Don’t Be Overly Pessimistic, Says Dr. Krishnamurthy Subramanian

In times like these, uncertainty thrives, and that scares people. The corona virus has implications not only in terms of economic effects, but the thought process of people. The virus calls for structural changes, changes in demand and supply and a reallocation of resources.

In order to provide context of the virus, one of the first parallels Dr. Subramanian drew was that between the Covid19 and the Spanish flu. Despite it taking place over a ‘century’ ago, it holds relevance today, as it is the most real thing in history that can provide context to these times. Calling both the events “black swan events”, Dr. Subramanian went on to describe how in “comparison to the Spanish flu, which infected 1/3rd of the world population, the corona virus has impacted only 1% of the population.” The death rate of this virus is much lower as well. The one thing we can comprehend when studying the flu, is that the devastations brought out a “reshaped recovery”, which took place for the better. Taking precedence from that, Dr. Subramanian outlined how a similar change for the better will take place, and that several times “creative destruction is needed in market economies”.

As humans, it is but natural to overthink problems, and be pessimistic about the negative aspects of life. Dr. Subramanian highlighted how more often than not, humans fall prey to the “salience bias”, which means that ‘prior to negative events, people give a low weightage to the fact that events like those will take place, however post events like those, people discount chances of normalcy”. It was greatly emphasized that the pessimistic approach should not be taken.

Juxtaposing this pandemic to war, several elements overlap, such as “uncertainty, lack of tourism, lack of discretionary spending and the fact that the essential commodities are holding the economy together.” However, the upper hand Covid has is that there is no infrastructure damage, and no factories are damaged.

When it comes to the economic impact of the virus, Dr. Subramanian discussed how supply side changes would come into the market due to demand side effects. Great emphasis was placed on the role of ‘Aatm Nirbhar Bharat”, an initiative taken by the government of India. The “demand for products needs to be generated”, and “companies need to cater to and manufacture products for even the bottom of the pyramid”. The “new India” needs “domestic capabilities in strategic sectors”. An example talked about was that of shampoo. The poor were not able to afford large bottles of shampoo, but once the small sachets were available demand went up. Companies need to think on similar lines. Other examples of programs like these are microfinance and prepaid phone service as opposed to post paid.

When discussing the role of the government, and packages provided by the government, Dr. Subramanian put forth the fact that, a significantly larger amount of stress (60%) is placed on MSME’s, when placed in juxtaposition with larger firms, whose only 10-15% are in stress.
The 10% GDP allocated towards the economy are in terms of fiscal measures, liquidity and monetary measures. Along with this, there are several reform measures taken by the government. The reforms are the driven forms of a ‘vision’. He further commented that he felt the package put forth by the Finance Minister was a “very comprehensive set of measures” Breaking down the package and simplifying it, here are a few main aspects and working guidelines discussed:

* “The increase in term loans and working capital limits, with 100% guarantee (so that it does not sever due to risk aversion of the banks)” provides considerable relief to everyone

* The credit is for firms under stress

* For stressed firms and firms under NPA, there has been relief provided though the sub debt scheme

* There is another scheme for equity infusion

* And another one on the dues due

* The last bit is on the global tenders.

Apart from this, he also talked about how “every policy has costs and benefits, and they are analyzed.” “Covid has a deflationary impact, and therefore monetization inflationary pressure reduces, and it is not a huge question”

When discussing the topic of unemployment and the trouble of migrant labour, Dr. Subramanian several times reiterated that events like these cause ‘structural changes. ‘ This means that there will be a “permanent” change in several industries, and workers will have to get “reskilled”, and the government may help with “retraining programs”. “80% of our labour force is in the informal sector.” Therefore they have an essential role. An example given here was of a “travelling in a 3rd class boogie train”, where those who come in first get the privilege, and as each station comes, there is less and less space. In relation to that, eradicating the “fear, and creating incentives” will bring then back. Most of their fear stems from the “vulnerability they are suffering”.

He ended, by saying that “movie hi ek tihai khatam ho gayi hai”, and to stay tuned for further updates from the government.