We are talking at a time when India is perhaps ready to start unlocking in phases. We now have a vaccine for the coronavirus which albeit is in shortage, but I want to focus on what is the ideal economic vaccine. What is your prescription for growth for the economy?
Firstly, I wanted to share that I complete my term at the CII on 31st of May after which Mr TV Narendran, Managing Director of Tata Steel takes over as CII, President. Of course, I will continue to be engaged but I just wanted to share this with you. It has been a truly uncharted year behind in terms of where we started and where we are one year later in this pandemic period. When we rather than looking behind, if we look at where we are, I think science and health will disproportionately determine where we go from here.
On the whole issue of science and health, the COVID numbers currently which are about 2 lakh positive a day based on predictions, by end of June should come down to about 50,000 a day because then we are in a very interesting dilemma about how fast we open up versus vaccination and capacity building – should there be a COVID 3.0. My personal view is this time our opening up has to be very calibrated based on expert advice and specifically focussed on our capacity to handle COVID, in terms of oxygen, hospital beds and medication. I would much rather we store the supplies and surplus and even if it leads to wastage because while wastage costs are bad, they are much less than the cost of losing human lives.
Similarly, we need to pick up vaccinations. We are now probably three to four months away from when we will get a little more comfort on the percentage vaccinated. Therefore, by that time around –September-October – I think we will reach a point that we would have reasonable vaccination, plus COVID positive peak cases, and immunity thereof for us to be comfortable. These three or four months are crucial in getting the balance between lives and livelihoods and looking at what COVID 2.0 has done and the fear it has created in the minds of states as well as individuals. I see the opening up as gradual and calibrated. As vaccines pick up, hopefully the variants will also be under control.
Therefore, economic outcomes will depend on that. If we are seeing some sort of a normalisation on vaccination and calibrated opening between now and September, then by September we should see economic activity normalise significantly. My expectation of economic outlook is that by end of March 2022, the size of the Indian economy will be the same in real terms as it was in March 2020. We saw the first year at around minus 8% GDP and the second year because of COVID 2.0 and its impact, the growth rate should be currently around 8% to 9% for this year which takes us back to a total close to 100, which is what we were in 2020 March.
You think by the end of this year the Indian economy will be back to pre-COVID levels? A lot of us are also spooked by other reasons. The tragedies have been very real and we have to deal with a lot of other factors now too. For example, whether it is inflation or the strengthening of the US dollar, or the super cycle of commodities.
I believe inflation in India will pick up sometime in 2022 – by March 22. Our estimate of inflation in India is at about 5.5%, but our view on monetary policy is that it should continue be accommodative through calendar 2021, and at least till December 21 and thereafter if at all a very gradual correction and normalisation is needed. On the other hand, on global inflation there is a debate out in the US led by the Fed itself who believes that inflation is transient. But many market experts believe that this is more structural than transient. I am of the camp that years 2022 and 2023 are crucial. Inflation will be higher, and we will have to deal with the inflation issue in calendar 2022 and 2023.
When you talk of the Indian economy returning to pre-COVID levels, will we need a helping hand from the government, a stimulus of sorts? Maybe we don’t need reforms the way that we saw in 2020, but a more direct stimulus and maybe many measures?
I think the government will have to expand its fisc. The good news is in the budget of 2021-2022, the finance minister was very conservative in her income projections for 2021-2022 and the revenue will be better. She has also got more dividend from the RBI and she has got credit from Food Corporation of India. Therefore, there are significant credits which are coming. At the same time, all of the expenditure may not happen to the extent expected. Therefore, as long as the privatisation as a disinvestment programme comes to around the levels it has been planned – I think within 6.8% – there is fiscal room to expand and give some support to the economy.
I would like that support to be in two parts. One is for the bottom of the pyramid, either in terms of kind, which is food or medical guarantees for medical costs or actual money for medical costs, and of course the NREGA scheme which is going on. That needs to be also strengthened. Additionally, if required, even direct cash to the bottom of the pyramid. We need to be out there to support the weakest of society at this point of time. Second is support to the stressed sectors through ECLGS expanded scheme. The earlier scheme was Rs 3 lakh crore that the government has announced and currently used about Rs 2 to 2.5 lakh crore. Time has come to expand it and I would recommend going up to 5 lakh crore.
Rs 5 lakh crore under the ECLGS scheme?
Yes.
Are
the market’s and
the industry’s expectation also that this is not the time to worry about fiscal deficit and the government should really loosen the purse strings?
I think it is absolutely critical to ensure that we support the economy at this time because we need to ensure trend growth comes back quickly. If we under-spend now over the next six to nine months, we will have a long-term impact on our trend growth. Therefore, now is the time to ensure that we keep the economy buoyant as we come out COVID 2.0 gradually.
What is CII’s recommendation? When would be a good time for the government to come out with a package which could be as big as Rs 5 lakh crore?
I would say that it has to be calibrated again, but we should start as soon as possible.
In your assessment what would be the stressed sectors? What is the industry’s expectation and what is CII’s recommendation that needs to be addressed?
I think there are a number of stressed sectors. There is the MSME sector. There is unsecured consumers who have borrowed and have problems paying back. There is the airline sector, hospitality sector, and all the COVID-affected sectors which we are aware of. What we also have to keep in mind is broadly sectors can be divided into two categories – sectors which are currently under pain and once we have passed the pandemic fully, these sectors will bounce back. So it is a transient pain.
