1. There is a lot of emphasis on India’s actions to curb and control Covid-19 successfully in the Economic Survey. Could you take us through the economic reasoning behind this?
India’s approach was quite different from that of many other countries, and certainly went against what a lot of international experts were advising at that time (in the early days of the pandemic). The most important thing to remember, if you go back to last March, is the sheer lack of information. We knew something had happened in China and that it spread to Italy and some other places in Europe and that it was killing a lot of people but we really had not much information other than that. You will also remember that there was a wide range of opinions amongst experts of various kinds, some of whom opined that this was not more than a bad form of influenza while there were others who were saying that India alone would have 300 million people infected and a couple of million dead by July. So, the first thing we understood out of that was nobody really knew how things were going to pan out, we were in a situation of radical uncertainty.
This is important because merely recognizing that nobody really knew how the pandemic would pan out, completely changes our response. Rather than choose one or the other of the forecasts, we decided to do what in finance is called the “Barbell Strategy” to deal with such situations. In the Barbell strategy, on one hand, you hedge for the very worst outcome and on the other side, you take a bet based on the available information, for making your way forward. This is basically what we did: the lockdown, right in the beginning, if you remember, was based on trying to avoid the worst-case situation where we did not have much information. This also gave us time to create quarantine facilities, testing, get some more information and as we got more information, we were able to update ourselves on a daily basis and move forward step-by-step. This way, on the health front, we managed to lower the lockdown and unwind it systematically.
The same approach was used on the economic front too. In the beginning if you remember, rather than carry out this grand, one-time, expensive stimulus, we basically cushioned the economy from the worst-case outcomes. So, for the very poor, we transferred some money through Jan Dhan, we organized the world’s largest food programs to ensure everybody had food. We recognized that there would be serious problems, ‘cascades of defaults’ in the business and MSME sectors so we created a cushion for that by providing 100 per cent guarantees for MSME loans, held in suspension, insolvency and bankruptcy proceedings and so on and so forth. What we were doing was ensuring that the system was given a cushion against the worst-case outcomes. At this stage, we were not at all attempting to revive the economy, which again, was very different from what many other countries were doing. Our view, which is a common-sense view, is that there is no point pressing the accelerator when you have got your foot on the brake.
Once we had got through the lockdown and unwound from it, we began to ramp up both on the health front i.e., began to provide more and more openness and on the economic front, began to allow more and more freedom. But by September-October, when we felt that enough of the supply side had been opened up, we then began to push up demand. Notice that we were not trying to deliberately pump-up demand while the supply was impaired.
This is important because many so-called experts were only looking at the demand side whereas in fact there is no point in focusing on the demand side when the supply side is also impaired. The fact that the pandemic and lockdown impaired the supply side as well, is a common-sense insight but seems to have not been debated at all. Once things opened up, say by September, we saw, of course, domestic demand from the pent-up consumption come back to some extent but that is also the time, where we began to push on the fiscal front and you have seen that capital spending was dramatically ramped up. So capital expenditure in October was up 129 per cent Y-o-Y, similarly in November 249 per cent and in December 62 per cent Y-o-Y. These are unprecedented expansions of capital expenditure.
Notice how the sequencing is done, the initial sequencing (phase) of the cushioning was almost entirely humanitarian and welfarist, the second phase is clearly aimed at rebuilding assets, as a way of rebuilding demand. Why are we doing this? Well, because we recognize that we are creating debt by ramping up this expenditure, so we are doing it deliberately in a way that also creates assets at the same time as we rebuild demand. So, you can see this is a systematic approach to rebuild demand rather than this pretense of knowledge, based on which, these grand, one-time stimulus packages were being rolled out.
2. There are predictions of good growth next year (the Survey says 11 per cent, the IMF says more than 11 percent), is there a broader point that you’re making in the Economic Survey about the fundamental strengths of the Indian economy?
I think the 11 per cent GDP growth rate for the next financial year is very conservative as we have said that it has significant upside potential. The reason for that is not difficult to tell- clearly for the first half of the next financial year, there will be a base effect, which will benefit the number, but also you will see that we already have a significant amount of tailwind in our favour. Many of the high- frequency data numbers are all very strongly posititive, as you may be witnessing. In many cases, they are already above where they were last year. So, we can see a significant momentum even before we are fully opened up, there are sectors of the economy that still face various kinds of restrictions like international travel, tourism and entertainment. Even with that being impaired, we are seeing our numbers coming back. For the manufacturing sector, we can see demand coming back in multiple layers, for instance, car sales, cement sales, many of our usual indicators are very strong. So, I don’t think we are being particularly optimistic about our forecasts, if anything, our forecasts will prove to be quite conservative.
