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'The economy has suffered due to the delay in stimulus'

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'The economy has suffered due to the delay in stimulus'

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The coronavirus was a bolt out of the blue and hit the world like a hurricane. What started off as a medical emergency, soon snowballed into an economic one. CNBC-TV18’s Shivani Khandekar speaks to veteran Indian economist Arun Kumar on his new book – ‘Indian Economy’s Greatest Crisis’ to understand the socio-economic implications of the COVID-19 crisis on India and what can be done to bring the economy back on track. Edited excerpts –

'The economy has suffered due to the delay in stimulus'
The coronavirus was a bolt out of the blue and hit the world like a hurricane. What started off as a medical emergency, soon snowballed into an economic one. CNBC-TV18’s Shivani Khandekar speaks to veteran Indian economist Arun Kumar on his new book – ‘Indian Economy’s Greatest Crisis’ to understand the socio-economic implications of the COVID-19 crisis on India and what can be done to bring the economy back on track. Edited excerpts –
Q1. You’ve chosen a telling picture of migrants moving back to their homes for your book cover – symbolic of the greatest ‘crisis’ that took place in India in the aftermath of the pandemic. How could the government have handled the situation better?
The government should have considered how would the marginalised sections of our society be able to cope with the immediate lockdown ordered on March 24, 2020. They live in crowded conditions and with little access to toilets, water or food. They earn every day and spend every day. So a stoppage of work means no income and immediate starvation. Most poor say they can’t even buy supplies for a week.
All this should have been anticipated and steps taken to decongest the poor living in the slums in urban areas. After testing they should have been allowed to return to their villages and for those who stayed behind facilities should have been provided by decongesting them. All this is spelled out in the book.
Q2. In the book, you’ve argued that the Indian economy was in recession even before the pandemic struck. With two consecutive quarters of negative GDP growth, we’re now in a ‘technical recession’. Why is there an absence of a serious debate on this?
The problem lies with the data for the Indian economy. Quarterly data of GDP is based on very limited data. It has some data for the organised sector of the economy and for agriculture but for the rest of the unorganised sector, it has no data. It is assumed that the organized sector can proxy for the unorganised sector. This methodology is fine in normal times but not after a shock, which hit the unorganised sector hard as has been the case post 2016 due to demonetisation, GST and now the pandemic.
The unorganised sector has been declining while the organised sector has grown. Thus, the latter can’t proxy for the former. So, for the former some proxy variables need to be used.
I have been arguing that if some assumptions are made to capture the decline in the unorganised sector the economy would have already been in recession before the pandemic hit the economy.
Most economists accept this fact now but they continue to use the official quarterly data. They are not willing to look for alternative analysis. For instance, the rise in the e-commerce is at the expense of the unorganised sector retail trade. So, actually the trade sector may be declining but if the data is only from large units then this sector will be taken to be growing.
Most of the analysis of the GDP comes from business analysts and they don’t want to be seen too far out of line with what the government says. International agencies like IMF are not independent data gathering agencies so they depend on government data and can’t be too different from the government given analysis.
Q3. A recent RTI query reveals that only 10% of the 20-lakh crore pandemic relief package has been disbursed so far. Do you think it has been successful in stimulating demand in the economy?
This should have been expected. Only 10 percent of the relief package was to add to demand through giving funds directly to the poor while the rest was for credit and loans to businesses. Thus the package was largely a supply side and not a demand side stimulus.
Due to the lack of resources, disbursals to the poor have been slow. As far as credit is concerned, when businesses are working at low capacity and not going for fresh investment due to high unutilised capacity, they do not need much credit. Thus if it not surprising that only 10 percent of the package has been implemented as of now.
The government has repeatedly said that it will give a boost to the economy at the right time but that time is long past and the economy has suffered due to the delay in the stimulus.
Q4. Rating agencies have been continuously revising GDP contraction on the upside, with many industrialists claiming that India can grow in double-digit in 2022. How realistic is this?
As discussed above, most analysts do not question the official data even when they agree that it is faulty. They also do not try for alternative indicators. Rating agencies also fall in this category.
