National Economy

TO ACCELERATE THE PROCESS, WHAT IS NEEDED IS AN AGGRESSIVE APPROACH TO VACCINE DELIVERY, A FISCAL STIMULUS, MORE CREDIT AND LARGE-SCALE PRIVATISATION OF PUBLIC SECTOR UNDERTAKINGS

With the exception of a stressed financial sector, India went into the coronavirus crisis with sound economic fundamentals. The lockdown in response to the threat of the virus created unprecedented friction in transactions between buyers and sellers of goods and services as well as of inputs, including labour. The friction afflicting transactions in goods and services constituted a demand-side shock while that in inputs, a supply-side shock. The greater the degree of this friction in an economic sector or geographical region, the greater was the severity of the shock.

Influenced by the large fiscal stimuluses announced by developed countries such as the United States, Japan and Germany, the vast majority of commentators had called for a similar fiscal expansion in India immediately after the announcement of the lockdown on March 24. At the time, I had sided with the minority view that India should refrain from a large fiscal expansion and limit additional expenditure to providing the necessities of life, such as food and shelter, to all. The logic behind this was twofold. One, with buyers and sellers of goods and services unable to transact, fiscal expansion could not translate into demand. And two, even if the expansion could add to demand, with the buyers and sellers of inputs, including labour, unable to transact, a demand stimulus could not induce a supply response. In the event, the government wisely chose a limited fiscal intervention.

The experience of India and other countries since the onset of the crisis vindicates the choice made by the government. During the April-June quarter, when the lockdown in India was extremely strict, the GDP (gross domestic product) declined sharply, by 23.9 per cent over the corresponding months in

the previous year. Similar declines in quarterly GDP were observed in countries in Europe that had been severely impacted by the coronavirus: 22.1 per cent in Spain, 21.7 per cent in the UK and 17.7 per cent in Italy. In the United States, which imposed minimal restrictions on the movement of people and where the crisis was geographically concentrated in a handful of states during the April-June quarter, the decline was less sharp, at 9-10 per cent.

The pattern of decline across sectors within India brought further evidence of the close link between the corona virus induced health crisis and economic performance. Agriculture, which had largely escaped the lockdown restrictions, grew at its trend rate of 3.4 per cent in the April-June quarter. But sectors in which transactions broke down were hit much harder: construction fell by 50.3 per cent; trade, hotels, transport, communication and services related to broadcasting by 47 per cent; manufacturing by 39.3 per cent and mining and quarrying by 23.3 per cent.

Equally, the economy returned to the path of recovery as the ability of buyers and sellers to transact improved with the gradual restoration of people’s mobility outside their homes. The reduction in GDP in the July-September quarter fell to 7.5 per cent. Once again, agriculture grew 3.4 per cent. Electricity and other utility services bounced back to a positive growth of 4.4 per cent from a decline of 7 per cent in the preceding quarter. Manufacturing too moved into positive territory, growing at a modest 0.6 per cent. Though construction remained in the negative zone, the fall in it was limited to 8.6 per cent. Predictably, trade, hotels, transport, communication and services related to broadcasting fell the most, at 15.6 per cent.

In the first half of 2020-21, GDP in India has seen a contraction of 15.7 per cent. This means that even if economic activity in the second half returns to its level in the corresponding period in the preceding year, the contraction for the entire year will be in the neighbourhood of 7.5 per cent. While all available indicators relating to the months of October and November point to a continued recovery, the economy remains below its level in corresponding months in 201920. Therefore, unless we see a surprisingly robust performance of the economy in the January-March quarter, the fall in GDP in 2020-21 is likely to be in the neighbourhood of 8 per cent.

Can the government intervene to accelerate the recovery? The answer is a resounding yes. I would recommend four specific interventions.

First and foremost, the government should take a more aggressive approach to the administration of vaccines. Given that we lose several billion dollars each week that the recovery is delayed, an extra investment of $8-10 billion in vaccines will pay for itself through a speedier recovery. Vaccines that are shown to be safe and 50 per cent or more effective should be speedily approved for public use. As long as the safety of a vaccine is assured, speed is of the essence.

