AP: You’re listening to the “Transforming India” podcast, collectively dropped at you by the Deepak and Neera Raj Center on Indian Economic Policies at Columbia University and the Times of India. I’m Arvind Panagariya, Director of the Raj Center and Professor of Economics at Columbia. My co-host on this podcast is Professor Pravin Krishna. He is a Professor of International Economics and Business at Johns Hopkins University. Welcome, Pravin.

 PK: Hi Arvind.x Delighted to affix you for the tenth episode of this podcast as we proceed to debate the Indian financial system. On the event of our tenth episode, I need to take the chance to thank our listeners for tuning in every month. We began this podcast final summer time and the engagement of our viewers has been actually heartening. If there’s something particular on the Indian financial system that you as listeners would love us to debate on the podcast, please tell us by electronic mail at rajcenter@columbia.edu. Once once more, the e-mail tackle is rajcenter@columbia.edu

Episode 10: Growth Slowdown – Pre- & Post-Coronavirus

  AP: Pravin, since our earlier episode, the federal government has launched further GDP development estimates. For the third quarter of the fiscal yr 2019-20, GDP development has been pegged at 4.7%. Going by the unique estimate of 4.5% for the second quarter of 2019-20, this could symbolize a much-awaited, even when small turnaround within the quarterly development charge. But the twist to the story is that the federal government has revised the second quarter development itself upward to five.1%. 

Therefore, the third quarter of 2019-20 now represents the seventh consecutive decline within the quarterly development charge. On an annual foundation, the expansion charge now stands at 6.1% in 2018-19 and 5% in 2019-20. Both are sharp declines in comparison with the common annual development charge of seven.7% in the course of the first 4 years of the Modi authorities. Given this setback to development and now, as well as, the risk to the financial system type the Corona virus turning very actual, in at present’s episode, allow us to dissect the slowdown in-depth. I recommend we do that in two phases by first specializing in pre-Corona slowdown after which taking on the risk from Corona and attainable response. Let’s begin by specializing in the pre-Corona slowdown. 

PK: Before we get to the causes, let me first level out that the present slowdown is the third such slowdown in India for the reason that launch of the financial reforms in 1991. From 1992-93 to 1999-2000, India had grown at common annual charge of 6.4% for eight years. This was the primary time, really, that the nation had seen above-six-percent development for such a protracted time period. But then the annual common development charge plummeted to only 4.2% in the course of the subsequent three years. That slowdown was then adopted by a sturdy 8.2% annual common development for 9 years, from 2003-04 to 2011-12. 

Then the expansion charge fell as soon as once more to five.9% for till 2013-14. After Prime Minister Modi got here to energy in 2014, India as soon as once more averaged 7.4% development throughout his first 5 years. The financial system has now fallen into the present third slowdown. This slowdown, the present one over the past two full years, will in all probability be half a share level worse than that in 2012-13 and 2013-14. 

AP: I’m glad you reminded our listeners of this previous historical past, Pravin. This actually provides some purpose for optimism: twice earlier than, we now have come out of slowdowns and so we’ll accomplish that this time as properly. Of course, you will need to perceive that the causes of the sooner slowdowns throughout 2012-13 and 2013-14, and people of the present slowdown are fairly totally different. Therefore, coverage responses to the present slowdown must be totally different as properly. The 2012 to 2014 slowdown was principally attributable to coverage paralysis within the central authorities, a close to standstill in environmental clearances for infrastructure initiatives, and worsening of the investor sentiment attributable to a draconian retrospective taxation laws and a whole lack of reforms throughout UPA-2 rule. Among the causes cited for the present slowdown are demonetization, GST, weak demand, and breakdown of monetary markets. 

PK: That’s true, Arvind. The essential keys to resuming development after the sooner slowdown have been ending the paralysis, rushing up environmental clearances, ending retrospective taxation and returning to the trail of financial reforms. 

To overcome the present slowdown, we additionally want to know which of the 4 causes that you simply’ve talked about are an important. And then, we have to ask whether or not the federal government must take any additional actions past what it has already completed. I’d dare say that of the 4 causes that you simply talked about, GST is the least essential one for the slowdown. Some teething pains accompanied it when it was first launched but it surely additionally introduced some advantages equivalent to speedy motion of products alongside the highways within the wake of a single nationwide tax on every good and the elimination of a number of oblique taxes that had cluttered the availability chains. The most up-to-date knowledge recommend that the GST income collections have begun to extend as properly, really, although the federal government must be cautious to ensure that the turnaround shouldn’t be a mirrored image of a slowdown within the refund of enter taxes that always occurs in direction of the top of a fiscal yr. 

