The world has had a big reboot. Some major economies have become the clear winners of the pandemic crisis. Where do you think India will move and evolve in the very short term and in the first half of 2021?
2020 has been a terrible year. In the first quarter of the year, growth was minus 24%! Even in the midst of the Great Depression, this did not happen. Even in the midst of world war, this did not happen. We got minus 24%. 100 not because of the recession. The government had a lockdown which prohibited economic activity. Now that we’ve come down to minus 24 we have rebounded in the next quarter and it’s minus 7.5%, way better than most people expect. RBI believes the next two quarters will be positive.
So after we had a huge crash, we showed resilience and got back up again. Unless there is a huge resurgence of a new type of coronavirus, a new variant, I would expect that in 2021 this upsurge would continue and because of that I wouldn’t be surprised if we are seeing GDP growth of 11 to 12%. It would be a good thing. A good rebound from something really low. To add to the economic trend, because the vaccines have now arrived, the vaccinations will start and I hope they will develop very quickly from January onwards because in the service economy people are still afraid to go out for for shopping, for travel and for sightseeing and for entertainment.
If people are still afraid, I am afraid that the economy will not pick up on the services side and that services represent 50% of the GDP! Vaccination is therefore a very important part of what will happen next year. We need to get this program started quickly. We need to expand it quickly. We need confidence to come back to the fact that it is now safe to shop. It is safe to travel. It is safe to do sightseeing, pilgrimages. Once that confidence returns, you will really see a good recovery in 2021, especially in the second half.
What are the key factors that you see evolving at the macroeconomic level for 2021?
India was in reasonable shape when it comes to macroeconomics before Covid. There was a blurring of the budget deficit and yet it was not too serious. The government had 3.5%, maybe 4.5%, maybe 4.5-5%. A very large number of countries in the world have opted for a massive budget deficit. Japan made 21% straight away. The United States did 10% right away and with the last thing we will go down to 20% as well. India has kept its fiscal stimulus at a maximum of 2% of GDP. I criticized it. I have been a critic saying that we are not doing enough for the poor. We are not doing enough to lower purchasing power. If you don’t have enough fiscal stimulus, you won’t get the economy going fast enough either. I will only say that I was wrong in that I did not think that the economy could recover to this extent without a stronger fiscal stimulus.
The good thing about this is the fiscal prudence that Nirmala Sitharaman has followed. This means that the long-term scars from Covid will be much less. With a large budget deficit, our debt to GDP ratio would have increased to 90-95% because the fiscal stimulus has only been maintained at 2%, debt to GDP will be around 80%, which is a lot lower and interest rates are lower. This will therefore leave more fiscal space for the economy to develop in 2021.
On the balance of payments, we have no problem. Money is pouring in. In fact, our foreign exchange reserves are at an all time high since the RBI did not want to allow a surplus of dollars to appreciate the rupee. So on the macroeconomic front, it’s generally good. The only source of concern is inflation. Inflation has exceeded the RBI range of 2-6%. It has gone above 6%. However, this is mainly due to two things; one was vegetable inflation because excessive rains had hit the kharif vegetable crop. Second, world oil prices had collapsed. The government did not pass it on. The government has absorbed a lot of money in the form of tax hikes for both of these reasons.
Having said that, I would still say that inflation under the current circumstances is not a threat in the short term. The government can afford to be reasonably bold and the point is that India today is able to borrow in international markets at lower rates than it could before.
How do you think the government should approach reforms in order to achieve sustainable growth for India?
It is a country where the acquisition of land continues to be a problem. We started to build what we called dedicated rail freight corridors, one was the West Delhi region to Mumbai, the other from Punjab to Calcutta. After 15 years, these are not finished due to land acquisition issues. What kind of development are you going to get when you create land acquisition laws and political funk to toughen those laws so projects just don’t progress.
IOC and others are planning India’s largest refinery and possibly one of the world’s largest refineries at Ratnagiri. There was agitation on the part of the farmers, we did not want to donate the land. The whole idea was abandoned because the government did not have the courage to acquire the land for a refinery. You have to overcome the land issue. It is not an easy thing to overcome. In Uttar Pradesh, Yogi Adityanath claims to have overcome the problem by saying that I do not buy, I buy. I just announced that the purchase price in urban areas will be double and in rural areas it will be four times and since this is a purchase and not an acquisition we do not go through all these procedures and we are quickly able to acquire land and we build our highways.
