Highlights: Prannoy Roy, Arvind Subramanian's Analysis On Economy After Covid

Dr Prannoy Roy and former Chief Economic Adviser Arvind Subramanian discuss the present and post-Covid economic scenarios.

The coronavirus pandemic has caused massive damage to the economy, and the lives and livelihoods of people. India, the second worst coronavirus-hit country in the world, has now been reporting less than 15,000 daily cases, giving an indication that the pandemic has slowed down if not completely stalled in its tracks. But what about the economy? How and when is Indian economy going to bounce back? What major policy decisions should the upcoming Budget have to cushion the blow? Dr Prannoy Roy and former Chief Economic Adviser Arvind Subramanian discuss the present and post-Covid economic scenarios.

Here are the highlights of Dr Prannoy Roy's analysis:

Jan 28, 2021 22:45 (IST)
Under these crisis conditions should we be worried about the budget deficit size

Jan 28, 2021 22:43 (IST)
What should this budget focus on?

Jan 28, 2021 22:42 (IST)
NDTV: You know Arvind, one of the things that really, one of the things that really became clear to me after reading a paper, one is our economy's in much worse shape than I thought it was. And a lot of these, like investment, you will feel slow growth for years to come. It's not just this year. But the other interesting point you keep making is like, what you call hardware versus software. Hardware? We are pretty good at, you know, giving LPG, building toilets, but in software, implementing it, not only those in not only welfare, all our sectors, implementation has been really our problem.

Dr Arvind Subramanian: I think, you know, so just stepping back Prannoy, our diagnosis of the economy, that the weakness in the economy is not because you know, of, you know, not doing a bunch of important taking important actions. It's the broader approach to policy making, what we call the software, and using soft power to, you know, to improve the software, those soft, that software is kind of needs rebooting, and that's why the overall state of the economy, so it's not any one thing done or not done. But you know, how you see the economy division, you know, the overall consistency, and, you know, state craft. So, let's go through each of these elements of software, one by one. Data integrity, you know, I want at this stage to really commend the Reserve Bank of India, you know, this time around, they've been remarkably admirably candid about what the impact of the, you know, the crisis is going to be. You know, they, you know, they said NPAs are going up, I think that needs to, that kind of transparency needs to occur more broadly, you know, our GDP data is under a cloud, you know, many of the data put out by the government were then withdrawn. I think, even on the fiscal accounts, last year, some improvements were made, but honestly, we don't have a good sense of what the real deficit is, you know, how much expenditure is off the balance sheet. So, I think that first element, data integrity needs to be improved.

Jan 28, 2021 22:34 (IST)

Jan 28, 2021 22:31 (IST)
NDTV: Yes, very important. And it's not just, you know, big business and Corporate, it is actually the entire, you know, sector and if you look at some of the other data shows, including government, it is very worrying how much it's slowing down. And many of these are lag effects looking to the future. It's worrying, look at investment, industry and government in infrastructure. Infrastructure was growing at 13% a year 5% in the first five years of this, you know, 2005. But now it's 3% a year. Investment in infrastructure? Disaster. And moving on to other areas, which are really worrying. Because these are long term impacts, you're not even seeing the impact here. Look at credit and bank loans to the economy, plummeting. 13% was pretty good. 20% excellent. Dropped in UPA 2 to 6%. And now 4%. And that doesn't include anything to do with the pandemic, one should just clarify again and again, like he did at the beginning. And government expenditure up and down, you know, no pattern, there's no consistency. But it's good to see that has gone up from 3%. Because you need that government expenditure when private industry is not investing. So that government expenditure, hopefully, some of most of it, or some of it is going into infrastructure, not all into salaries. This is alarming, very alarming.

Dr Arvind Subramanian: So, in fact Prannoy, the credit number that you showed, and the investment number you showed, I mean, that's the heart. By the way, that credit number is not even credited to industry. If you look at credit to industry, it's actually negative growth in the last 20 years. So, remember that, you know, the twin balance sheet problem, you know, the financial system is impaired, you know, the corporate sector is impaired. And that's why you get very weak growth in credit, have very weak growth and investment. And that's been holding back the economy. But when in fact, you know, in the early 2000s, these things were booming at 15% and 20%. So how you get this back is going to be, you know, the heart of the challenge. And if anything, I think that government expenditure you showed, I mean, suggests that it's been government expenditure that to some extent, has been, you know, cushioning the economy, and preventing it from being even worse than it could, that, you know, it is otherwise. So, I think that the government is playing that cushioning role, which is a good thing.