That is why they have to keep revising their prediction for GDP and its growth. This also happened during the global financial crisis in 2007-09. As was said then they were behind the curve. The same is true now as I have discussed this in the book.
Certainly the economy would recover from the low in 2020-21. So, the rate of growth for Q1 of 2021-22 would be sharply higher, even double digit, over the year earlier period. The issue is whether the GDP would have picked up to the level in Q1 of 2019-20. That is where the doubt is since many sectors are not yet performing well, especially in the services sector and that contributes to 55 percent of the GDP.
Even in the manufacturing sector industries like textiles and leather goods are still down 20 percent compared to last year. In the services sector trade, tourism, travel, hotels and restaurants and so on are still way below capacity. Investment is also down. Given all this, the economy is likely to remain below its level in 2019-20.
Q5. You have pointed out how disasters are the ‘third crop’ in India. Why do you think disasters are money-spinning?
Disasters are the time for businesses to make extra profit by raising prices and where relief is given by the government again politicians, bureaucrats and business collude to make money. During disasters policy has to be implemented quickly so accountability is forgone and that is what affords those in power to make an extra buck.
It is the black economy that kicks in. For instance, during the lockdown while farm gate prices crashed for fruits and vegetables, their prices in urban areas shot up. Traders took advantage of the scarcity mentality to make a quick buck. Similarly, prices of medicine, mask, oximeter, etc., were jacked up and extra profits made. Hospitals charged the moon for admitting patients and testing labs charged exorbitant amounts for COVID tests.
Businesses took advantage of the public’s panic caused by the virus and the lockdown. The well-off sections hoarded essentials and emptied shelves in the shops worsening the situation. The poor suffered since they had to bribe to move and carry on their activity.
Q6. What are your expectations from the union budget of 2021, especially when it comes to ramping up the health expenditure?
Due to the sharp downturn in the economy the budget for 2020-21 has gone considerably off the estimates and needed to be redrawn. Unfortunately, the government has not given any idea of what is going on. This will impact the budget making for the next year.
All budgets are dependent on the assumption about growth and if this is in error, it throws the budget off. To boost growth, government needs to step up expenditures to help the unorganised sector. It also needs to step up investment in agriculture and rural areas to generate jobs there. It would need to create an urban employment scheme as well.
Expenditures on big ticket infrastructure projects do not generate many jobs given that they are capital intensive so the need is for large number of small rural projects, education, health, drinking water and so on. Of course, given that the country is still afflicted with COVID, there is a big need to ramp up public health. Testing and vaccination for COVID must be made free. Wi-fi should be made a public good so that children of the poor can also access internet for their education.
Q7. As mentioned in your book, farmers have been arguing about receiving a price below MSP. How, in your opinion, will things change with these 3 new farm laws?
The 3 new farm laws are premised on the idea of creating free markets in agriculture. I have argued that markets for agricultural produce can’t be made free for a vast majority of the farmers since they are interlinked with the credit and land markets as well. Also, given the structure of agriculture, it is not like the markets for non-agriculture produce. This is the reason government intervention is crucial in these markets. Even in the advanced countries, agriculture is heavily subsidised.
The new laws will not eliminate MSP or APMC immediately but over time they will undermine them and that is not desirable for agriculture and farmers. The new laws will corporatise agriculture over time and that will work against the interest of the vast majority of farmers (86%) who are small and marginal. A whole package is needed for agriculture which will also link up with employment, technology and taxation. The solution does not lie entirely in agriculture itself.
Q8. The coronavirus situation has taught us that pandemics are just waiting to happen. How can India be prepared to face it if another one strikes us anytime soon?
The coronavirus has taught us that we are a collectivity and there is no individual solution to a pandemic. Even the highest in the land such as Trump, Johnson, Bolsanaro, Macron and Amit Shah can be afflicted by it. So, those countries where people have faith in the leadership and followed it, have come out much better than where the public doubted the leaders and defied science. So, alienation of the public from society has to be tackled. Much greater attention has to be paid to R&D and education so that society can quickly tackle new diseases and the public understands science and is not led astray by rumours and obsolete ideas. Above all governance has to be effective for any policy to work, especially in a crisis.
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