In an interactive session with the Indian express, noted economist Pronab Sen talks about the impact of the government’s economic stimulus, highlights the need for traders to have access to credit, assesses why the new method to calculate GDP is better, and says lockdowns in towns to control Covid will hurt due to supply chain disruption.The session was moderated by Indian Express’s Special Correspondent Aanchal Magazine.
Asked about his views on the announcement of the third tranche of the economic stimulus he says that the Indian economy has already suffered a loss of about Rs 18 to 20 lakh crore relative to last year, of which, about 40% is the loss that the government has taken on its tax revenues. The rest is the loss that households have suffered, whether directly through loss of jobs or indirectly through a sharp decline in reserves of various companies. What we witnessed in the last three months is completely expected. Once the retail side of the lockdown was lifted, there was bound to be a spending boom based on pent-up demand because people hadn’t been allowed to spend on anything other than essentials. Combined with that was the festival season… As a result, what we are seeing is an improvement in the economic numbers. But does that mean we will cross last year’s figures? No. With heightened uncertainty will come the natural response of households to keep their savings up which in time would provide for unforeseen eventualities. If that happens, the pace at which consumption demand will grow will be slow, and many production entities will fall by the wayside. Until now, they have been holding because of what the RBI and government have done. But all of those measures are rapidly coming to an end. So their survival depends on their production and sales. If demand continues to be sluggish, then the next year is probably going to be tough.
On the question asked about the divergence between retail inflation and wholesale price inflation he replied that that there could be a situation where the traders are demanding less from the suppliers and supplying less to the consumers. This can be because the trading community may not be getting the kind of bank finance that they were getting earlier. That is the root cause of the problem.
About the complete dichotomy in what data the economy is giving us and what the stock market is showing, he has suggested caution and expressed concern. He has called it a bubble till the new IPOs come into the picture. He says that there has been a huge increase in liquidity across the world and in India and when liquidity is infused into any system, it has to go into some kind of transactional law. If the transaction is happening in the real economy, then the money moves in that direction. And you can get a little bit of inflationary impact because people are demanding more than supply can provide. But in the absence of transactions in the real economy, those funds will move to the asset segment. And as there is no additional supply side, what you will get is essentially more money chasing a fixed stock of assets because the supply of assets is not changing. Now, the situation could change if new assets were coming into the market. But if companies do not wish to invest, you’re not going to get IPOs (initial public offerings), which are essentially the increase in asset base in asset markets. So, if IPOs come, you will see the stock market self-correcting.
About the system of computing the GDP, he opined that the current system of basing it on the GVA is better. he maintains that the earlier system missed the efficiency component which the current system is able to account for.
On the migrant crisis during the current COVID crisis, he maintains that something should be thought about at the state or municipal level. If the well-being of a geography is dependent on migrant workers, it is the responsibility of the local authorities to take care of them. Otherwise, this kind of thing will happen again. A dialogue of this kind has to be taken up at a wider level as there has to be an emerging consensus.
He is of the view that positive growth will come back only in the fourth quarter of next year, and then might stay positive thereafter. The second and third quarters is where he expects negative growth to happen.
One important point that he raised is that rural India is going to see changes as it has a growing dependence on urban India for out-migration and remittance. A lot of rural India was taking that for granted. That confidence is going to be shaken.
On giving fiscal stimulus to the economy, he is of the view that the government is thinking short term, hence it is worried too much about the downgrades. From a long term perspective, according to him, demand should be created and then the economy will take care of itself.
He maintains that the role of the states in helping the people and the economy cannot be understated as the states are at the execution end. So release of their monetary dues by the centre is of paramount importance.
The above has been extracted from the interview published in the Indian Express dated November 16, 2020.