will actually get their vibrancy back.
“ACTION OF RATING AGENCIES IS LIKE BOLLYWOOD, WHERE NEW FACES ARE OFTEN THOUGHT TO NOT HAVE AS MUCH TALENT AS THE INCUMBENTS”
You said India is an outlier in terms of rating agencies’ grade to the economy. All three rating agencies have given India the lowest investment grade. What should be the ideal rating for India, according to you? We have said that, on various parameters, India’s economic fundamentals are not being reflected in the credit ratings. For instance, the ability to repay, as we know, is nothing but a reflection of the probability of default, which itself is a function of the willingness to repay and ability to repay. In terms of willingness, India’s ability to repay is gold standard. Even in 1991, faced with the worst ever crisis of payment imbalance in history, we actually shipped gold to England to honour our obligations. On the ability to repay, if you take out the total obligations, including the private sector’s foreign exchange obligations, our reserves are greater than that. It means that even if private sector firms have foreign exchange obligations and approach the Reserve Bank, seeking foreign exchange to repay, each one of them together can be taken care of. This means the probability of default is actually zero, which conveys the fundamentals. We have been internally deliberating with the rating agencies, regulators and other stakeholders about this.
You also said fiscal policy should not be constrained by ratings. But investors do make their decisions on the basis of ratings. How should this be addressed?
There is a large literature the Survey mentioned about, which highlights some of these biases that are there. If you look at an advanced economy, when it became the fifth largest economy, the ratings had been triple A, but when China became the fifth largest economy, the ratings were several notches lower. The same thing is true for India as well. It is related to something like Bollywood, where new faces are often thought to not have as much talent as the incumbents.