First let’s talk about the second COVID-19 wave, which seems to be receding right now but has left its mark on the country’s indicators. What is your assessment of the path ahead?
We went through a very difficult and disruptive second wave, so unsurprisingly many of India’s indicators have been thrown off. We are now back in an environment where cases have come down and we are able to open up. But, the exact trajectory the economy will take from here needs to be watched closely; I think we shouldn’t make a call right now, it would be better to wait and watch, see how the indicators behave once things have opened up properly.
However, unlike the first lockdown, the impact of the second lockdown on many indicators is perhaps muted. Exports are doing reasonably well, FDI is doing well, there are many sectors that didn’t shut completely, unlike the first time. Overall, there is still some momentum in the economy but there are service sectors that have been hurt particularly hard, especially contact-intensive ones like hotels.
We need to wait and watch to gauge what will happen and to chart a response.
Meanwhile, we should focus on the following — first, everyone seems to have forgotten about the fairly expansionary budget back in February; many would agree that most of the measures announced then were good, we just need to make sure we implement them.
Secondly, we need to ensure that the vaccination programme continues to be rolled out aggressively; numbers are going up exponentially, which is necessary to ensure the country gets back on track.
That’s our focus, to ensure speedy vaccinations and to ensure the Budget, and previous policies, are fully realised.
We need to assess things over the next five weeks or so to see how they pan out and then we can get a sense of how our responses will be.
How are we preparing ourselves for a third wave, or possibly a fourth?
The important thing to recognise here is the fact that – irrespective of which model you use – it is extremely difficult to predict exactly how either a third wave or fourth wave may happen or exactly what trajectory the economy will take.
And this is a point I keep making, the most important learning of the last year and half is not to take prescriptive models too seriously. Instead, pay attention to the data.
On the healthcare front, the most important thing is we need to have heightened surveillance even when casese come down; we need to keep testing to make sure we know when the number of cases spike. We need to be able to take instant action. Of course, we also have to keep vaccination going in the background.
The exact same analogy can be used for the economy; we need to make sure supply side and demand side measures keep getting implemented, but at the same time we should not try to predict how things may pan out. We should be open to prioritising whatever comes up, be it inflation or growth. We can’t commit to one approach right now, we need to pay attention to experts and data and then decide.
Concerns have been raised about the government’s economic package and while I do understand that we still need to monitor data and we are open to taking more action, there are suggestions that recent announcements might not do much to move the needle, what do you have to say?
Our approach from the start has been to have the economy fully open, that’s the most important thing and hence the emphasis on vaccination and surveillance.
Once we’ve got the healthcare situation in a good place we can open up and unlock the economy without any second thoughts. That has always been our focus.
Second, we announced a fairly expansionary Budget in February, which I have mentioned earlier as well. There are strong demand side measures in there and rather than announcing newer and newer measures, we need to follow through with the old ones and make them stick.
Meanwhile, of course, we remain open to doing new things and we did do a whole bunch of them. We have to be cognisant of the fact that while we cannot be sure inflation is an issue, we still need to watch and we will keep an eye on it. Right now, the focus is on keeping to the course on supply side measures. As far as new things are concerned, we need to watch real data rather than commit ahead of time.
About inflation, you said it could be a concern; but, it’s not just that is it? There’s a trinity of issues — global rates, the rising dollar and inflation — at play. Do you think that trinity could pose a big risk?
As I said, it is a possibility that global inflation will be an issue. Oil prices are high but inflation has picked up in many many countries including in the US, so that could be the path the world economy will chart. If that happens then there are some positives – it would mean global demand is strong, exports are likely to be strong and domestically, demand will come back. Under those circumstances, growth will be the lesser of our problems and inflation will be the focus. We will appropriately manage our macroeconomic policies but it is very difficult to judge ahead. This it is not an India problem, it is a global problem and debate is rising around the world.
Always remember that if one set of problems emerge, then it means that another set of problems ease off. We need to respond according to what is the actual path that we take; for now, our job is cut out. Implement the budget and the supply side measures, vaccinate everyone and keep up the surveillance.
When you say it will cause another set of problems, are you referring to the RBI tightening their monetary policy?
RBI will respond to the data as well; they are a responsible organisation but the point is that right now, monetary and fiscal authorities around the world are watching how things evolve and I think it is the fair thing to do.
We generally keep an expansionary stance because we still have to support the economy for it to make a comeback. But, any additional measures need to be nuanced according to how things pan out. And as I said, if you solve the growth problem then inflation will become the issue, but then solving the growth problem is in itself not trivial. If growth momentum peters out then, well, growth is the issue but on the other hand it will solve the problem the second and third impact of inflation will not be particularly sticky.
Finance Minister Nirmala Sitharaman has been taking a slew of meetings with public sector enterprises as well as other ministries, talking about front loading and giving capex a much needed push as well as an infrastructure related push. Will that be enough to get demand back on track?
I think it will be. If necessary we can do more but I think there were a lot of strong measures – as I keep pointing out – in the budget and we only need to make sure that those measures get put in place so that we can keep moving forward. I do think that if demand and pricing is as strong as some people think it will be then sure, capex will come back very strongly.
Top leaders of India Inc have been making a case for putting more money in the hands of people; what has been your experience on this? A research report by SBI also seems to suggest that the financial stress on Indian households has increased quite significantly, do you think that can be solved by helicopter money?
I don’t think helicopter money has worked anywhere in the world. During periods of stress, households tend to tighten their purse strings that is the experience in pretty much every country in the world. So, while we do provide support to the very poorest I think trying to reinflate the economy through large transfers is not the most efficient way to revive growth. It may be better to focys on higher capex which directly spends money as well as creating jobs which can then have second and third order effects. So, I think the balance of evidence is quite strong that capital expenditure by the government is the more efficient way to reinflate demand.
Whether you see the October-March period, where we dramatically ramped up capital expenditure or the budget for 2021-2022 which also was very much capital expenditure oriented – our primary approach has been capital expenditure and of course there is the good news that exports are doing particularly well because global demand has also come back. So we have
of growth out there and if those engines of growth are there and we can keep avoid further lockdowns I am quite confident that consumer demand will also come back.