THE LOCKDOWN CAUSED UNPRECEDENTED FRICTION BETWEEN BUYERS AND SELLERS OF GOODS & SERVICES

Second, with the mobility of people restored and the light at the end of coronavirus tunnel in sight, the consumer mood has been turning progressively positive. This fact makes a small dose of fiscal expansion via one-time cash transfer to rural and urban poor amounting to 1 to 2 per cent of GDP a good bet. On the upside, the measure would speed up the return of the economy to its precoronavirus path. On the downside, the worst that could happen is that it would add to the debt while bringing some relief to the poor during the current difficult times.

Third, the government must significantly boost the capital of PSBs (public sector banks). By all accounts, as the economy comes out of the coronavirus crisis, bankruptcies will accelerate and banks will add to an already high level of nonperforming assets. That, in turn, would undermine the expansion of credit. This is a problem India had encountered soon after Prime Minister Narendra Modi came to power in 2014. But the government took a long time to take necessary countermeasures, including the recapitalisation of PSBs. As a result, growth in credit by PSBs entirely collapsed during 2016-17. A repeat of this needs to be avoided at all costs. The government can escape any increase in the fiscal deficit by selling bonds in return for equity to PSBs.

The fourth intervention relates to large-scale privatisation of PSUs (public sector undertakings). It is now generally agreed that even if the government gives no additional fiscal stimulus this year, due to a sharp decline in revenues, the combined fiscal deficit of the Centre and states in 2020-21 would end up at 12-13 per cent of GDP. This would take the debt-to-GDP ratio from 72 per cent at the end of 2019-20 to 84-85 per cent at the end of 2020-21. Prior to the coronavirus crisis, the N.K. Singh committee on the review of the Fiscal Responsibility and Budget Management Act had recommended bringing this ratio down to 60 per cent. Unfortunately, the crisis has pushed the debt burden in the opposite direction. Therefore, a critical task in the post-coronavirus era will be to bring down the debt-to-GDP ratio. The privatisation of several PSUs, already approved by the cabinet, can be a powerful instrument to achieve this.

An even more compelling reason for the privatisation of a vast number of PSUs is rooted in economic efficiency. A good economic principle is that unless an activity serves a public purpose, the government should leave it to the private sector. When the government undertakes commercial activities that have no public purpose and fails to generate competitive returns, it amounts to a plunder of taxpayer money.

The evidence is unequivocal that the returns generated by PSUs are not even half of their private sector counterparts. In part, this is because government employees, appointed for short terms as CEOs, are never assessed on the returns they generate. Their laxity is reinforced by the fact that when their balance sheets are in the red, the government comes to the rescue of PSUs. The government further undermines efficiency by turning one public sector activity (for example, railways) into a captive buyer of another (for example, steel). Finally, when faced with persistent losses by PSUs in a sector such as steel, the government ends up resorting to protective tariffs and antidumping duties that undermine the efficiency of the private sector as well.

Given the utter failure of the Department of Investment and Public Asset Management in implementing the mandate for privatisation of more than three dozen PSUs by the cabinet since 2016, it is time for the government to return to a model that Prime Minister A.B. Vajpayee had successfully deployed: create a separate ministry of disinvestment headed by a minister and a secretary who genuinely believe in implementing the cabinet’s mandate.

During its second term, the Modi government has greatly accelerated the implementation of economic reforms. Big-ticket reforms have included a large cut in the corporate profit tax, liberalisation and rationalisation of labour laws, greater freedom for farmers in marketing their produce, the introduction of commercial coal mining and the replacement of the 1950s regulatory regime by a more modern one in medical education. If the government would additionally undertake some key financial sector reforms described in my recent book, India Unlimited, appropriately incentivise states to reform land laws to make land available to entrepreneurs at affordable prices and, above all, roll back the protection introduced in the past three years, there is little to stop India from transitioning into and travelling along a double-digit growth trajectory in the post-coronavirus decades. ■

INDIA LOSES BILLIONS OF DOLLARS EACH WEEK THE RECOVERY IS DELAYED. A $8-10 BILLION INVESTMENT IN VACCINES WOULD PAY FOR ITSELF