AP: That then leaves demonetization, weak demand and the turmoil in monetary sector because the three candidates, Pravin. Now many critics of Prime Minister Modi wish to pin the slowdown on demonetization. But I need to say that there’s virtually no optimistic proof to determine this hyperlink. There are many items of proof that time in the other way. First, demonetization occurred in November 2016 and the expansion charge throughout 2016-17, which ended on March 31 2017, was a powerful 8.3%. Any main hit to development ought to have been captured throughout this fiscal yr. Second, the impact of the huge discount in money provide ought to have been felt first in a collapse of costs. But we see virtually no break in worth knowledge—inflation continued easily alongside its established trajectory in November 2016 and subsequently. Third, even a examine by demonetization critics concludes that no matter impression demonetization might have had, dissipated by the top of 2016-17. And lastly, critics like to claim that demonetization led to the slowdown by disrupting provide chains of micro, small and medium enterprises. But this can be a pure assertion, which has gained foreign money solely by repetition. To-date, the critics have offered no proof that such disruption really occurred. To my data, there aren’t any surveys of MSMEs earlier than and after demonetization to glean such proof.

PK: That then leaves us with weak demand and disruption within the monetary markets as the 2 attainable explanations, Arvind. The weak-demand argument particularly has discovered its strongest expression within the requires help by the auto trade for help to it. In addition, many commentators have performed for a hike within the fiscal deficit to compensate for the weak non-public consumption demand. As far as coverage response is anxious, I really feel that we now have to take this consider with some grain of salt. As far as particular industries equivalent to auto are involved, any motion geared toward aiding them I feel is a dangerous proposition. Specific industries could also be dealing with difficulties merely due to their inefficiency. This issue is especially more likely to be at play within the case of the auto trade. Given that regardless of safety at tariffs reaching as excessive as a 100% for many years, the auto trade has did not seize even 1% of the world export market means that it suffers from a critical effectivity drawback. Indeed, if auto trade was aggressive, it may have overcome the issue of weak home demand by exploiting extra absolutely the very massive 800 Billion greenback export market. But a good greater drawback with rescuing particular industries is that it creates perverse incentives. Industries acknowledge that any time they run into an issue they will get the federal government to underwrite their losses. And the top result’s that income find yourself going to companies and the losses fall on the taxpayer.

AP: Let me add Pravin that so far as pre-Corona slowdown is anxious, the case for the federal government to supply further generalized stimulus by larger fiscal deficit can be fairly weak. Indeed, it may show counterproductive. There are three causes for this conclusion. First, even with fiscal deficit held at 3.5% in 2020-21, as the federal government plans to do in line with the latest price range, as soon as we add the fiscal deficits of the states and off price range borrowing by public entities, the entire public sector borrowing would find yourself at about 9% of the GDP. The authorities is thus already offering a heavy dose of stimulus. 

Second, fiscal consolidation has been a hard-fought achievement of the federal government. It has efficiently satisfied the markets that it’s a accountable reasonably than profligate authorities. Taking under consideration the lags in spending plans translating into precise spending and such spending translating into expansionary impact, it’s not clear that the good thing about but larger fiscal deficit outweighs its price. Finally, any additional growth of borrowing will significantly undermine non-public funding, which constitutes a extremely productive use of financial savings. Now bear in mind when the federal government borrows from the market it’s leaving much less for the non-public sector, crowding out non-public funding. In sum, the Prime Minister and the Finance Minister have been clever in holding the road on fiscal consolidation and retaining the deficit at 3.5%.

PK: Arvind, this then brings us to the dislocation within the monetary markets as the important thing issue. Prima facie, the truth that the expansion slowdown occurred simply as the federal government began cleansing up the huge non-performing property of the banks, and simply as non-bank finance firms, the NBFCs, confronted a near-crisis, the disruption in monetary markets would appear to me to be an important rationalization. 

Even granting that different components might have performed some position, I’d argue that the antagonistic impact of the dislocation in monetary markets has been far greater than all different components mixed. Credit is the lifeblood of all fashionable economies in order that disruptions in monetary markets will be devastating to their development. We can all recall the extended disruption that the economic economies confronted after the worldwide monetary disaster in 2008. 