Jan 28, 2021 22:21 (IST)
NDTV: According to your data on the corporate sector, let's have a look at the power corporate sector is suffering. And it really is worrying to see what's happening there. We look at the data there that you brought up. If you look at for example, sales, sales are really falling hugely. They were growing at 11%, 17% and 7%. Now they're growing at 3%, a year from 17% to 3%? I mean, that is just a very frightening impact of all the policies that are, you know, self-reliance and protectionism. Moving on, let's have a look at even the profits of the corporate sector. What are they like? They are also falling dramatically from this percentage of GDP. From 2.7% of GDP profits of 1.4. Now, people might say, oh, cut profits is a great thing. But these profits are savings, and they are reinvested. And the impact is really severe on the economy. So, profits dropping by half is terrible. As a result, as I just mentioned, profits are used to invest, look at that plummeting investment in our industries, 25% down to 2%. That's the growth rate? That is really worrying. This is, this is an emergency, we need some resuscitation, or, Arvind.

Dr Arvind Subramanian: Yes, so I think very broadly, I think Prannoy, what all these indicators show, and this is true of, you know, the index of industrial production, it's true of exports, it's true of credit, you know, the credit, you know, all these things, basically, after the global financial crisis, the Indian economy has never really recovered. And in the last four or five years, you know, the deceleration, deterioration has only increased. So, that's why the big, so now we have to get into this, you know, so just stepping back, you know, macro stability, good. New welfarism made many achievements, but the overall health of the economy, still very, very weak and slowing down. That's why we saw all those Child Health and Nutrition indicators suffer. And now we're seeing. Broadly. economic activity is basically down very flat. And that's the challenge for how we get back to, you know, investment growing, export growing, credit growing, you know, as SMEs, growing employment. That's, I think, the big challenge going forward, because the economy has been very weak for very long.

Jan 28, 2021 22:09 (IST)
NDTV: And moving on to a couple of other points that you make. And that is on this return to kind of protectionism, you show that 2017-18 there's been a major hike in import duties, just look at the number of tariffs increased each year. There used to be 160-150, then they recently 140, but in 2017-18, 2460 times were tariffs increase, that is a return to protectionism.

Jan 28, 2021 22:05 (IST)
NDTV: Having seen a more stable economy, seeing this welfarism, some of the figures you bring out on the ground reality about, say, just a child, children's health. Just take you through your fingers again. And you could just give us a little more in-depth perspective on that. What about children's health in India? How is it improving? Is getting worse? It is not a very good picture, you just look at some of the data on that, by Arvind Subramaniam, Indian children are suffering still.

Arvind Subramanian: Yes. I think that, you know, this data shows, I think, broadly Prannoy, that see, firstly, I think we should be careful and fair and say, you know, the new welfarism that you showed, is all because the government has taken the lead and the government is taking, you know, a lot of putting in a lot of political capital into it. All these things that you showed, you know, the child in health, nutrition, it's a combination of what the central government does, or doesn't do, what the state government does or doesn't do. And most importantly, is the economy dynamic and booming, which is providing income, and, you know, purchasing power and consumption to families, which also then gets translated into better health and nutrition outcomes. And to me, what these numbers suggest is that, you know, that, you know, the health of the child and nutrition of the child has been set back in the last few years. And we have to find, investigate why that's the case, because this takes something like stunting, you know is coming down remarkably.

Jan 28, 2021 22:01 (IST)
NDTV: A negative data is a bit worrying on that front, about looking inward, what you've shown is that we're kind of, in an era now, returning to a sort of protectionism, just look at the figures you've brought out. And it is worrying, you know, that at the time when one should be emphasizing openness and getting our exports up, we're seeing exports suddenly collapse, they were growing at 24%, from 16 to 24, came down to 18. And now in the last four or five years, they're growing at 3%. Of course, there are external factors also, but 3, that is way below emerging markets average.

Dr Arvind Subramanian: Yes. So, I think, you know, this is work I've done with Soumitro Chatterjee and you know, essentially, what is two, three things significant about this Prannoy. One is that it reverses a 20-30-year consensus that the economy we had that we would gradually open up and that was the basis of our dynamism. Now all the exports and imports that you saw, this was the basis of that. So, we've reversed, you know, kind of a three-decade old, you know, kind of consensus, as it were. The second, of course, implication of this is that if we do this, and of course, this comes with other actions that we've taken, for example, not joining certain agreements, you know, and so on. So, essentially, it seems to be that policymakers are somehow thinking that by turning inward, our economy can go off faster than it is now. And which flies in the face of the evidence of what happened in the '90s and 2000s. Until about the global financial crisis thereafter. So, it's this, why are we not learning from the experience? Why are we changing a policy that has, you know, it's like killing the goose that laid the golden eggs? Why are we doing that? And that's kind of the open question for policymakers. So Atmanirbhar; seems to be, you know, flying in the face of the evidence that being open is actually good for the economy.