I’m not sure how much of an exaggeration and how true it is, but there needs to be some new thinking, especially at the state government level, on how to quickly and quickly acquire land and reasonably priced.
The other problem in Punjab is that of the farmers. There is no industry coming to Punjab because the cost of land is up to one crore per acre. Why should someone create an industry? Land is just too expensive and yet the totality is that with all the subsidies you give to farmers and things, nowhere can you get land less than Rs 50 lakh per acre and decent land. is now one crore per acre. So you can’t even industrialize the Punjab because the land has become too expensive.
One of the great things to do is make it easier to acquire land for projects, although it is necessary to donate more money, but for heaven’s sake, do it quickly. As far as labor is concerned, this is primarily a state matter and Mr. Modi is in the process of decentralizing liberalization powers to state governments. So far, I haven’t seen him perform miracles. You still wouldn’t have anyone who wanted to build a factory with 25,000 or 40,000 workers – the kind of giant textile factories we have in Bangladesh, for example, where you can hire and fire. Given the political opposition, I don’t think this is feasible in India.
One of the main benefits for India has been our demographic dividend. However, there has been a huge drop in labor market participation, especially of women, and we are seeing high unemployment rates. Instead of reaping the rewards of the demographic dividend, can it become a challenge and backfire?
The expected demographic dividend has not come. The demographic dividend means that a greater proportion of your population is working because they are of working age between 15 and 45 and to that extent. there are fewer dependents. If in the population you have more workers and relatively few dependents, then that is the demographic dividend. But for this, the total participation of labor in the economy would have to increase.
In a very large number of similar countries, the activity rate of people over 15 years of age is 60 to 65%. In India, in around 2017, we barely managed to reach 50%. Before Covid it had fallen to 43% and because of Covid it had fallen to 39%. It may pick up a bit now, but we have a very serious problem because it’s a gender issue. Male participation is quite high – 75% to 90% at various locations. But women’s participation in the labor market in rural areas has declined considerably.
Should the government continue to spend on MGNREGA, MSMEs, infrastructure, etc.?
There is a consensus among economists that we should be spending very large sums on infrastructure, especially at this point. Infrastructure takes a lot of time and a lot of money. It’s very capital intensive. Right now, we have the lowest interest rates in the world for ages. You can therefore borrow abroad. Even in India the rate of gilts has now fallen to 6% or so and during the crisis of 1991 the rate of gilts was 13-14%. As interest rates have come down, now is the perfect time to invest in infrastructure for the long term.
My real problem is that we already have such large infrastructure projects that never seem to be completed. We have been independent for 75 years, you still cannot build a railroad to Srinagar. I mean how pathetic can you get. In China, they can cross Tibet to Lhasa and build a railway line. We can’t even reach the Srinagar Valley. Why has the east-west corridor taken more than 15 years and we still can’t do it? Mr. Modi said I am going to have this bullet train between Ahmedabad and Mumbai, but I just cannot acquire the land for it. We need to invest heavily in infrastructure, but before we can invest in infrastructure, we need to improve our ability to invest.
Do you think that by the second half of 2021, the RBI will begin the process of normalizing monetary policy?
The RBI has made it very clear that between inflation and growth, the RBI today focuses on growth and not inflation. So while everyone is used to the idea that the RBI only cares about inflation and what it will do with interest rates, the RBI wants growth to pick up and because of that, it gave the moratorium on loans, the special exemption for MSMEs and leveled off. it is best to ensure that various insolvency issues are resolved quickly.
RBI’s goal will be to promote growth. There will be no rush to raise interest rates. It will tolerate higher inflation rates than in the past because after a bad 2020, 2021 must be the year of growth. Let no one say 2021 was about to explode and the RBI killed it by raising interest rates. That’s the last thing the RBI wants to say and so I would expect the RBI to be more growth friendly and more willing to tolerate inflation than some other gentlemen seem to think.