can never rule out downside risks completely, but in terms of just putting weight one can say that the upside potential is greater, says Chief Economic Adviser K V Subramanian. Edited excerpts:
Let me first begin by asking you about your 11% growth projections. Of course it is in line with the IMF’s estimate but I want know about the key downside risks as even the IMF in their estimates have said that any kind of delay in vaccine rollout, any sort of vaccine hesitancy will play a key part as far as downside risks are concerned. Would you agree with that and would you also say that these continue to be a large overhang on where India and Indian economy really moves from here?
While I think those aspects cannot certainly be ignored, I do think that given the projection of 11% the potential for upside is greater than some downside risks. I do not think anytime ever you can rule out downside completely but in terms of just putting weight I would say that the upside potential is greater.
In the press conference also I had asked you about vaccine hesitancy and that it seems to be a concern. Even though we have seen as many as 25 to 26 lakh people being inoculated so far but there has been a lot of talk about one of the two vaccines that has been cleared. I want to understand from you that do you believe that vaccine hesitancy could be a big downside risk going forward?
As I responded to your earlier question as well I do not think it is a large downside risk for two reasons; one if you look at a lot of the recovery that has happened, the manufacturing sector has contributed significantly to that. The service sector has been affected far more and even within the service sector if you look at the PMI indices they have actually grown despite the contact based service sectors like tourism continuing to be impacted because of the pandemic.
So I do not think the manufacturing sector will get impacted by the vaccination one way or the other. The only sector that actually does get influenced is the contact based service sector where if you focus on the fact that there are a large amount of vaccinations happening then at some stage as epidemiological research shows that herd immunity can develop and can actually lead to the possibility of cases going down.
So when you put all these together I think that is what leads me to believe that the downside risks are not as large as the upside potential is.
You also said that countercyclical fiscal policies seem to be the need of the hour, however you also warned that one should not be irresponsible during these times. I want to understand from you does it mean we are in a for a range. This is something that the 15th Finance Commission has also spoken about. In terms of the inflation targeting framework as well we have a range and that allows us to be a little more flexible perhaps is that what you are pointing towards?
So in that chapter on fiscal policy there is a box at the end which looks at one particular country’s example of a fiscal rule that enables countercyclical fiscal policy. So the basic point that is being made is that when you have countercyclical fiscal policy, the cycles that happen in an economy get dampened. If your fiscal policy is pro-cyclical, exacerbate those cycles and therefore there is a lot more volatility in the economy and private agents therefore respond to such uncertainty. But for a fiscal policy that is countercyclical, those cycles are actually mitigated and which reduces uncertainty and private agents then respond to the same as well. So I feel the idea of counter cyclical fiscal policy is more nuanced than just a range.
You have also in fact referred to India’s test match as well that we won with respect to Australia. I want to understand from you when you are talking about India’s fiscal policies and how we need to react to situation such as COVID, how is it that India should look to bet?
Well I think if I were to frame counter cyclical fiscal policy I would say that Sachin Tendulkar would actually be the best example because Tendulkar actually combines both Pujara and Rishabh Pant and that is what I am advocating. I do not think we have had a better batsman than him ever in Indian cricket team.
Absolutely agree with you. Having said that you have also in fact hit out at the rating agencies and this is coming after India has been downgraded. You have said that India’s debt paying capabilities are gold standard. Do you by this argument mean that after the Budget, you are going to ask the rating agencies to relook at India’s rating or relook at their methodology?
So what we are highlighting here is that if you think about the obligations and obligations for a country that does not have full capital account convertibility, you need to look at not only the obligations of the sovereign in foreign exchange but also the obligations of the private sector.
The obligations of the sovereign are minimal as we pointed it out but if you take into account the private sector’s obligations, they need to basically go to the central bank, give rupees, and get foreign exchange in return.
If you take all that into account and if you take total debt, our foreign exchange reserves now are greater than our total obligations. What that means is if a company has more cash sitting on its books than the debt then the probability of the company to repay that debt is 100%. It is the same for India as well because even if at the same point in time every private sector entity approaches the Reserve Bank asking for foreign exchange saying all of us want to repay our foreign exchange obligations then the central bank can still take care of that. I think it cannot get better than that.
But it is also about vulnerabilities. For example you have said that there are financial vulnerabilities and as far as the banking sector is concerned we should do an AQR exercise once the forbearances are done away with. I want to understand from you in terms of recap, this is something that even the IMF has spoken about as well. In my interview with the Chief Economist at IMF Gita Gopinath she did say that India needs to recap its banks. How significant is going to be this exercise. Can we expect something in the upcoming budget as well as far as dealing with the question of financial vulnerabilities is concerned?
This is something that has been lent a lot of thought and various ideas have been discussed. So I think as they say ‘sabr ka fal meetha hota hai’ to why not wait till Monday.
But would you say that the health of the banking sector may deteriorate if the situation were to persist?
So I think that’s why we are pointing out the importance of treating regulatory forbearance as emergency medicine and not a staple diet. I think that idea is important. And what we are trying to do is to caution the way how it should be looked at.
Would you also say recaps for banks have become a staple diet as far as what the government has been doing?
I think there are a lot of different committees that have opined on that. I do not think this year’s survey has anything to add. Last year there was a chapter that we looked at because it was a golden jubilee of banks nationalisation. As we do not have anything on the survey I do not have much to add.
You said that we have to do away with jugaad especially in Indian businesses and you have made a case for private businesses to invest more in R&D. Having said that do you not believe that while yes, tax incentives are given, the Indian government also needs to open up a lot of spaces where we currently have only government monopolies. It would also allow more R&D into that space, case in point being the space sector for example?
So that has been done. If you have seen the defence space, all these sectors are being opened up but firstly from an economic research perspective. I am not convinced on the point that you are mentioning in terms of sectors that the government still occupies is a hindrance for innovation. For instance during the time when the information technology sector was really generating a lot of cash flow one could possibly think that that might have been the time to actually work more cash flows in and become the world leader. That is the basic idea that we are trying to mention which is that the proportion contributed by private sector to gross expenditure on R&D is much lower at a 37%, than that in advance economies which is close to 68%.
I completely forgot to ask you about the healthcare spend and you have said that the time for it is now. How crucial is going to be that with respect to the upcoming budget?
Very much, I think right now the focus has to be on ensuring the vaccination proceeds really well and the necessary funds for that should be allocated. If the vaccination drive goes through well then it would actually be a good stimulus and then going forward actually a path needs to be laid for this.