"Mankind does not reflect upon questions of the economic and social organization until compelled to do so by the sharp pressure of some practical emergency" - Kristine Bilkau
As the world continues to manage and contain the COVID19 crisis, we continue to remain in a state of stagnancy. As young citizens, it's an element of obviousness to wonder about the implications that this status quo will have on our lives. The most hard-hitting effects that exist today are the collective social distress and inevitable economic crisis; something that each and every one of us is trying to demystify in our own way. While social issues are more comprehensible, it's often the economics that we struggle to interpret.
However, economics and its trends are something that once understood, proves to be of great utility to manage future prospects for every citizen. Some even find it compelling to indulge in this field but the friction of political influences and over-complexity of terminology and theory leaves us half-informed. This, however, should not keep us from being informed. We should not let this be a barrier to our understanding of financial policies. While it's our responsibility to bring you perspectives and information from sources that are honest and real, it should be every reader's attempt to decode and learn as much as they can from every opportunity. And what's better than knowing the views of a widely renowned economist, who has also served as a member of the 14th Finance Commission, Dr. M Govinda Rao.
Dr. Rao in his spectacular career served as a consultant to the World Bank, International Monetary Fund, Asian Development Bank, and the UNDP. These international institutions have engaged him in pertinent policy debates and discussions. Further, Dr. Rao served as the Director of the National Institute of Public Finance and Policy and as the Director of the Institute for Social and Economic Change. In his many marvelous endeavors as an advisor, his research expands into the public finance and fiscal policy, fiscal federalism, and state and local finance.
In his interview with VIT Today, he talked about fiscal deficits, which is a situation when the government finds its expenditure exceeding its income; and debt monetization (A term referring to the purchase of government bonds by the central bank to finance the spending needs of the government). We also raised issues of proposed measures of gross market borrowing (borrowing money to stabilize the fiscal deficit) and on the probable rise of protectionism due to domestic empowerment. Dr. Rao also touched upon what an ideal countercyclical fiscal policy (refers to a strategy by the government to counter recession through fiscal measures by working against the ongoing recession trend and thus stabilizing the economy) and stimulus measures.
In conversation with VIT Today:-
1) If you had to explain to a child how big a set back the global economy faces in a relative metric due to this crisis, how would you go about it?
Ans: If I have to explain to the child (depends on how big the child is), the set back in the global economy due to crisis, I would simply say that she can not go to school for a few months not going to play with friends, she can not go for holidays anymore and there will be a lot of people in the world who will not have jobs and income. A lot of people have fallen sick all over the world and the sickness is spreading fast. People will have to go out only after wearing the mask to avoid getting sick.
2) Were the cuts made necessary to the extent of their practice by the RBI?
The cuts in the policy rate become useful only when the businesses start borrowing. They will start borrowing only when the businesses resume. Again, cut in the policy rate does not necessarily mean that the banks would be willing to lend at cheap rates to them. Banks will continue to be hesitant for fear of reprisal. Similarly, businesses would need demand revival which requires the lifting of restrictions. In short, the RBI has kept the powder dry by ensuring adequate liquidity and reducing the policy rate. That fulfills the necessary conditions, but not sufficient conditions for revival.
3) In light of your recent support to debt monetization to reduce strain on the economy by increased government borrowing, how can it be implemented in our country and how would its implementation affect the government's ambitious plans to revive the economy?
Ans: Direct monetization happens when the RBI buys and Treasury Bills which are not passed on to other banks. Before 1997, government deficits were automatically monetized by issuing non-marketable ad hoc treasury bills of 91-day maturity to the RBI to replenish the Central government's cash balances to meet government deficit. The practice was discontinued and only marketable securities have been issued since 1997 and these are passed on by the RBI to the banking system as an SLR requirement. The problem is when the household sector's financial savings are just about 7 percent of GDP and the current account deficit is just about 2 percent of GDP. the total available money in the market for borrowing is just about 9 percent. This has to be shared between the government, public enterprises, and corporates, and the public. To some extent, this can be done by the RBI buying old securities by issuing new money supply and that is called open market operations. This is not automatic monetization, but monetization of the deficit nevertheless. Perhaps, the RBI will prefer this route rather than issuing ad hoc treasury bills.
