Union and state govts must use the current hiatus to prepare a comprehensive calendar of reforms for H2FY21 and H1FY22
Once the lockdown is over, fiscal measures must be targeted at industries and sectors that are most severely affected
The Covid-19 pandemic has led to an unprecedented public health emergency with countries, including India, under prolonged lockdowns, bringing business activity to an abrupt stop, something that will manifest itself in loss of economic growth and job losses. The government has announced an economic relief package to alleviate the pain of the most vulnerable sections of the society, but the rest of the economy, particularly India Inc, is awaiting a fiscal stimulus. To understand the challenges facing the country, Mint spoke to Arvind Virmani who served as the chief economic adviser in the finance ministry from 2007 to 2009 and was India’s executive director at the International Monetary Fund from 2009 to 2013. In an email interview, Virmani talks about how the coronavirus pandemic could be reshaping the future of the Indian economy. Edited excerpts:
How do you assess the economic fallout of the Covid-19 outbreak on the Indian economy?
There is an unprecedented shock to every economy in the world, including the Indian economy. There are three aspects. First the lockdown, which is unprecedented even when compared to that in the key economies involved in World War II. It practically immobilizes the workforce and thus reduces production to zero in 80-90% of economy. The lockdown in China, the first globally, was also an unprecedented disruption of production-inputs, the supply of intermediate goods, given China’s role in so many critical global supply chains and its monopolization of so many products. The contagion fear before the lockdown, which will remain after the lockdown, constitutes a huge demand shock for contact services, which involve dense collections of people such as air, rail, and bus transport, tourism, restaurants, and hotels, entertainment and malls.
How do you see the economic relief package announced by the government and the financial package by the Reserve Bank of India? Will they be enough under the circumstances?
Both packages are rightly designed to deal with the impact of the lockdown, which covers 80-90% of the economy, and the succeeding 4-6 weeks. The best part is the assurance that the government now has its ear to the ground and using information to design and modify packages. The challenge is, therefore, shifting to effective implementation. As states are responsible for both health and welfare, effectiveness of health and social welfare measures depends on the states, who are actually present at ground level.
Do you think India should announce a large stimulus package, including a bailout for Indian companies that are affected badly?
Fiscal stimulus is completely the wrong thing to do in a lockdown. Once the lockdown is over, fiscal measures must be targeted at industries and sectors that are most severely affected by the epidemic (contact services mentioned above). Next in line must be industries and sectors that were already badly hit by the growth recession and whose situation has worsened because of the pandemic.
Do we have to revisit and reset the self-imposed red lines in fiscal policy such as fiscal deficit and debt-to-gross domestic product (GDP) ratio limits to revive the Indian economy?
The mantra of “fiscal space" is completely irrelevant during the crisis. The FRBM (Fiscal Responsibility and Budget Management Act) should be suspended or reformed to take explicit account of such crises. Ignoring fiscal deficits during the crisis to institute temporary expenditure does not mean irresponsible commitment to medium-term schemes, which will sink the deficit in the medium-to-long term.
What of 2021 and beyond? Will the Indian economy be stuck in the low-level equilibrium of 5-5.5% for the next few years?
That would be a disaster of immeasurable proportions for the Indian economy and the welfare of its people. Union and state governments (example, GST Council) must use the current hiatus in economic activity to prepare a comprehensive calendar of reforms to be implemented during H2 (October-March) of FY21 and H1 (April-September) of FY22. Besides comprehensive reform of goods and services tax (GST) and the Direct Tax Code, it must include reform of external sector and exim (export import) policy, agriculture, skilling including apprenticeship, regulatory reforms for promoting education in India, land and labour flexibility for coastal/special export zones and import substitution zones, electricity distribution and pricing for industry, and manufacturing subsidies for industries monopolized by dictatorships who don’t follow global rule of law. A once-in-a-century crisis like this also provides an unprecedented opportunity to transform the Indian economy. We would be compounding the tragedy if we waste this opportunity.
Forecasters and rating agencies such as Moody’s have revised downward their growth estimate for India to 2.5% for 2020.
We are in the process of estimating the likely GDP growth in 2020-21. Right now, the available forecasts seem to be heavily dependent on assumptions about when the pandemic will peak in India and the US.
Would a stimulus be more effective through direct and indirect tax cuts or direct cash transfers?
Once the economy comes out of the crisis mode, the primary policy issue will be how to speed its recovery back to its growth potential. In this context, tax reforms (Direct Tax Code, GST) are far more important than expenditure reforms. Tax reduction must be considered a part of these tax reforms, to provide short-term stimulus, while ensuring long-term fiscal sustainability through improved voluntary compliance and higher buoyancy. Direct cash transfers will of course be necessary for those affected by the crisis, but overall increases will be sustainable if and only if combined with a reduction of leakages (inefficiency and corruption) in major subsidies such as fertilizer and food.
Is it the right time to revisit the idea of universal basic income (UBI) and guaranteeing social security to all the vulnerable people?
The UBI concept, though it may be relevant for developed countries, is irrelevant for India. A “targeted" UBI is a contradiction of the term “universal". We in India had developed the concept of direct cash transfers to the bottom 40% of the population in the mid-2000s, pursuant to which we recommended the creation of a universal ID (UID) to help target such transfers. To preserve incentives in our system with evasion and corruption, we need to mesh this into a negative income tax (NIT) system. The time to consider it will, however, be in 2021-22, after the economy is on road to recovery.
Do you think Covid-19 will accelerate the process of deglobalization already visible through intensifying trade wars?
Deglobalization started after the global financial crisis and is clearly visible in the declining world trade-to-GDP ratio, as well as in reduced capital flows, particularly to emerging market economies. These trends will intensify and expand to include greater restrictions on low tech migrant workers.
How do you think economies may change the way they work, say two to three years from now? What policies will guide cooperation and competition among them?
The partial economic decoupling and high tech decoupling set in motion by the tariff war will accelerate. The decoupling will be between free, open democracies that follow the rule of law domestically and accepted rules of country behaviour internationally and those who merely pay lip service to these principles of acceptable behaviour.
Do you apprehend more pressure now on global supply chains to withdraw from China?
Yes, there will be an accelerated diversification of global supply chains from China, particularly in industries that China had monopolized through subsidies, non-tariff barriers, and mercantilist practices.
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