You have just mentioned the IMF as a number, which is higher than ours, but as with everything, we continue to watch the situation very closely. Our economic policy will be based on how things pan out. As the Prime Minister himself said that in the last one year, we have presented a series of new ‘Budgets’ and that stands to reason in the sense that we remain committed to responding as the situation evolves and that is the correct way to do.
The broad point that the Economic Survey makes is that anti-cyclical policies, both fiscal and monetary, are important and they should respond according to the situation. If you read the economic survey, we have made a case for strong support for the next year, a very strong pro-growth message and we have said that even from a purely fiscal consolidation perspective, it makes sense to be pro-growth in a country like India, because that is the best way of ensuring fiscal sustainability because of the impact on both, the revenue growth, and on the denominator. The message from the Economic Survey is very clear: we remain tilted pro-growth and remain open to doing more, where necessary.
3. Last year, the Economic Survey spoke about wealth creation at the grassroots and this year you talk about the innovation pipeline. How can India better the innovation pipeline and solve some of the problems that you mention in the Survey?
Some of it is simply having a culture of innovation, for way too long, Indians have not had the self-confidence I think, in many fields, to go out there and innovate. This is true both for the government and the private sector. The data quite clearly shows that we underestimate our abilities to innovate. Support needed, for example, by R&D departments in private sector and even in government institutions tends to be quite small, we don’t provide adequate support to innovations.
This shows in multiple ways, there is a very recent case where a CSIR scientist wanted to do a spinoff which is incidentally allowed by the rules but then ended up getting caught up in the government’s own regulatory web and ultimately had to go to the courts and later, won the judgement. But the fact is why did somebody who is a well-known scientist, who has clearly been doing what he is allowed in the rules and even encouraged in the rules by virtue of doing spinoffs and a startup. Actually, the government system went out of its way to try to tie the person down till the court struck it down.
So, I think there is a lot to be said about simply the culture here of doing innovation, taking risks, spinning it off, encouraging scientific and business innovation. We tend to be very, very conservative still, in fact, I would argue that there is a lack of self-confidence in doing this and that has to completely change. After all, Indian scientists and engineers go all around the world and do exactly that and succeed. Why is it that we are unable to do it in India?
4. Let us talk about the health chapter in the Economic Survey. You mention how the Ayushman Bharat program helped states which adopted it fix many of their underlying health challenges and that the difference between the states that adopted it and the states that did not is stark. What do you think holds back a greater rollout of health services, greater spends in terms of GDP on healthcare, what is likely to improve in the future?
The approach is not very different from an intellectual framework, which is that, while we have applied the cushion point, the point of hedging against the worst case, in terms of our rollout of the Covid response. But even in routine situations, this is also true particularly for the poor, where a sudden shock in their private lives from a health perspective, it could be an accident, a disease with an expensive treatment, things like these can completely throw a family off-balance because of the medical expenses.
What we are trying to do is twofold: one, is obviously provide some sort of an insurance shock-absorber which is what Ayushman Bharat was and we have given data to show that this seems to be working. The second thing we need to do is also provide some sort of regulation of how this sector works, particularly on pricing but other things as well because there is an information asymmetry between the medical sector and the consumers. This is not like buying a smartphone, where if one did not work, you can move to the other with relative ease. So, in that situation, what you do need, and this is true of every sector with information asymmetries, the provision of a public alternative and some regulation to ensure transparency to the sector. It is, in some ways, a very common-sense point.
This is a sector where you need to ensure that there is a safety net or cushion and at the same time, you have a level-playing field between providers and users of healthcare. The public sector is part of that solution, in terms of providing a sort of competition, so to speak and it is also important from the government perspective to have a regulatory body of some sort where the private sector is at least regulated as far as transparency and so on are concerned.
5. I was particularly interested in the bare necessities chapter because you seem to suggest overarchingly in the Economic Survey that unless these “bare-necessities” so to speak, are plugged more efficiently, the transition to growth and innovation, is going to be slow. The response to Covid-19, of course, was a showcase of how those gaps are being plugged. Perhaps you could talk a bit about why you put this “bare-necessities” chapter in the Economic Survey.
It is the same point, again. You need to do both, its not like one has to be done and then the second gets done. If you want a risk-taking system, you also need safety nets to be built in. If anyone is driving a car, you ask them to wear a safety belt, here also the same concept is being used: we have to have a safety net of some basics on one hand, which in some ways, enables you and on the other hand, it opens up people and encourages them to take risks. You may find it interesting that the intellectual basis of the "bare necessities" chapter in the Economic Survey is the same as that of the "innovations" chapter and the chapter on "deregulation," they are basically saying the same thing in three different ways.
