The world has seen a great reboot. Some large economies have emerged as the clear winners from the pandemic crisis. Where do you think India will move and evolve in the very near term and in the first half of 2021?
2020 was a terrible year. In the first quarter of the financial year the growth was minus 24%! Even in the midst of the great depression this did not happen. Even in the middle of the world war it did not happen. We got minus 24% not because of the recession. The government had a blockade that prohibited economic activity. Now, having dropped to minus 24, the next quarter we have recovered and it is less than 7.5%, much better than most people’s expectations. RBI believes that the next two quarters will be positive.
So from having a big crash, we have shown resilience and we are climbing again. Unless there is a big resurgence of a new type of coronavirus, a new variant, I would expect this rally to continue in 2021 and so I would not be surprised if we register GDP growth of 11-12%. That would be good. A nice bounce from something really low. To add to the economic trend, because vaccines have already arrived, vaccines will begin and I hope they will expand very quickly from January because in the service economy people are still afraid to go shopping, travel and tourism and entertainment.
If people are still afraid, I fear that the economy will not revive on the service side and services account for 50% of GDP. So vaccination is a very important part of what will happen next year. We need that program to start quickly. We need to expand it quickly. We need the confidence to know again that shopping is now safe. It is safe to travel. It is safe to do tourism, pilgrimages. Once you get your confidence back, you will see a nice rally in 2021, especially in the second half.
What are the key factors that you think are evolving on the macroeconomic front for 2021?
India was in reasonable shape when it came to macroeconomics before Covid. There was some confusion in the fiscal deficit, and yet it was not too bad. The government had 3.5%, maybe 4.5%, maybe 4.5-5%. A large number of countries in the world pointed to a massive fiscal deficit. Japan made 21% right away. The United States made 10% immediately and with the latter we will also go to 20%. India has kept its fiscal stimulus at no more than 2% of GDP. I have been a critic of this. I have been a critic saying that we are not doing enough for the poor. We are not doing enough to eliminate purchasing power. If you don’t have a big enough fiscal stimulus, you won’t wake up the economy fast enough either. I will only say that I was wrong to the extent that I did not believe the economy could revive to that point without stronger fiscal stimulus.
The good thing about this is the fiscal prudence that Nirmala Sitharaman has followed. It means that the long-term scars from Covid will be much less. With a large fiscal deficit, our debt / GDP ratio would have risen to 90-95% because the fiscal stimulus was only held at 2%, debt / GDP will be something like 80%, which is much lower, and interest rates they are lower. . So this will leave more fiscal room for the economy to expand in 2021.
In the balance of payments we have no problem. Money has been pouring in. In fact, our foreign exchange reserves have risen to a record high as the RBI does not want to allow excess dollars to appreciate the rupee. So on the macro front, it’s generally okay. The only source of concern has been inflation. Inflation has exceeded the RBI range of 2-6%. It has exceeded 6%. However, this is mainly due to two things; one was vegetable inflation because excessive rainfall had affected the kharif vegetable crop. Second, world oil prices had plummeted. The government did not broadcast it. The government absorbed a lot of money in the form of higher taxes for these two reasons.
That said, I would still say that inflation under current circumstances is not a short-term threat. The government can afford to be reasonably bold and the fact is that India can borrow in international markets today at lower rates than before.
How do you think the government should approach reforms to achieve sustainable growth for India?
This is a country where land acquisition remains a problem. We started to build what we call dedicated rail freight corridors, one was the western region from Delhi to Mumbai, the other from Punjab to Kolkata. After 15 years, these are not complete due to land acquisition problems. What kind of development will you get when you’ve created land acquisition laws and a political funk to be tough on these laws so that projects just don’t move forward?
The IOC and others are planning the largest refinery in India and perhaps one of the largest refineries in the world at Ratnagiri. There was agitation on the part of the farmers for not giving the land. The whole idea has been dropped because the government doesn’t have the guts to buy the land for a refinery. You have to overcome the problem of the land. It is not an easy thing to overcome. In Uttar Pradesh, Yogi Adityanath claims that he has overcome the problem by saying that I don’t buy, I buy. I have just announced that the purchase price in urban areas will be double and in rural areas it will be four times and since it is purchase and not acquisition, we do not go through all these procedures and we can quickly acquire land and we are building our highways.