Jan 28, 2021 21:54 (IST)
NDTV: Over the decades, India has always considered, oh, we don't export much, not important, we should have been an export led growth country. And then he showed this and let's have a look at the data. India's exports have grown year by year, third fastest in the world, Vietnam, almost 16%, China 15.5, in India 13.4. And the world average is 6.9. And we are just India. Very fast growth of exports really helped our GDP. And it's not just software exports, we look at manufacturing exports, that's the other data you brought up. And that shows you know everybody thinks, oh yeah, there's all software. No, no, manufacturing. Vietnam 19.9, China 14 and India you know, nearly there, third 12.1. That is just astounding data. And this helps the GDP a lot, hasn't it over time?

Dr Arvind Subramanian: I think what this reminds us is that when our exports do well, our economy does well. And that we have done well, not just in services exports, but also in manufacturing exports. The two I think, things to keep in mind, however, is that we've done very well in terms of high skill manufacturing exports, but the unskilled manufacturing like textiles, clothing, leather, footwear, toys, all those things which create, are done as well. So that's the first thing to keep in mind when we're talking about policy going forward. The second thing, the second thing, I think, which is really why I think everyone should take notice of this data, is that, you know, Prannoy reminds me a little bit of the debate in the '50s and '60s, you know, there was this whole, you know, export pessimism, you know, India can't export. So therefore, let's turn inward. And in fact, one of the few people then who said no, India's exports prospects are good was in fact, Dr Manmohan Singh, he wrote a famous book on the saying that, you know, we shouldn't be pessimistic. So now, in fact, it's likely in a twist of fate, even though we've done well on exports, we kind of turning inward, as if, you know, forgetting that, you know, the way to, you know, expanding the Indian economy is by, you know, doubling down and expanding manufacturing and low skilled manufacturing growth.

Jan 28, 2021 21:48 (IST)
NDTV: Other data that you provided about how India's economic stability is improving, inflation is coming down, you can see under UPA 1 it went up. UPA 2, it was at its highest, over 10%. And now under the BJP it comes right down to around about 5%. Again, this is BJP up to the pandemic, not including the impact of the pandemic. Now, the final thing in this kind of category of economic stability being improved, that you have provided Arvind, which I found really interesting, we move on to the next one. It says that the current account balance, that's imports minus exports, that's that trade plus remittances, that current account balance is better. It's improved, you can see that as a percentage of GDP is now just 1%. And that's, that's pretty good, pretty good, a little bit higher than the average for developing countries, but still not bad at all. So, these three improvements, one could build on and why have they happened?

Dr Arvind Subramanian: So one way of thinking about this Prannoy is that, you know, in India, in the past has been prone to economic instability and financial crises, from you know, what, you know, Harish Damodaran calls the four Fs; food, fuel, foreign exchange, and fiscal, right? These are the things that create, you know, food prices go up, oil prices go up, we don't have enough foreign exchange, all those create, I think, instability and crises in India. And what you've shown just now is that, apart from the, you know, the fiscal situation we'll talk about later, especially after the pandemic, these three Fs have been relatively under control. And that goes to the credit of the government that, you know, it believes in macroeconomic stability, it believes in low inflation, generally believes in prudence in terms of running the, you know, the budget, and foreign exchange reserves, there are now 600 billion or so. So we're very comfortable, so we are less prone to that kind of instability in the past, and as you said, that offers an opportunity to build upon.

Jan 28, 2021 21:43 (IST)
NDTV: Another interesting factor that's happening in India increasingly, and that is a kind of what you call new welfarism. And it's kind of hardware welfarism, where several kinds of items are provided directly to the poorest. Let's have a look at some of them that you have listed.

