“If we look at India in the longer-term, say since the early 1990s, the country has had a record of gradual structural reform. We think it is urgent to get back to that once the crisis is over,” says Ranil Salgado
While healthcare professionals and scientists scramble to cope with the human toll of the ongoing COVID-19 pandemic, policymakers worldwide and in India are racing to stabilise their economies, and mitigate the damage that has already been inflicted upon livelihoods, especially of poorer sections. Ranil Salgado, India Mission Chief at the International Monetary Fund (IMF), discussed the big questions on macroeconomic policy, growth dynamics and poverty alleviation, and challenges for India with Narayan Lakshman. Edited transcript:The IMF’s June 2020 World Economic Outlook update projected global growth at minus 4.9% in 2020, nearly 2 percentage points below the April 2020 forecast. Please characterise the steepness of the fall in growth in India due to the COVID-19 pandemic, across sectors and the impact on jobs and future growth.Globally, this is the impact of COVID-19, the lockdowns and the follow-on effects, including a supply-side hit but also [an impact on] consumers and corporations that could not work. As a result, spending falls. You had a similar feature replicating in India. India started with a relatively pre-emptive lockdown since March 24, 2020. There were only 550 confirmed cases across India at that time. India implemented a very strict lockdown, probably one of the strictest lockdowns. We had already revised down India’s growth in April 2020, not as much as globally because we thought the pre-emptive lockdown would achieve better results than [what we] ended up [with].There was progress until the last week of April 2020, where the growth rate in confirmed cases of COVID-19 came down. There is counterfactual analysis suggesting that it may have been much worse in that period if not for the lockdown. But, unfortunately, India has not been able to gain full control of the COVID-19 situation.
So, when we looked at the numbers again in early June 2020, we revised down India as well just as many other countries were revised down. We revised down India’s fiscal year growth to minus 4.5%. We do not usually publish our calendar year forecast for India but, ironically, it is exactly the minus 4.9% that you mentioned for global growth. This is down to the number of COVID-19 cases per day, which was then only at 8,000, but is now in excess of 50,000.We will have to think about this. The next time we do a forecast will be for the October 2020 World Economic Outlook. We will wait until we see the first quarter fiscal year GDP before making a forecast but again, I think there are downside risks for India. You said you were hopeful that the lockdown effect would kick in, in terms of flattening the curve or giving the government more time to respond to the crisis. The black box in this scenario is testing, in India and abroad, leading to questions surrounding what the ‘true’ case numbers are. If there is a spike in tests leading to higher numbers, do you expect the Fund will also revise its forecast accordingly?We are not epidemiologists, and this is a little bit outside our expertise. The positive test ratio in India was pretty low, under 5%, I think through April 2020. More recently, it has risen incrementally, to somewhere above 10%. From what I understand that ratio needs to be below 5%. This suggests that although India has ramped up its testing rate to almost 5,00,000 people per day, it probably has to ramp it up even further. An example I would give is New Delhi, where a month and a half ago, there were large concerns. New Delhi then tripled testing, with the help of the government, in a matter of three or four days. That seems to have helped flatten active cases in New Delhi. Even though there are new cases coming in, recoveries are matching that rate. In some sense, I suppose that needs to be replicated throughout India. The Fund has also highlighted the acute adverse impact of the pandemic on low-income households, “imperilling the significant progress made in reducing extreme poverty in the world since the 1990s.” What macroeconomic strategy could India follow to mitigate this impact on its poorest?In India, decisions regarding fiscal expenditure or stimulus are more difficult, given India’s initial condition of generally high level of government or public debt. We think a large part of this stimulus should be focused on those vulnerable households. To date, what we consider the above the line spending, the ones that go into deficit, have been that way. Especially if the impact of the pandemic continues, even more will be needed in that area. We have been emphasising that the fiscal space that India has needs to be used to support vulnerable households. This includes in-kind transfers and food transfers that have worked quite well, the support for rural employment but also efforts to support urban employment. Do you think this is the right time to push forward on the conversation about the Universal Basic Income?That is a difficult question in India, again because of the fiscal space issue. There have been proposals, including by the previous Chief Economic Advisor, about a more limited form of that. There is scope for something like that – a limited form, I would not call it universal. But it has to be combined, given the fiscal issues, with more extensive subsidy reforms. You essentially end up taking some of that money that goes into subsidies and then better targeting it toward more vulnerable and poorer households. That is the way to reconcile providing that income support while maintaining a sustainable fiscal path. Given the sharp drop in aggregate demand, do you think there is any potential for deficit monetisation by the RBI?It is a very unusual circumstance, and a few