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K. Subramanian, chief economic adviser.
K. Subramanian, chief economic adviser.

India will get back to high growth again, says CEA

Reforms done on the agriculture side, on labour, on privatization, all these will increase productivity and help in bringing back growth, says K. Subramanian, chief economic adviser

Despite the surge in coronavirus cases and the pandemic’s shock the economy, all is not that gloomy as many sectors are on a recovery path and the reforms undertaken will deliver a long-lasting growth impetus, according to Krishnamurthy Subramanian, chief economic adviser in the finance ministry. Subramanian says in an interview that there is a case for focusing on consumption, but cash hand-outs are not the answer as people tend to save defensively. Edited excerpts:

Our reported coronavirus cases are surging while the pace of economic recovery is slowing down on a sequential basis. Do you see any silver lining?

What we have to recognize is that the spread of the virus depends on network effects, the size of the population and population density. It is important to look at numbers on a per capita basis. On a per capita basis, our numbers are much lower because pandemic spreads through a network and the network effects are unlikely to be larger in a bigger population. Secondly, when you look at the rate of growth, at the start of the lockdown, active cases were doubling every three and a half days. Now it is every 50 days. It is 15 times slower. The rate of growth is 1.4% on active cases. But it is happening on a higher base. You have to keep in mind that a 10% increase on 100 is the same as a 1% increase on 1000. So, the growth rate of active cases has clearly slowed down. But the base on which it is increasing is higher. On absolute basis, the cases are what they are now, but when we look at it on a per capita basis, we are not doing that bad. The other point is that it is also important to look at the number of deaths. Ultimately, what creates a long-term impact is the loss of human lives. When you look at India, our deaths have been five per lakh, in contrast with Europe, some of the Latin American countries and the US, where it is 60 per 100,000. It is 12 times higher. These are important factors to be kept in mind so that we do an apples to apples comparison.

Many analysts are saying that this pandemic may not only impact India’s short-term growth but also potential growth in the medium to long term. Do you agree?

Commentators must remember that for 12 quarters—which is three years in 2000, 2001, 2002 —we had recorded growth rate of 3.8%, 4.8% and 3.8%. That happened due to the ASEAN financial crisis which was an exogenous shock that impacted the Indian economy. After that, when reforms, infrastructure spending and the disinvestment that happened, we got growth back to 8% over the next five years. We have to be a little bit more careful, India has been in periods like this. The fifth largest economy of the world of course will be linked to the global economy and an exogenous shock like covid will have an impact. But a lot of the measures have been taken. It is important to remember when the reforms were being done during 2000-2003 period, check the newspaper articles, very few articles actually commended those reforms at that time. Now, we wistfully look back at those reforms. We have been there earlier, we will do it again. When you think about the potential growth, it is affected by the fundamental aspects relating to overall demand in the economy. There may be an impact for some quarters. When you take into account some of the reforms that have been done on the agriculture side, on labour, on privatization, all those together will increase productivity in the economy and therefore will help bringing back growth. We are a growing economy and we will get back to high growth.

How soon can we expect a V-shaped recovery, and to what extent, given that the economy was slowing down even before the pandemic hit us?

This narrative that the growth decline in June quarter of FY21 has anything to do with the economic situation prior to covid-19 is not supported by data, and is the result of an elementary conceptual misunderstanding. If you look at data, all high-frequency indicators till February were shaping up very well. If covid-19 had not struck in March, given the way the indicators were looking, we would have certainly had a much higher growth rate than the 3.1% (in March quarter of FY20) and in fact would have been higher than the Q3 growth rate (4.1%) as well. When you look at high-frequency indicators, again, there is a recovery that is happening after a sharp decline in April and May. My office tracks almost 60 high-frequency indicators on a weekly basis. We see the recovery is 85-90% across many of these sectors.

We usually have a spike in consumption during the festive season. This year, because of the current circumstances, if we don’t measure up to the same level, will the macro-economic data show a deep contraction around October, November period? And also economists say that this is the best window if we want to give more money in the hands of people. What are your thoughts?

On the second part, we have to be a little bit more careful. I see the point that may be, there is a case for some temporary incentives for consumption, but giving cash, I am not sure, will actually increase consumption. Careful research and data shows -- For instance, if you look at the US, cheques were mailed in the month of March, when one looks at the consumption, it has only impacted consumption of essential items, it had no impact on consumption of durable items which is discretionary. Similarly, in India as well, if you look at the PMJDY balances, this is section of the population which typically consumes almost entire part of its earning, even there savings increased significantly. Economist Joseph Stiglitz identified it very well and wrote a piece a couple of months back that giving cash will not necessarily increase consumption, something I have been saying since March. There is a case for focusing directly on consumption, but risk of giving it in cash is that it may just sit as savings.

Many analysts say our testing rate is lower than that in developed countries. Your comments?

As a counter-factual thought experiment, let us suppose the actual cases are ten times more. If that were the case, then the mortality rate would be ten times lower, given the data on deaths is what it is, right? We have clearly ramped up tests significantly.

Rating agencies are now revising down their GDP growth forecasts for this fiscal and most of them are expecting double-digit contraction. Today, S&P said that in view of rising covid cases, they do not expect a revival in consumer sentiment any time soon. Is that a big worry?

We have to be cognizant of the fact that manufacturing sector which is not affected much by social distancing (requirements), will see recovery. But sectors like travel, tourism and services which are influenced by social distancing, there will be an impact. The uncertainty relating to the pandemic will remain, not just in India, but everywhere, till a vaccine is discovered and people are inoculated or till the time people get the confidence that a vaccine is developed and it is only a matter of time that they will get inoculated. The government’s efforts in procuring vaccines are important initiatives in this regard. Compared to any of the previous crises where consumer sentiment was affected by economic factors, in this case, the sentiment is affected by a health factor.

On the first part of your question, what we have to keep in mind is that this is a severe exogenous shock. The World Economic Outlook showed that the number of countries where GDP per capita is going to decline this year is by far the largest in 150 years. There is still residual uncertainty that is there. We are six months into the pandemic and we are expecting the vaccine by early next year but till the vaccine does not come there will be residual uncertainty which is undeniable.

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