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Pronab Sen, former chief statistician of India. (Mint)
Pronab Sen, former chief statistician of India. (Mint)

Time is of essence in deciding on a second round of stimulus: Pronab Sen

Rural consumption will get hurt in parts of India since remittances have dried up. Seven states in particular are vulnerable to it, says Pronab Sen, former chief statistician of India

India is facing sharp economic contraction and a surge in coronavirus cases, while policymakers at central and state governments are grappling with revenue shortfall in the face of mounting expenses.

The biggest challenge for policymakers is to address fear and uncertainty, explains former chief statistician of India Pronab Sen in an interview. Sen also speaks about how the government could steer the economy out of the current crisis. Edited excerpts:

India looks set to have the second largest number of coronavirus cases overtaking Brazil, while the economy already has suffered a sharp contraction. Do you see any silver lining?

As far as the pandemic is concerned, India overtaking Brazil isn’t any surprise because we have a much larger population, more than five times that of Brazil. So that in itself doesn’t mean much. The real issue is the way the pandemic is playing out now. Until now, rural India was virtually untouched. But now that it is in rural areas, it is hard to predict what kind of effect it will have, unlike in the urban areas. The bigger fear is that in rural areas, because of non-availability of medical facilities, the death toll may go up.

As far as the economy is concerned, we have had one of the most severe lockdowns in the world. And since the economic performance during the April-June quarter is linked essentially to the intensity of the lockdown, it is no surprise that its effect was also one of the most pronounced in the world. The real question is what happens going forward. Now the national lockdown has been lifted and the question is what kind of effect the local lockdowns imposed by states at various times and places will have. In terms of direct economic consequences, that effect may not be that big but what is more important is the uncertainty it creates, which can be destabilizing. I do not see a silver lining as yet.

How big could the pandemic’s impact be on agriculture and rural economy?

In agriculture, not really. But remember, agriculture now accounts for around 42% of rural incomes. It is the remaining 58% that I am more worried about. A lot of farm households also rely on non-farm income. That getting disrupted is a worry. Even worse, if people develop a fear about going to mandis, then agriculture trade may get disrupted. In any case, rural consumption is going to get hurt at least in parts of the country because remittances have dried up. That effect is going to play out and seven states are particularly vulnerable to it. Even if they have had a good harvest, the fact that remittances have pretty much dried up, will mean that rural demand in those areas will be depressed.

Many analysts are revising their forecast for September quarter growth downward. Do you think there is still merit in assumption of a ‘V shaped’ recovery?

I do not think there is. There is something called multiplier. As a country, we have lost already, something like Rs18 trillion-Rs20 trillion worth of production income. That is going to translate into something like 40 trillion-Rs50 trillion damage, which will play out in the next one year and a half. If you take that into account, although you may see resumption in production up to a point, sooner or later the demand side will kick in. At the moment, we are dealing with the supply side problem. Pent up demand is shoring up demand at the moment but pent up demand doesn’t last very long. Maximum two to three months. After that, the fact that people’s incomes would have been seriously eroded, will play out. Second, investment demand is not coming back in a hurry. Data suggests capacity utilization in industry is below 70%. Until that goes up to above 80%, do not expect any real investment to happen.

The festive season is coming up. Is this the right time for a second round of stimulus?

This festive season is going to disappoint us hugely. During the festive season, demand always spikes. Because of the base effect, you might see a massive decline during the festive season, not because there will not be an increase but because the increase will not be that much. I would not pin too much hope on the festive season. But this is the time to put out the fiscal stimulus, particularly, the income transfers. If this is done just before the festive season, people will spend. Income transfers before festive season is a reasonably good way of stimulating the economy.

What should be the most important consideration while deciding on the stimulus?

Time is important. We cannot delay. The longer we delay, the worse the damage will be and worse will be the level of uncertainty. Time is of essence. Action should not only be taken now, but also seen to be taken now. People should be given the assurance that this is not going to be a one off intervention and that it will last at least through next year. That message must go out.

Along with income transfers, will a GST rate cut help?

No. It is completely pointless.

What could be the quantum of stimulus we need?

Everything depends upon the nature of the stimulus. If you are thinking of direct income transfers, then such transfers up to now has been about 1.2 trillion. That can be pushed up to maybe, 3.5 trillion-Rs4 trillion. But the problem with that is that the multipliers on that are usually pretty low and this time around, unless you do it just before the festive season, they will be particularly low because people will tend to save given the level of uncertainty. The other way of doing it is through infrastructure investments, which has a higher multiplier effect. But the problem with infrastructure investments is that it will take time, while income transfers can be done in weeks. You have to think about the intervention in terms of a combination rather than as a single intervention.

From where will money come?

At the moment there is a lot of surplus liquidity in the market. Investments are not going to happen soon, so private demand for loanable funds from banks is not going to happen for a while. About 55% of bank loans are for fixed capital. My sense is that, that is going to get reduced to half. That means there will be further availability of funds. A large chunk of the necessary funds can be sourced from the market. It does involve fiscal deficit going up, however you do it, because the government has to borrow. But that is not the limit. If the need is for an even larger stimulus, then monetization of the deficit should be thought about very seriously.

What is the biggest challenge facing us?

The biggest problem is fear and uncertainty. This will determine a lot of things, including behaviour of investors and consumers. How one addresses it is an important issue. Ignoring the disease or waiting for the vaccine do not help. The solution is to assure people that it is not as bad as it is made out to be and that even if one gets the disease, health facilities have been set up to deal with that. We have set up capacity for a lot of the requirement, now the point is to get these down to small-towns and rural areas so that the local people get confidence that if they get the disease, they will get treatment.

Do you see June quarter GDP figures getting revised in a big way, given the challenges to mobility and data collection?

As far as quarterly data is concerned, there is very little need for people to go on the field. You have agriculture data from patwari level, which is standardized and gets collected anyway. The rest of the data are all from published sources. The biggest chunk is from the quarterly results of listed companies. Another large chunk this time has come from GST. None of this involved field work. Sebi data is partial as the regulator extended the time for filing returns. So, a lot of data has not come. Once we get the complete set of data for listed companies, revision may be warranted. Other than that, the next revision you will get is when the corporate affairs ministry data comes in. That captures all unlisted companies as well and has a wider coverage. But as far as informal sector is concerned, until and unless the field investigators are able to go, we will not have that data.

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