countries and emerging markets have been doing that recently, including Indonesia, for example. But we still think for India that should be a last resort. So far, partly because of the shortfall in demand, there seems to be plenty of savings available for the government to tap into right now. So far, the government has not had to do this. 10-year yields are below 6%, and States are able to access funds at fairly low rates. Right now we do not see a clear need but that is something that could potentially be considered if things tighten up.What we also think is important in the longer term is that once the COVID-19 crisis has passed, India has to get back to its long-term fiscal consolidation strategy. That could also potentially ease concerns in markets and keep rates relatively low. That could help avoid any need for consideration of monetisation by the RBI.What structural reforms are necessary to see India through in the longer term, given that the economy was already on a sticky wicket before the coronavirus struck?If we look at India in the longer-term, say since the early 1990s, the country has had a record of gradual structural reform. We think it is urgent to get back to that once the crisis is over. Some structural reform we have seen the government already announce, in the agriculture sector, in particular. A few years back there had been substantial steps taken, whether it be the Insolvency and Bankruptcy Code (IBC), forming a national GST, steps to improve businesses which are ongoing, as evident in the World Bank ease of doing business indicators, and issues relating to FDI. These are areas where progress has been made with reforms.
Reforms are still needed in those areas and some in other areas. I should also emphasise the step-up in infrastructure spending. There has to be further progress on labour market reforms and land reforms. Our fiscal affairs department did some work with Niti Aayog recently, on sustainable development goals, including progress in terms of healthcare, which turns out to be important during the COVID-19 crisis, education and a broad array of reforms that need to continue notwithstanding the progress that India has made over the last few years. Looking at the banking and liquidity crisis that had hit earlier, what would be a fresh, post-COVID-19 perspective on reforms needed there?That is an area of incomplete reform. I refer back to the previous Chief Economic Advisors and his four ‘R’s. Three of the four ‘R’s were done fairly well, that is Recognising stressed assets, putting together the Resolution framework or the IBC, and the Recapitalisation by the government of public sector banks. The recapitalisation of public sector banks, while important, also means that the government will own more of these banks again. That has to eventually be unwound, somewhat.The fourth step, where we see less progress, is the reform of governance issues – and I would also extend this to private sector banks. By this I mean how banks manage operationally and how banks manage risk. That is a key area where progress needs to be made afterwards. We do support temporary moratoriums but those need to be limited. Once the crisis is over, we have to get back to a recognition of stressed assets as quickly as possible, because otherwise new lending gets shifted to that category. You have to have real new lending, to new companies and ventures – that is critical.Part of this question is about resolving the issues of the Non-Bank Financial Corporations as well. That was a stress we saw and was a concern, just ahead of the COVID-19 crisis. Steps have to be taken in that area too. Looking forward, do you think that additional lockdowns will start to have a negative impact on the prospects for an economic recovery?That is the difficult balance that, not just India, but all countries are facing right now. How do you balance the need to resume economic activity with the health issues? We think it is critically important to resolve the health issues, while trying to gradually open up. We touched a little bit on testing, and I think that is a key part of it. If you have a sufficient amount of testing, then you will be confident enough to open up and not further spread the disease. Otherwise this will lead to official or voluntary lockdowns. People will be nervous to leave their houses and to engage in economic activities. I was reading this morning that exporters are starting to get orders again. The concern is that workers do not want to come back to work, because they are nervous. You have to make sure that people are confident on the health side, so that they feel not only that they can go to work but that they can resume other activities, including things like shopping.Right now, what we are seeing globally are very strict lockdowns, or limited lockdowns, where they exist, and that could work.If there is one silver lining for India on the economic front, how would you characterise it?When you think of India about two years ago, the country was averaging 7+% growth, over the previous decade. We think India can get back toward that, even we are not sure how quickly it will. Partly, that reflects demographics – India has a relatively young population, possibly one of the youngest in Asia. We did some work about three years ago showing that. That is important.Second, India has large potential for catch-up, as economists say, meaning that productivity levels in India are below advanced countries, so India can continue to catch up in terms of productivity levels. The way you do that, as we discussed earlier, is through structural reforms and infrastructure investment.The positive news in this is that India has the potential between these two factors that we hope will help it get back to the 7% growth that it had just a few years ago. This will go a long way in restoring the strength of the Indian economy.