We Always Worry About How Rating Agencies Will React To A Large Stimulus--Omkar Goswami, Chairman, CERG Advisory

Some of the emerging data following the second wave of Covid-19 suggests lower expected growth. Most of the growth projections that this year’s budget was built around are mired in uncertainty. How do you look at the economy now? Moody’s projection cuts GDP growth forecast to 9.3 per cent from 13.7 per cent. What is your take?

At the end of the first wave of the pandemic and before the advent of the far worse second wave, the consensus estimate of India’s real GDP growth for 2021-22 was in the neighbourhood of 10 per cent to 11 per cent — coming as it would after an 8 per cent to 9 per cent compression in GDP in 2020-21. However, that is being questioned, and recalibrated downwards. 

As of today, only some of the newer growth estimates are publicly available. CRISIL estimates 2021-22 growth to reduce to 8.2 per cent. Moody’s has cut its forecast from 13.7 per cent to 9.3 per cent. HSBC has reduced its GDP growth estimate from 11.2 per cent to 8 per cent. 

Personally, I think it will be at around 8 per cent to 9 per cent. But think about this. Suppose India’s real GDP for 2019-20 was 100. It fell by around 8 per cent in 2020-21. So that makes it 92. If it were to rise by 8 per cent it will be 99. And if it were to rise by 9 per cent it will barely cross 100. So, we will have lost one full year. Even at 9 per cent real GDP growth, our GDP at the end of 2021-22 will be no larger than what it was at the end of 2019-20. That’s the loss.

Many argue that fiscal deficit target is irrelevant during an extraordinary situation like the current one and the government should rather focus on a large enough stimulus package. And, we are still talking about 1 per cent of GDP. What is your take on this?

The Finance Ministry is forever bothered about how rating agencies will react to a large fiscal stimulation package. 

So, while there is still a strong case to increase the stimulus, I have my doubts whether that will occur in any meaningful way.

The Budget allocated Rs 35,000 crore for the vaccination drive. But now that appears inadequate in the wake of the severe second wave and needs to be sufficiently augmented. What should the government do now?

The Budget has provided Rs 35,000 crore on vaccinations alone. At Rs 350 per shot including the cost of logistics and storage chains, this takes care of 1 billion vaccines. This money must be spent on ordering the vaccines, instead of passing the buck on to state governments and private sales. Let that be done, at least, to show some credibility.

India’s forex reserves are all-time high at $550 billion. What’s you view on utilising the reserves for infrastructure creation and building other national projects? Often, the forex reserves are invested in liquid assets like US Treasury bonds and euro-denominated bonds of other advanced economies with near zero interest rate and in securities trading at negative yields.

This has been said many times in the past; and it is best not done. Why? Because any such use of the reserves for domestic spending will immediately have an impact on money supply. Moreover, it will set a wrong precedent for policymaking in that the government of the day will think that the reserves are there for taking. 

It is a bad idea. And if that starts, there will be no shortage of demand for using such reserves to boost domestic spends every now and then. It was once proposed in 2008 during the global crisis. RBI put an end to it. That door is best not opened.

How important is it to address the pending privatisation and disinvestment in PSUs?

Critically important. The government expects Rs1,75,000 crore from privatisation and disinvestment. If that reduces by even 50 per cent, with all other revenues and expenditures remaining exactly the same, the fiscal deficit for 2021-22 will jump from 6.8 per cent of nominal deficit to 7.2 per cent. That aside, each privatisation will take away huge future expenditure outflows of the central government on account of these PSUs. Can the target be met this year? I think not. But I pray that it will.

Omkar Goswami: Critically important address the pending privatisation and disinvestment in PSUs.

Our growth model is largely based on domestic consumption unlike the export focus of the major economies in Asia. Where are we lacking? Also, we are not competitive in global supply chain. Where will the sustained economic growth come from?

We have neglected exports for 50 years. 

When the South-East Asian and East-Asian countries were building their economic strength by creating world class exporting capacities and related infrastructure, we focused on import substitution. As we still do, for what else is ‘Atmanirbhar Bharat’? 

Suddenly, we can’t change our genes, can we? Besides, the train has left. Even Bangladesh thoroughly beats us at this game.