India to return to pre-Covid GDP growth, perhaps a bit higher: Arvind Panagariya

Compared to pre-Covid days, the GDP growth should be significantly higher than where we left off in 2019-20, says Arvind Panagariya , Former VC, NITI Aayog, in an interview with ET Now.

What is your assessment of the macroeconomic scenario both globally and in India?
Globally, it will be good if we can get back to the pre-Covid level of world output and income. I would put that as a good scenario at least for the current year meaning. So if we are talking about 2021, then things look a little better because we certainly have the vaccines going around to leading countries on that front like the United States and China. We have made a beginning in India as well. Some of the other countries are behind. So, 2021 should look better and we should see good recovery. I do not put any numbers yet as it is too early to do that. In India, I remain optimistic that we would return to the pre-Covid GDP, perhaps a bit higher than that in 2021-22. Given the base of 2021, this will mean a very significant growth but compared to pre-Covid days, the GDP growth should be significantly higher than where we left off in 2019-20.

What would the Biden presidency mean for the US and global recovery? Do you see the US as less protectionist? Do you see an end to the US-China trade wars?
Personally I do not think this is going to change the economic scenario very much. The Biden administration will probably be a bit more on the stimulus side so fiscal will be more expansionary. They certainly have given those indications right now and that should help the US economy a bit. On the other hand, a lot of studies also show that temporary stimuluses generally do not translate into very large impact simply because people spend only a very small fraction of that money.

On the US-China trade front, I do not think there is going to be a change. There has been a long standing bilateral consensus on China in the United States going back to President Bush and then President Obama going by all the reports that the USTR sends to the Congress annually. So, that will depend on how the stand-off between China and the United States plays out but I do not think any initiative will be taken from the US sides because there is a different President.

From the Indian perspective again, I do not see much change given the fact that China is a major issue for the United States . India is simply too critical for the United States to make any shifts in policy.

So what about global trade?Will it be as lacklustre as last year?
It should do better because ultimately the dent in global trade was made by Covid and as we vaccinate the populations across the world, global trade will pick up also. It has already picked up. The numbers show the pickup in global trade has been way stronger and sooner than was the case in the 2008-2009 global financial crisis. From India’s perspective, I have always maintained that what happens to the recovery of global trade is of far less importance than what we do in India because ultimately the global market is extremely large. The total goods and services were about $25 trillion pre-Covid. Even if they drop to $22-23 trillion, that is a hell of a large market. Our problem is to get a larger share in that very large market.

You spoke about the Indian economy doing better than expected and you also spoke about the US stimulus likely to be larger under the Democratic administration. Should we in India be a little less stingy as far as the fiscal stimulus is concerned? Should the government going into the Budget worry about the fiscal deficit so much?
What the government did was absolutely right and I would not characterise it at all as stingy. They were very prudent not to have started firing right away as the United States did and from the way the economic recovery has unfolded since then, that stance has actually been vindicated. My own view has always been that if the workers cannot get to the work, then you cannot generate supply response by simply stimulating demand.

In fact, even the consumers cannot go and spend the money because of Covid. Any stimulus would not have translated into effective demand in the first place but even if it did, there could have been a supply response because workers simply could not get to their workplaces. But now that workers are returning and vaccination has started, there is scope for some response.

I would suggest that first, a lot of overdue payments by the government to the states in terms of the GST overdues, tax reimbursements or refunds to the people and companies should be made. Likewise, a lot of the payments have to be made on goods and services that have been delivered to the government but payments have not been made. Fast-track those payments. That is one thing I would do and also frontload a lot of the expenditures that you are going to do in 2021-22. For instance, the PM Kisan payments could be made in advance rather than in three tranches. Just do a one tranche of Rs 6,000 in April if that is feasible and then some of the other expenditures could also be frontloaded.

Under the UPA government just before after the 2008-2009 crisis, the fiscal deficit had gone up to 6.4%. Do you think that 6-7% fiscal deficit could be safely run? Will rating agencies not blink at that?
I still remain on the conservative side and which is why I have said that frontload the expenditures and then wait and say where you want to go and you can do a revision if necessary on the Budget halfway through. That is how I would go. Fiscal deficit does matter because you are also crowding out private investment which needs to be able to get resources in the financial markets as well.

If the government borrows too heavily in the financial markets, then that is a problem. I would instead recapitalise the banks so that the credit flows do not get choked. Debt matters. After all, somebody will have to pay in the future. Interest payments will pile up. Already from 2021, we are going to add up debt to GDP ratio of about 85%. One needs to be careful. So it has to be calibrated and that is how I would approach.

Between recapitalising the existing banks and a bad bank, which one would you favour and why?
I do not think it is an either or choice. Recapitalising has to be done because the NPAs will add up. At this stage, I do not think we need a bad bank really. For example, State Bank of India has its own asset reconstruction company (ARC). If it chooses to go that way, that is fine but now we have got a proper bankruptcy process in place and that is what we ought to use.

Instrumentality ought to be used far more effectively and we have done that. When we talk about bad banks, our ministries are not able to move fast enough. Just remember how long it took and still I am not sure where the Infrastructure Investment Fund stands. It had been promised in 2015 or 2016 and it never took off. When the bankruptcy policies were not at work, I would have said we should do it, but now the IBC process is at work, I would strengthen that if necessary and rely on the banks themselves to go to the ARCs if necessary.

Since resources are always going to be a constraint for a government in an economy which is recovering very slowly, would you favour unconventional measures like monetising the deficits?
Monetisation anyway is RBI’s decision. If it wants to monetise, it can go in and buy the government securities and put money into the market. That is the conventional way we used to do it where the government will write the securities directly to the central bank and central bank will give equivalent amounts of money. It is no longer really needed and it is not desirable either because other processes accomplish the same thing that is the purchase of the securities in the secondary market, in a far more transparent manner. It takes place at a market interest rate whereas when you do a direct transaction, you do not know what the appropriate interest rate is.

One demand which periodically resurfaces is since India has huge forex reserves which are earning very little, why not use these forex reserves to fund infrastructure as these will create jobs and vital infrastructure? Is that a good use of forex reserves?
At the end of the day, it ultimately comes down to asking whether it is desirable for the government to run larger fiscal deficits. We had an earlier play of it during UPA-1. I wrote about this and in the end my conclusion analytically was that there is no easy way to do this without also showing this on to the books of the government. It will have to ultimately reflect somehow in terms of the fiscal deficit because the spending ultimately has to be done by the government. You have talked about transparency and even if you create some sort of a special purpose vehicle (SPV) and put it on those books, it still ultimately is a part of the government liability and will certainly show up in terms of interests that will have to be paid by the government.

It is up to the central government and if the interest earned on these assets is very low, which I am sure it is because most of it sits in treasury bills in the United States, should we have a sovereign wealth fund or something which then is invested in more lucrative higher return securities or even equities? That will be a much bigger decision.

To me, the main issue is that you know whatever it is on the accounts of any of the public entities which are not an integral part of the budget, we should list that fully. I do not think that the ratings agencies know what is on the books and what is not on the books. It will be nice for the analysts to be able to get that in one single place. We should start that practice. Some of it got done in the previous budget. We have to do a bit more of that bringing all the expenditures together so even the government will find it useful to have all these listed somewhere in the budget itself.

Source: Economic Times