Hyderabad: As the government embarks on the vaccination drive to secure the citizens from the infectious Covid-19 disease, the focus has now shifted to the economy that plunged into a severe contraction.
Against this backdrop, former Reserve Bank of India Governor C Rangarajan spoke to Eenadu Associate Editor N Viswa Prasad on a range of topics, including, the state of the Indian economy, low credit off-take, investment climate, and the controversial farm laws.
Edited Excerpts:
Q. As per the data, the Indian economy contracted by 7.5 per cent in the second quarter compared to a decline of 23.9 per cent in the first quarter. This has raised hopes of a speedy recovery. What is your assessment of the present state of the Indian economy?
First of all, we need to understand the nature of the economic crisis that we are facing. For the first time in recent memory, the economic crisis has been triggered by a non-economic factor, which is a pandemic.
There are many indicators showing that the economy is picking up. But as I said one of the important factors influencing economic growth is the way in which we will go regarding the removal of the restrictions.
One hopes that we have seen the end of it (Covid-19) and therefore we will be in a position to be able to withdraw almost all restrictions during the Q4 of the current fiscal year.
It looks that with the withdrawal of the restrictions, the economy will pick up and we may end up with only a shrinkage of 7.7 per cent during the current fiscal.
Q. The government's final consumption expenditure declined by 22.2 per cent, private final expenditure decreased by 11.3 per cent in the second quarter also. Also, the contraction in gross fixed capital formation was at 7.3 per cent. What is your take on these figures?
These numbers reveal something. First of all, the reduction or the decline in private consumption expenditure is easily explained. Because consumption expenditure is a function of income; if peoples’ income didn’t grow then automatically private consumption expenditure will decline.
In the first half, the decline is about 15.2 per cent. Probably, as the economy picks up in the third and fourth quarters, the private consumption expenditure will also rise.
But what is disturbing in the numbers is the decline in government consumption expenditure. The government has been coming forward to say that they are undertaking so many measures to kick-start the economy and provide stimulation for the economy.
Besides the decline in the final consumption expenditure of about 22 per cent, the other important number that comes out of the national income statistics is the sub-sector - public administration, the defence sector, and some other sectors-- declined in both the first and the second quarter.
In the first quarter, it declined by 10.3 per cent and in the second quarter it declined by 12.2 per cent.
This particular sector is policy driven. The bulk of it is only public administration and defence. Therefore, it appears that the government is not spending as much as it should be.
If the pickup in the economic activity is to happen as per the forecast, I think the government must step up its expenditure. The government’s actions in trying to increase the level of expenditure in Q4 will have an important bearing on how the economy for the year as a whole will look.
Q. Bank credit growth, which is one of the important parameters to assess the health of the economy, continues to decline. In the second quarter, it declined by 5.2 per cent as compared to 8.8 per cent decline in the same quarter last year. What does it indicate?
One should not be surprised as the quarter in which the total economic activity is fell by 24 per cent, there can be no credit pick up. Firms and industrial units borrow from the banking system to increase their production and sell them.
And, when there is no demand in the market because of the Covid-19, the need for producing is also not there and therefore, the need for credit is also not there.
However, the monetary policy has been pro-active on two fronts. First, in reducing the policy rate substantially and secondly, in providing adequate liquidity to the banking system through the measures like cash reserve ratio.
These measures have added to the ability of the banks to lend.
More credit can be made available because of the increased liquidity, but the demand for credit has to come.
In my view, banks should also be proactive. It is not as if they wait for somebody to come to the bank in order to provide credit. They can, in a sense, take a step forward and announce a number of ways by which the availability of the credit is utilised better.
Q. In a recent article you have mentioned, "We must also remind ourselves that the climate of investment is also influenced by non-economic factors of which social function is most important." Can you explain it in detail?
The main driver of economic growth is investment, particularly in developing countries. One factor that is coming up very clearly is the ratio of investment to GDP has been steadily falling, which means, the investors are not coming forward to invest.
I think, at the peak that was in 2005-06 and 2006-07, the investment rate was very high. But, since 2011-12 it has been falling and more particularly in the last few years.
There are three elements that will create an investment climate. They are – positive perception of the people regarding the future, supportive policy framework and non-economic factors.
What I meant by the non-economic factor is - people will be willing to make more investments if the environment in which they are operating is peaceful and is not torn by conflict, etc.
The most important thing is that we need to grow fast and in order to grow fast, we need a larger amount of investment, and if larger investment needs to be forthcoming, we need to build a better investment climate.
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Q. When would our economy return to the activity levels prevailing before Covid-19?
The decline during the year 2020-21 may be around 8 per cent. Therefore, in 2021-22, we need to grow at least 8.7 per cent in order to compensate for the loss in 2020-21. Only then, by the end of 2021-22, we will be where we were in 2019-20.
By taking into account the much-needed strong V-shaped recovery in the next financial year, I would say, by the end of 2021-22 we may be at the same level as that of 2019-20.
Q. The central government will present the Budget soon. In your view, what should be the government’s priorities?
As I said earlier, the level of government expenditure must go up substantially. And, among government expenditure, capital expenditure, must go up sharply. Only then we will be able to move fast enough to reach at the end of 2021-22 the level we were at the end of 2019-20.
Poverty and income inequalities are increasing because of the impact of COVID-19. What are the necessary steps that the government should take to address these problems?
The inequalities have existed even before the Covid-19. Many estimates regarding the people below the poverty line vary from twenty to thirty per cent.
Actually, when the economy is growing fast, the number of people below the poverty line comes down. In fact, when the economy grew very fast in the post 2005-06 period, there was a sharp decline in the number of people below the poverty line.
In a year in which the growth rate is -7.7 per cent, naturally, the employment opportunities are less and less and the vulnerable and the poor groups are even more affected.
For example, one group of people, who has been severely affected is migrant labourers. Our own estimate as far as the Tamil Nadu shows that there were 15 lakh people that come under the category of migrant labour.
Since these people have been thrown out of employment suddenly because of Covid-19, certain amount of cash distribution is essential for the purpose of immediate benefit.
But going ahead in 2021-22, the most important way in which we can help the poor and vulnerable is that the economic activity picks up speed and growth rate remains at a high level.
Q. 50 per cent of the country’s population depends on agriculture. The sector has been witnessing a huge crisis for many decades. How this can be tackled? And, what is your take on the recent farm laws?
The problem essentially is that we have not progressed industrially and otherwise strong enough to absorb the population from agriculture. As a result, more and more people get dependent on agriculture and the average size of land holding is coming down. This requires to be taken care of. Otherwise, the incomes farmers earn will not be high.
Regarding farm laws, while no one can doubt the need to reforming the mandi system, at this particular point of time, one suggestion I have is, probably the Central government can leave to the state governments, whether they want it or not.