Dr Arvind Subramanian: So, I think, in my view, I think this is probably one of the most significant achievements of the government. You know why it's very interesting is because it is a very distinctive approach to the question of redistribution, and you know, inclusive growth, you know, how governments generally do that, either they provide you know, health and education like public goods, or the UPA builds social safety nets like, no, MNREGA, you know, PDS, right to education, right to food, etc, etc. So that was the UPA approach to this. The BJP and Mr Modi's government have a very different approach to this, which is essentially to say, we are going to provide tangible goods and services like all the things that you mentioned, to improve the lives of the poor.
Jan 28, 2021 21:39 (IST)

Dr Arvind Subramanian: There are two big challenges that await us even if we rebound. One, there's going to be a just recovering the devastation from the pandemic itself, you know, 15 to 17 million people, fewer are employed relative to 2019. And the RBI, you know, remarkably, has said, you know, the NPA are going to go up from seven and a half, almost doubled to 13-and-a-half percent.

NDTV: Non-Performing Assets, NPA

Dr Arvind Subramanian: Non-Performing Assets is going to be devastating. So, we just have to recover from that. Yes, that's the first challenge.

NDTV: And then they are going to double? Bad debts are going to double. Wow.

Dr Arvind Subramanian: They're going to double. Exactly. Terrible

NDTV: But one thing that you did mention, one thing that you have mentioned in your papers is that India has achieved some degree of improved economic stability and if I show some of your data, maybe you could explain it to us in a little more depth.

Dr Arvind Subramanian: Sorry, we should just clarify to viewers that now we're going to talk about all these numbers until just before the pandemic hit, because that debt number is going to look very different after the pandemic. Now the economy, until the pandemic hits, because that's going to give us the second challenge, how do you restore dynamism back again?

Jan 28, 2021 21:31 (IST)
Dr Arvind Subramanian: The good news is that it's going to be a good year, that the economy is going to bounce back. And it's going to bounce back for two or three reasons, Prannoy, right? One, of course, is that you go down because activity stopped. But with the pandemic a little bit more under control, we can release all those restrictions, so naturally, the economy will come back. That's point one. Point two of course, is that, you know, the world economy is rebounding, the IMF is forecasting, you know that trade is going to go up. So that's going to come back as well to help India, financial conditions are very, very good. You know, interest rates are very low all over the world. So, a combination of just having gone down so, so bad, the fact that the pandemic is relatively under control in India, and the fact that, you know, activity will come back, the restrictions will be lifted, the trade will improve, financial conditions are a thing, then, of course, there's some natural optimism and animal spirits. So, all of these means that 2021 will be a relatively good year.

Jan 28, 2021 21:25 (IST)

Jan 28, 2021 21:23 (IST)
NDTV: In fact, some of your findings, and I've read all your recent papers, which have been really, you've been working hard for once in your life. And what it tends to show is that the pandemic has been a terrible devastation, but there were problems even before and we're talking about leading up to the pandemic, there were things that were not all okay, right?

Dr Arvind Subramanian: Yes. So, I think in some ways, if you, you know, look at the impact on the Indian economy, from the Budget, it was really, from the pandemic, it was really a combination of two things, right. One was, you know, the pandemic and the lockdown response that had to be taken. So that economic activity slowed down quite a bit. But that came on top of, I think, pre-existing weaknesses in the economy.

Jan 28, 2021 21:17 (IST)
NDTV: The IMF forecasts that for next year, if we look at, we will be bounced back. Will we rebound? Will India rebound? What is the IMF saying?

Dr Arvind Subramanian: Yes. So, I think those are very nice graphics Prannoy. For now. I just, one caution is that all these numbers are subject to a lot of uncertainty, as you know, I think what we can say for sure, is that 2021 will be a good new good year for India. And that's the good news. Whether it's 11 and a half, or seven or eight or nine or whatever, who knows. But I think it's going to be...

NDTV: A 12 or 14, yes?

Dr Arvind Subramanian: Whatever. Yes, it's going to be.

Jan 28, 2021 21:03 (IST)

NDTV: Arvind just to start, before I just get into your first bit of data, this is a really, as I mentioned, pivotal time for the Indian economy, a crucial time. It's a big, big budget and an important economic survey. Right?

Dr Arvind Subramanian: Yes. You know, just to be a little bit provocative, I would say that, perhaps after the first full Budget of the government in 2015, this is arguably the most important Budget because, you know, for two reasons. One, of course, is that, you know, the economy has been devastated by, as you were describing, one of the worst pandemics. And so, you know, we have to recover from what is a huge hit to the economy. But I think also in a more positive sense, it offers the government an opportunity to kind of reset course, you know, given, you know, successive stumbles, the pandemic, it gives it a chance to, you know, reset its approach to policy making, which is what I hope we will discuss over the course of this programme.