The second is many sectors are structurally changing. Industry dynamics are changing forever and in those sectors the pain is going to be much more. How we are going to ensure the companies come out of this or do not come out of it at all and how do employees in those sectors get rescaled for new jobs, all these are planning measures which we need to take.
Given the uncertainty is industry also hoping the government does something as far as demand goes? In 2020 most corporates were planning growth in rural India.
Which is why I am suggesting a deeper direct cash transfer to the bottom of the pyramid including significantly in rural India.
What can be done for the middle class?
For the middle class I think if you can protect the companies, we can protect their jobs. Which is why you need to go out and support the MSMEs and stressed sectors with government guarantees. Support them and that will protect the jobs.
You talked about the RBI surplus dividend, but there is also an underlying assumption that we will have proceeds from disinvestment. There is so much excitement in the capital markets, but the big ambitious plans of strategic stake sales seem to be under threat.
I would like to compare the state of the capital markets to a gushing river water. Take buckets full of water as soon as you can. The water is flowing, take it and please recapitalise balance sheets whether it is governments, public sector or private sector. Do not miss this opportunity. The gushing river of capital which is flowing is not going to be necessarily so strong over a long period of time.
You had also made a clarion call in 2020 to your peers in the banking industry and to NBFCs to not miss that opportunity to recapitalise. We did see some recapitalisation but maybe not enough.
If you look at the banking and financial sector through 2020 and 2021, many players have raised capital which is why the financial sector’s capital position is much stronger today than it was one year ago. I say capital is the oxygen of the financial sector. Similarly, the governments of the day also must utilise the positive capital markets and raise their money.
What is going to happen with America coming out with the bazookas and China also making so many orders in infrastructure? Every country is trying to pump prime the economy, India will also be competing with that. We are in the midst of the super cycle of the commodity markets. Banks still have not seen the credit growth that they should have. They are not increasing working capital limits and borrowings. What is the solution for this?
I think today banks are ready to lend to good credits. The good credits do not want the money. The problem is reverse. They are not drawing down. And on that note, I must also give one of positive signal for the Indian economy and that is exports. If the world is moving, India has a great ability to export particularly when we have surplus capacity in the Indian industry. If you look at the steel industry today, despite the fact that domestic steel demand is subdued, the steel sector is doing wonderfully because global steel prices are higher than domestic prices and the demand is great. Therefore, exports today is one of the big pluses for India to be growing out of the current economic challenges.
Given the US dollar weakening, should the RBI look at limiting the gains of the rupee?
My view is that at this point of time, a weaker US dollar is a reality. When a country prints money like there is no tomorrow which is what the US is doing, it is bound to affect the value of its currency relative to the rest of the world and therefore a weaker dollar. A less depreciating rupee is the new reality and we should be aware of that, which also gives us the ability to actually monetise our deficit and for the RBI to expand its balance sheet domestically as well.
If you would make recommendations, what could it be on this front because this is going to be the new reality?
My view is do not bother too much about the rate of the rupee and the dollar. Go out there, export like hell, the world market is buoyant. India has surplus capacity and needs GDP growth. Whether demand comes from here or outside, it will help Indian industry and create jobs in this country. And we should be going hell for leather for exports and we should become much more globally engaged. Just as the world markets are helping us today by keeping their markets open for our exports, India should be bolder in terms of expecting a competitive situation on imports. Excessive protectionism is not something which India should encourage.
This is considered to be India’s decade, but there is gloom and doom because of the second wave. Do you still stand with the view that this is India’s decade?
I think India has to work on the global challenge which the pandemic has thrown for us at this point of time. The last two months have been rough for India globally. One of the first ways to get better is to accept the facts in front of us. Once we do that, we have to ask how do you go from here. So, whether it is government, whether it is the regulators, we should not have policies which are inconsistent with the best-in-class global policies across a whole range of areas.
This is something I would recommend for India to be out there as a world-class country. We need to ensure that we have world-class policies and execution to back our points. We should respect science, we should respect knowledge, we should respect institutions and support them to make India a world class country.
What can the private sector do when it comes to the vaccine program? You are talking of a calibrated reopening, what is the role the private sector?
I have a view on the whole vaccination strategy. Purchasing say 75% of all vaccines at a price somewhere in the range of between Rs 150 and 300, whether it is Rs 250, Rs 300, whatever it is. But one price for 75% of purchases by the central government and the balance 25% for private sector to purchase and vaccinate its people and divide it instead of a three-way policy into a two-way policy.
The three-way policy is creating challenges because states are unnecessarily competing with each other and with the private sector at the same time. Let the central government equitably distribute out of 75% to all of India through the government sources and private sector can vaccinate from the 25% market. That will lead to less confusion and get clarity on the vaccination policy going forward.
Do you have a view on how the Centre should distribute it among the states? Should it be where you have more cases or should it be based on logistics?
I think the Centre already has a process for 50% ensure that it is increased to 75% and the decision making and allocation is non-political.
One of the biggest lessons from this pandemic that we must also learn is to invest in our health infrastructure. Any parting advice on that front? How can it be ramped up?
As I said, our ability to open the economy is linked on our ability to build health capacity for a potential third wave and that has to be the priority over everything else at speed. It is not a long walk, it is heart massage we need to do for improving our health infrastructure.