AP: In addition to the weakening of banks’ stability sheets, the disruption within the monetary sector has additionally been accompanied by a weakening of companies’ stability sheets. Bad loans usually are not nearly banks incurring losses by haircuts but additionally concerning the stability sheets of companies getting into purple. This weakening of the stability sheets of companies has ended up contributing to weak funding demand. In this sense, even a few of the weak point in demand, which was our different issue, has originated within the monetary sector.

But the coverage query, Pravin, is whether or not the federal government must take further actions to strengthen the monetary sector. What is your view on that?

PK: I feel a lot of what the federal government wanted to do within the brief run, it has already completed. It has infused over 2 Trillion rupees in fairness into the banks and it needn’t do extra. For the remaining, the banks should assist themselves by elevating capital from the market. Cleanup of Nonperforming Assets is progressing steadily beneath the Insolvency and Bankruptcy Code. Perhaps the federal government may perform a little extra right here to hurry up the method by appointing extra judges to the National Company Law Tribunal, the NCLT. Though instances beneath IBC are topic to a time-bound course of, the NCLT is failing to satisfy prescribed deadlines. And repeated delays of this sort can result in the tradition of delays turning into accepted. And I actually assume this must be prevented. What do you assume?

AP: There is little doubt, Pravin, that the IBC course of has significantly improved the decision of NPAs. Even taking the delays under consideration, IBC has lower by huge margins the time that asset decision used to take beneath older channels equivalent to Lok Adalats, Debt Recovery Tribunals and SARFAESI Act. Recovery charges beneath IBC have additionally been considerably larger. But as you say there may be appreciable room for enhancing the IBC course of each when it comes to time taken and restoration charges. 

A separate essential problem that deserves authorities consideration is that it guard in opposition to future accumulation of NPAs. Industry is all the time asking for forbearance and there’s a hazard of slipping again into the outdated follow of letting restructured loans retain their classification as customary loans reasonably than downgraded to substandard standing which is what we name the NPAs. 

PK: Is there anything you’d advise the federal government?

AP: Other measures, Pravin, are of a longer-term nature. There are critical governance points with respect to Public Sector Banks. The RBI’s powers to control them are significantly extra restricted than its powers over non-public sector banks. At the identical time, Public Sector Banks are topic to rules by the federal government that don’t apply to personal sector banks. They are additionally topic to potential investigations by vigilance businesses, which makes them tremendous cautious in making selections on credit score and backbone of NPAs. A key purpose why the NPA disaster has been extended is that CEOs of Public Sector Banks are afraid to make selections that contain haircuts on NPAs thereby attracting the ire of the vigilance businesses. So, there’s a good bit of labor to be completed within the forthcoming years to get the governance of banks proper. This might even contain privatization of Public Sector Banks. What must be completed is a topic for a separate, future episode.

PK: Let me then flip to the brand new risk the financial system faces: the Coronavirus. In phrases of the variety of international locations impacted and velocity of unfold, we now have no comparable expertise in fashionable occasions. We have handled the AIDS pandemic that started within the 1980s, the Hong-Kong flu of 1968, the Asian flu of 1956 and probably the most dreadful pandemic of the final century, the Spanish Flu of 1918. Among these, solely the 1918 pandemic impacted India on a big scale with estimated deaths from it being 17 to 18 million. But the circumstances of that episode have been totally different. Health infrastructure beneath the British had been non-existent and the worldwide linkages of the Indian financial system, which was extremely rural and agricultural on the time, have been fairly restricted. 

AP: This is a really useful background to the previous episodes of pandemics, Pravin. As you’ve gotten already hinted, the circumstances India faces are very totally different at present than these throughout probably the most horrible episode of 1918. On the optimistic facet, we now have substantial well being infrastructure within the nation and a authorities that’s vigilant and dealing in nationwide curiosity. On the unfavorable facet, the financial system is extremely globalized, which implies that even beneath the extremely optimistic state of affairs by which India manages to comprise the unfold of coronavirus internally, the antagonistic impression of closing down of the key world markets and close to ban on worldwide journey for a while may have a critical unfavorable impression on development. Under a much less optimistic state of affairs, if Coronavirus finally ends up taking the course it has taken in Europe and the United States, we could also be taking a look at a really massive impression. Given our huge inhabitants, unfold of the virus to even 1% of the inhabitants will overwhelm our medical amenities. This is why preventive measures equivalent to near-complete voluntary lockdown until all present instances of coronavirus get well and new instances drop to zero is our greatest hope. Each citizen ought to behave as if she or he has already caught an infection and should due to this fact stay in seclusion. This is what most of us within the United States are doing presently. 

