India must gird for sharp slowdown: Arvind Subramanian

Former CEA calls for complete revision of this year’s budget framework; spending to revive growth must take precedence

June 03, 2020 10:59 pm | Updated 10:59 pm IST - MUMBAI

Arvind Subramanian.

Arvind Subramanian.

India should brace itself for a sharp economic slowdown and a difficult fiscal situation by the end of this financial year, former Chief Economic Advisor Arvind Subramanian said on Wednesday. He added that the government could have done much more after the ‘sudden’ lockdown including with helping States deal with the COVID-19 pandemic, enhancing public health infrastructure, on tracing and testing efforts, as well as providing social insurance to the worst affected such as the urban poor.

Also read: Editorial | Ominous signals: on slowdown of India's economy

Dr. Subramanian also called for a complete revision of this year’s budget framework, which itself was based on ‘unrealistic numbers’ amid an already slowing economy, as facts on the ground had changed ‘so much’ since it was presented. Similarly, he said there was a need to reframe the terms of reference for the Fifteenth Finance Commission and the Fiscal Responsibility and Budget Management law, as spending to revive growth would have to take precedence over fiscal considerations in the coming months.

“Long-term fiscal macro questions need to be carefully considered whenever this dust settles,” he said at a webinar on the economic and business impact of the COVID-19 pandemic hosted by EY India. “How much should we spend now and what should be the debt reduction path… should we spend an extra 5% of GDP now… I would still say anything that we can spend on public health, cushioning the impact on the poor and those sectors worst hit by the crisis — we should spend as much as necessary.”

While the damage on Indian firms’ balance sheets would be far more widespread now compared to the 2008 global financial crisis when infrastructure firms were most affected, the former CEA said more efforts were needed to ensure that firms don’t face permanent damage from the temporary setback due to the pandemic.

On the decision to allow States to expand their fiscal deficits and raise more money for fighting the pandemic and reviving the economy, Dr. Subramanian said the ‘conditional’ nature of this relaxation made it ‘almost like an IMF rule that the Centre has imposed on States.’ “No doubt States have to reform, but whether this is the time to do this is questionable,” he said.

However, he termed Indian agriculture, with the expectation of a good monsoon this year, as a bright spot. “India’s macroeconomic crises traditionally have been driven by food (inflation), fuel and foreign exchange. On all three, we are relatively comfortable at this point. So those parameters for the moment are holding up. How can we build upon them to see if we can turn around now,” Dr. Subramanian explained.

The economist, who is now a senior fellow at the Peterson Institute for International Economics and a visiting lecturer in public policy at Harvard University’s Kennedy School of Government, said the lockdown also proved ‘inadequate’ the JAM trinity of financial inclusion, driven by bank accounts for all.

“The problem is we have lots of bank accounts, but we didn’t know if urban poor and migrants were covered. Regardless of what we had, we should have just pumped money so that whoever got the money would have been better off, and complemented it with other measures to help urban poor. So this crisis is a wake-up call and an opportunity to complete the JAM infrastructure as we realise we need a social safety,” he said, adding that MGNREGA only covers rural poor and a more robust system could open up possibilities for providing an universal basic income in the future.

Terming the government’s fiscal response as ‘far less than developed countries,’ he suggested the decision to rely on credit guarantees instead of spending and providing liquidity through measures taken by the Reserve Bank of India appeared misplaced as liquidity was not a problem even before the lockdown.

“The problem was heightened risk aversion after IL&FS (collapse) and its aftermath for non-banking financial companies. We had ₹6-7 lakh crore liquidity, but bankers were not lending. Are bankers more brave now? Are they more risk averse now to lend money to challenged companies today? The test of the credit guarantee schemes will be whether we see more credit flowing into the system over the next few months,” he pointed out.

While the Insolvency and Bankruptcy Code had worked for a few large cases, he mooted a fresh solution for resolving loans that were falling into trouble now as interest moratoriums wouldn’t work.

“We need a quick resolution mechanism that protects and provides relief to enterprises affected by the COVID-19 crisis. We can’t just keep using moratoriums, this ‘extend and pretend’ game has been going on for many years. It doesn’t solve the problem, it aggravates it,” he concluded.

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