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‘India is capable of getting back to 7% growth’

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 the 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 that the country faces. Edited excerpts:

How would you characterise the fall in growth in India due to the COVID-19 pandemic?

Globally, this is the impact of COVID-19, the lockdowns and the follow-on effects included a supply-side hit but also [an impact on] consumers and corporations that could not work. As a result, spending falls. 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]. 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 just as many other countries were revised down.

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.

What macroeconomic strategy could India follow to mitigate the impact of the pandemic on its poorest?

In India, decisions regarding fiscal expenditure or stimulus are more difficult, given its initial condition of generally high level of government or public debt.

We think a large part of this stimulus should be focused on vulnerable households. Especially if the impact of the pandemic continues, 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. 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?

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, [including] a step-up in infrastructure spending, [and] further progress on labour market reforms and land reforms.

Looking at the banking and liquidity crisis that had hit earlier, what would be a fresh, post-COVID-19 perspective on reforms needed there?

I refer back to the previous Chief Economic Advisor 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.

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.

Second, India has large potential for catch-up, [in terms of] productivity levels, through structural reforms and infrastructure investment.

There is a potential for catch-up through structural reforms and infrastructure investment