Infrastructure safe unlike earthquakes; early recovery post Covid: D Subbarao

In an exclusive interview, Former RBI Governor Duvvuri Subbarao has said that the current COVID-19 crisis is external to the economy and expressed hope that the economy will see an early recovery as physical infrastructure has not been destroyed unlike in the cyclones and earthquakes.

Hyderabad: Global economy is in the doldrums. Policymakers around the globe are struggling to assess how deep the impact of COVID-19 pandemic would be on production activities and State finances.

Against this backdrop, Former RBI Governor Duvvuri Subbarao spoke to Eenadu special correspondent M L Narasimha Reddy on the impact of COVID-19 on Indian economy, challenges before the government in the post COVID-19 scenario, issues related to migrant labourers, efficacy of Helicopter Money, etc.

It is worthwhile to mention that Subbarao took charge as the RBI Governor in 2008 when the global financial crisis was unfolding in its fullest form. He is credited for putting in place necessary safeguard mechanisms to protect the Indian financial system during his tenure.

Edited Excerpts:

What is the impact of COVID-19 on global economy in general and Indian economy in particular?

The International Monetary Fund (IMF) has warned that the coronavirus outbreak posed a serious threat to the world economy. The current crisis may be way worse than the 2008 global recession.

The COVID-19 crisis is an ‘external threat’ to the economy. In the past, measures were taken to increase the demand as well as supply. Despite the current steps to reduce interest rates and increase liquidity, the economic activity is not picking up due to the lockdown.

Even before the COVID-19, Indian economy was bleak. GDP growth in the third quarter of 2019-20 was under 5 percent. The growth rate in fourth quarter is expected to be even worse. How bad can it go from here?

IMF estimated 4.2 percent growth rate for FY 2019-20. For FY 2020-21, the forecast is 1.9 percent.

Compared to the projected negative growth rates for developed countries, 1.9 percent for India is not that bad.

However, this is not a thing to rejoice. India has extreme poverty. Hence, greater the impact.

Non-Performing Assets (NPA) and debts are weighing down our economy. We are faced with a dire crisis at a juncture where we cannot borrow anymore.

We have to remember that the COVID-19 has not destroyed physical infrastructure. In the event of earthquakes or floods, we would need a lot of money to rebuild lost properties. The situation is different with corona. So, there is a chance of early recovery once the disease subsides.

Many countries are announcing fiscal packages. India too is following the path. To what extent these stimulus packages help the economy?

About 83 percent of India’s workforce is in the unorganized sector. The current lockdown has endangered their livelihoods. It is the government’s responsibility to support them.

Last month, the Union Finance Minister announced a relief package amounting to 0.8 percent of GDP. However, the amount is small in comparison to what other countries have announced and not sufficient in view of the severity in India.

We should also understand that there are not enough funds with the government. The fiscal deficit is already high. Tax revenues have also plunged due to the ongoing lockdown.

Before the COVID-19, the combined fiscal deficit of central and state governments amounted to 6.5 percent of the GDP, which may now exceed 10 percent.

Borrowing more money for stimulus packages will be an additional burden.

If the Centre decides to spend 2 to 2.5 percent of GDP for corona relief programs, it must borrow accordingly; doing so will pose problems too.

Due to the increased debts, rating agencies may downgrade our credit rating.

Foreign investors will take back their investments. Then the problem of foreign exchange arises. Inflation may also increase.

The Centre must come up with a full proof plan, assure that the debts taken to tide over the crisis will be paid off in the next 2 to 3 years; which will win the trust of markets.

In the post lockdown scenario, what should be the policy priorities?

It will not be enough even if the RBI imposes a moratorium, increases liquidity or reduces interest rates.

It must extend helping hand to real estate (residential) and other industries. The government must pay dues to big companies. These companies should in turn be able to make timely payments to medium and small-scale industries. This will ensure cash flow. But this process requires borrowing.

Though the RBI is slashing interest rates, banks will refrain from lending due to high NPAs. The government must provide guarantees in such cases.

The US rolled out a stimulus package consisting of tax rebates and grants to affected companies during the 2008 financial crisis. The Union Government must announce similar measures.

Policies like Quantitative Easing and Helicopter Money are being suggested. What is your take on these?

The situation in India is not that worse yet. The US and Europe followed Quantitative Easing strategy during the 2008-09 global economic crisis.

Central banks in all countries regularly monitor cash availability. Government bonds are held by banks and mutual fund companies. Central banks purchase these bonds to ensure cash availability in the system. This is a common practice.

During the 2008-09 crisis, cash availability was low despite bond buying. In an unusual move, the banks had to buy corporate bonds and other securities to increase cash availability in the market.

While in India, the RBI has no authority to buy any except government bonds. Laws can be amended if the need arises. But we have not reached that stage yet.

Under Helicopter Money strategy, central banks will print new notes and hand them over to the government. Remember, this is not a loan to the government.

The government will distribute this money through various schemes to people, which in turn will enable higher public spending. This will increase the demand for goods and services.

There is a clear difference between Quantitative Easing (QE) and Helicopter Money.

In the case of QE, we can reverse the increased cash availability in system, which is not possible with Helicopter Money.

In 2002, Ben Bernanke (former Chairman of US Federal Reserve) suggested Japan to implement Helicopter Money scheme. Of course, Japan did not follow this path.

Even during the 2008 global crisis, the US did not resort to Helicopter Money.

So, it is highly unlikely that India will favour this policy either. Once an economy turns to Helicopter Money, inflation will go out of control.

How do we solve the problems of migrant workers?

Migrant workers are an essential part of India’s economy. The issues in unorganized sector cannot be addressed at the moment.

Interstate migrations will be there. But the government should take necessary measures. Proper accommodation and healthcare facilities must be provided to migrant workers.

Is it fair to compare the current crisis with the 2008-09 financial crisis? Which one do you think is the bigger crisis?

The global recession of 2008 began in the financial service sector. Banks and financial institutions in the developed countries have created a variety of derivative products causing the sector to collapse.

As a result, people lost their wealth and savings, causing a decline in demand. That crisis has spread to real economy too.

The current corona crisis is a stark contrast to the 2008-09 slowdown.

The current crisis is caused by a pandemic, which first affects the real economy and then spreads to the financial sector.

Supply chains are disrupted and the demand has plummeted. Since the two crises have two different root causes, the solutions must be different too.

Back then, the financial sector needed support. It was imperative to protect financial institutions. Real economy had to be reinvigorated for economic revival.

But now we have to contain the corona pandemic to boost the real economy.

Another difference is while the 2008-09 financial crisis started in the US subprime mortgage sector and impacted the world, the novel coronavirus first appeared in China’s Wuhan and spread all over the world.