4) With the Chief Economic Advisor Subramanium suggesting that the government use this pandemic as an opportunity to reduce the budget deficit by listing government securities on global indices, what would be the impact of downgrading of the sovereign rating on this policy, and should it be taken forward?
Ans: This is precisely what one is afraid of. The countercyclical fiscal policy requires that the government spend more to revive the economy to avoid large scale unemployment and fall in incomes because the private sector will not be making investments. With a sharp decline in revenues, the deficit is likely to rise sharply and the only way to cut deficits is to sharply cut expenditures. That is neither feasible nor desirable. It will lead to massive unemployment and loss of incomes and will make revival impossible.
5.) What is the long term impact of India not joining the Regional Comprehensive Economic Partnership (RCEP), especially taking into consideration the strong anti-protectionist rhetoric that the government has employed? Do you believe that India is moving towards protectionism?
Ans: Despite much talk about self-reliance, the way forward for the country is to be competitive. RECP would help to expand our trade. This will force us to become competitive. Aloofness and protectionism will only add to our lack of competitiveness and force our people to consume inefficient products at high cost. Exports are an important engine of growth and we can not afford to shut this engine. Our experience with import substitution until 1991 is an adequate testimony of living in stagnation and poverty.
6) The Chief Economic Advisor Subramanian believes that increasing the gross market borrowing, and listing government bonds on global indices, would ensure that the government will be able to fill the budget deficit, and will not have to approach the International Monetary Fund. In light of the dip in global demand, what are the odds that this strategy will help the nation, and how?
Ans: Meeting the budget deficit is not going to be a problem and there is no need to go to the IMF for that. In an environment where the private sector borrowing is subdued, there is not much fear of crowding out by borrowing from the domestic market and to the extent, and by listing bonds globally, the budget deficit can be met. If necessary the RBI can buy non-tradeable treasury bills from the government (monetize the deficit) as it used to be done until 1997. We have enough foreign exchange reserves and there is no need to go to the IMF unlike in 1991.
7) Could you please tell us how an increased fiscal stimulus would contribute to reviving the informal sector of the Indian economy amidst the COVID crisis?
Ans: Much of the stimulus has been in terms of making credit available to SMEs, ensuring liquidity, and creating funds available from NABARD for investments. Fiscal stimulus has been just about one percent of GDP. The liquidity provision and credit availability will start yielding results only when the economy opens up after the lockdown. Again. availability of liquidity or credit doesn't mean that the leading will actually be done. Bankers will continue to be cautious. Moreover, the poor economic environment before the COVID-19 and the impact of the pandemic could result in a large number of businesses closing down. Finally, there will be both demand problems as falling incomes would have reduced demand and supply bottlenecks due to labour shortage and supply chain disruptions. It appears the revival will be prolonged.
8) The Central government is banking on the growth of the Medium and Small Scale industries to support the Atmanirbhar Initiative. How viable is this strategy when goods from MSMEs do not thrive in competitive markets?
Ans: If by Atmanirbhar, we mean import substitution, it has been proved time and again that it is a self-defeating strategy. If the objective is to make the system competitive in the international market, then the focus should be to address the factors constraining this and not the scale of operation. The change in the definition of MSME can help to enable better scale somewhat, but it must be noted that small is not always beautiful What is important is to allow the scale to vary depending upon the optimum in each sector and not giving extra protection either through lower interest rates or through compliance requirements to the small scale industry. The focus should be on competitiveness and not scale.
This conversation accounts for a great deal about how the current system looks like and what the future of it might seem. It's yet to be certain about whether the RBI will revisit the 1997 method or open market operations as a means of reviving our economy. Shedding light on how protectionism kills competition and proves bad for the economy, Dr. Rao also mentions that our economy is in a better state than to depend upon the IMF for assistance. This he furthers while talking about MSMEs and how their protection should be carefully done. Such an insight with terms of understanding can change the way we perceive our economic status. This everything implied to one and only one conclusion that it's important now, more than ever before, to stay informed about the economy and policies to have a well-informed future.
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