PK: That’s wonderful recommendation, Arvind. In case our listeners have any doubts about how we are attempting to cope with the scenario within the United States, let me point out that at the same time as we report this episode, Arvind Panagariya and I are every in our respective properties, as are our producer Atisha Kumar, and our editor Rebecca McGilveray. We are all speaking utilizing a digital platform. Turning to coverage responses to Coronavirus-induced slowdown, attainable actions will be divided into two classes. In the primary class, we now have measures that purpose at assuaging Coronavirus-induced financial misery among the many susceptible. As customers in the reduction of their purchases of non-essential objects, many self-employed staff stand to lose their incomes partially or wholly. Those engaged on every day wages might face comparable hardship. Some focused motion is required to assist these people. Here you will need to keep in mind that the overwhelming majority of this inhabitants is more likely to be city. Therefore, what the federal government ought to do is to have an effect on money transfers and enhanced distribution of backed grains to city poor who qualify for help beneath the Food Security Act. If indicators of Coronavirus induced financial misery emerge in rural areas as properly, the transfers ought to be prolonged to rural areas. As a precautionary measure, the federal government might additional think about changing NREGA wages briefly into money transfers. 

The second class of coverage measures needs to be geared toward minimizing the disruption of financial exercise. This is a harder space and larger warning is required when intervening. Possible devices of reduction are delays in tax assortment and mortgage repayments but when deployed they need to finally be withdrawn as soon as the financial exercise returns to regular ranges. 

AP: Pravin, let me add that there’s maybe additionally room for the RBI to make a contribution right here. With no risk of demand-induced acceleration in inflation, the RBI ought to think about slicing the repo charge aggressively. This is precisely the course that the Fed Reserve has taken within the United States. 

A ultimate level I want to touch upon considerations the general fiscal stimulus on which debates in India usually focus. The unfold of Coronavirus has coincided with a pointy decline in oil worth. Being a big oil importer, India advantages significantly from this decline. Available estimates recommend that for each $10 per barrel decline in oil worth, India positive factors roughly $15 billion. Last yr, oil worth had common roughly $65 per barrel and is more likely to common $30 per barrels this yr. This would imply an general achieve of greater than $50 billion. The authorities has properly raised excise tax on oil to transform a big a part of this achieve into revenues. These revenues present the federal government ample funds to finance coverage actions in response to Coronavirus. Nevertheless, a violation of the present fiscal deficit goal should occur attributable to a fall in revenues that’s seemingly in view of diminished financial exercise.

PK: Arvind, that’s the final phrase since our time is up. As normal, let me wrap up the episode with a fast abstract. We have mentioned at present 4 potential causes of pre-Coronavirus slowdown in development: GST, demonetization, weak demand and disruption in monetary markets. Our view is that of those 4 components, disruption in monetary markets is by far an important one. Here the federal government has taken plenty of essential actions, that are sufficient for now. But, for the longer term, it ought to guard in opposition to, returning to the outdated ways whereby restructured loans have been allowed to be categorized as customary property. The international greatest follow right here as an alternative is to downgrade restructured loans to substandard standing or to that of a Nonperforming Asset. On Coronavirus-induced slowdown, at this stage, there may be far an excessive amount of uncertainty. Minimally, even when India manages to comprise the unfold of the virus internally, the injury from a near-complete lockdown of the world financial system and the ban on journey will result in a big antagonistic financial impression. Among coverage measures, we now have advised ramping up transfers to these already susceptible and people more likely to be adversely impacted by the virus, principally in city areas. As for measures to maintain the financial system going, the federal government might think about delays in tax assortment and mortgage reimbursement with out penalty. But these measures ought to be non permanent and withdrawn as soon as the financial system returns to a traditional stage financial exercise.

With that, we finish at present’s episode. Signing off, that is Pravin Krishna.

AP: And that is Arvind Panagariya, on the “Transforming India” podcast, produced by Atisha Kumar, Research Scholar at Columbia University and edited by Rebecca McGilveray at INCITE at Columbia University. Thank you for listening.

DISCLAIMER : Views expressed above are the writer’s personal.

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