I don’t know to what extent this is an exaggeration and to what extent it is true, but there has to be new thinking, especially at the state government level, on how to acquire land quickly and quickly and at a reasonable price.
The other problem in Punjab is the farmer. No industry is emerging in Punjab because the cost of land is up to one crore per acre. Why should anyone put an industry out there? The land is too expensive and yet the whole thing is that with all the subsidies you give to farmers and other things, nowhere can you get land less than Rs 50 lakh per acre and the decent land is now a crore per acre. So you can’t even industrialize Punjab because the land has become too expensive.
One of the most important things to do is make it much easier to acquire land for projects, even if it is necessary to give more money, but for the love of God, do it quickly. On the job side, this is significantly a state issue and Modi is generally decentralizing the powers of liberalization to state governments. So far I haven’t seen him achieve any miracles. There still wouldn’t be anyone who would want to set up a factory with 25,000 or 40,000 workers, the kind of giant textile factories that we have in Bangladesh, for example, where you can hire and fire. Given the political opposition, I don’t think it is feasible in India.
One of the main positive aspects of India has been our demographic dividend. However, there has been a big drop in labor participation, especially that of women, and we are seeing high levels of unemployment. Instead of reaping the benefits of the demographic dividend, can it become challenging and counterproductive?
The demographic dividend that was expected has not arrived. The demographic dividend means that there is a higher proportion of your population that works because they are of the working age of 15 to 45 and to that extent. there are fewer dependents. If there are more workers and relatively few dependents in the population, that is the demographic dividend. But for that, the total labor share in the economy should be increasing.
In a large number of similar countries, the labor force participation of people over 15 years of age is 60-65%. In India, in about 2017, we had barely managed to reach 50%. Before Covid, it had dropped to 43% and due to Covid, it had dropped to 39%. It may improve a bit now, but we have a very serious problem because it is a gender issue. The participation of men is quite high: 75% to 90% in various places. But female labor force participation in rural areas has dropped dramatically.
Should the government continue to spend on MGNREGA, MSMEs, infrastructure, etc.?
There is a consensus among economists that we should spend very large sums on infrastructure, especially at this stage. Infrastructure is time consuming and expensive. It is very capital intensive. We currently have the lowest interest rates the world has seen in a long time. So you can borrow abroad. Even within India, gilt rates have dropped to 6% or whatever, and in the 1991 crisis, the gilt rate was 13-14%. So, since interest rates have dropped, this is an excellent time to make long-term investments in infrastructure.
My real problem is that we already have infrastructure projects so big that they never seem to be finished. We have been independent for 75 years, still cannot build a railway line to Srinagar. I mean how pathetic you can get. In China, they can cross Tibet to Lhasa and build a railway line. We can’t even get to the Srinagar Valley. Why has the east-west corridor taken more than 15 years and we still can’t do it? Mr. Modi said that I am going to have this bullet train between Ahmedabad and Mumbai, but I cannot acquire the land for that. We need to invest in infrastructure in a big way, but before we can invest in infrastructure, we must improve our investment capacity.
Do you think that by the second half of 2021, the RBI will begin the process of normalizing monetary policy?
The RBI has admitted very clearly that between inflation and growth, the RBI’s focus today is on growth and not inflation. So while everyone is used to the idea that the RBI is only concerned about inflation and what it will do with interest rates, the RBI wants growth to resume and that is why it gave the loan moratorium, the special waiver. for MSMEs and is doing its level. it is best to ensure that various insolvency issues are resolved quickly.
RBI’s focus will be on promoting growth. You will not be in a hurry to raise interest rates. It will tolerate higher inflation rates than it could have in the past because after a bad 2020, 2021 must be the year of growth. Let no one say that 2021 was about to explode and that the RBI killed it by raising interest rates. That is the last thing the RBI wants to say, and therefore I would expect the RBI to be more supportive of growth and more willing to tolerate inflation than other gentlemen seem to think.
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