About: Mr. Pronab Sen is the Programme Director for the IGC India Programme. He received his PhD in Economics from the Johns Hopkins University specialising in open-economy macroeconomic systems, international economics and public finance. Most recently the Principal Adviser, Power and Energy, at the Government of India’s Planning Commission, he has also had positions as the first Chief Statistician of India, acting as the functional and technical head of the national statistical system in India, as well as Secretary, Ministry of Statistics & Programme Implementation, Government of India.
1. Seeing the current situation of India's economy amidst the pandemic, in which sectors should India invest to get the best returns, and what do you predict will be India’s position post-covid?
Mr. Sen: If you’re focusing on returns, that’s one thing; but I think what the covid-19 incident and subsequent developments have brought to the front is that there are sectors where it is absolutely essential for us to treat as strategic sectors and there are at least 2 areas which are self-evident. One is pharmaceuticals. Today we have a situation where 80% of our API’s are imported and of that 60% comes from China. That type of an overreliance makes us vulnerable. Something is very similar in the case of electronics as well. So, these are two sectors in which whether they are profitable or not is really not the issue, but these are two sectors that need to be focused on purely for strategic reasons much like the way we focus on food security.
I think pharmaceutical security and electronic security are both important. Now if I leave these two alone, clearly what has happened for instance is that there has been a fairly interesting shift that has taken place in the automotive sector. We have a very peculiar situation where our auto components are being exported world over but on the other hand, all the finished automobiles that we make in India depend upon components from China. Now whether that in itself is an area in which people should be looking into is an open question because there are economies of scale involved and there are technologies involved but that is something we do need to look into. But the critical area is the light manufactures where a very large part of our MSME’s exist. What has been happening over time is that the urban demand for a very wide range of light manufacturing, toy s on an obvious example which had been taken over by China. That’s an area where I think if we really want to revive the MSME sector, where post demonetization and now post lockdown have been really hurting, then those are the areas where we should be looking at because unless we revive the MSME’s and make them profitable again, we are going to have a serious employment problem on our hand.
2. Sir, as an insider, where do you see the Indian economy going in this post COVID period?
Mr. Sen:Well as things stand, it doesn’t look good. Now that the lockdown has been lifted, things will come back to some sort of normality, but the problem of course is that in the interim, where very large parts of the economy haven’t produced anything and haven’t generated any income; particularly small firms simply do not have this kind of staying power. I suspect if census of enterprises is done today, you will find a very high level of mortality particularly in the micro and small enterprises and maybe in the mediums as well. Now the problem is that at the moment we do not know what the banks have done in terms of giving moratorium, but the figures that are available seem to suggest that the banks are giving moratorium only to their best clients and the rest haven’t got it, which means by now a lot of the crores they have given on which moratorium has not been granted, has become increased except the banks are not allowed to recognize NPA’s until September. So, it is a hidden problem, we do not know the magnitude, but I suggest this magnitude is going to be large.
Now, that causes 2 levels of problems. The first problem is that these entrepreneurs that who turned into NPA’s will never get a bank loan again. They’ll simply be blacklisted in the banks. For them to restart their business will be practically impossible, because they will have to raise money from non-formal sources which is either friends or family or money lenders. The troubles we do not know the magnitude of yet because of this ban on NPA recognition. The second problem is of course is that when NPA’s go up to that kind of level that we expect to happen, the banking sector’s ability to lend is going to get adversely impacted. So even when the economy is ready to take off, the bank finance will simply not be available in sufficient quantities. There’s going to be plenty of liquidity but the banks are going to run up against the capital reserve requirements that have been specified under the banking laws.
3. How far is the parity between the central bank and the central govt. important in consequence to the successful economic reforms or policies?
Mr. Sen: As far as reforms are concerned that is effectively in the domain of the central govt. The RBI can only play a supportive role so that if the reforms involve any financial reengineering, that’s where the RBI comes in. Otherwise, reforms are predominantly in the realm of the central government.
4. Has there been a marked decrease in RBI's autonomy over successive regimes?
Mr. Sen: Again, there has been a greater discord between the RBI and the government, but the idea of the RBI autonomy is a little fictitious, since, at the end of the day, the RBI is an arm of the government and really needs to work in close collaboration with the government itself.
5. Sir, we have seen states like UP, Gujarat, and Madhya Pradesh come up with a relaxation of labor laws. Do you think that in order to revive the economy, labour laws ought to be relaxed? UP and Madhya Pradesh to some point even reversed the relaxations. What do you have to say about that?
Mr. Sen: This kind of relaxation simply has the opposite effect to what is intended because what is going to end up happening. Remember, this relaxation is essentially happening for a period of 3 years or 1000 days. If you think about any new investment particularly in manufacturing, where the problem is so acute, it takes around 3 years for a project to actually come to completion – from the beginning to coming into production. The lead time is 2-3 years. So, you’re going to have people who you know will put in the money; by the time the investment turns into production, the labour laws would have gone back to what they were earlier. In which case they’re in trouble. So, I don’t think it’s going to attract any investment as these states hope; that’s a complete pipedream. The downside - which I’m shocked people are not talking about – the downside is that existing firms who have permanent workers can simply fire them and replace them with contractual workers. So, the degree of formalization in the labour market in these states is likely to get worse, and that is not a good thing to happen.
6. Sir, in today’s date, emerging economies are crying out for a crash. India being one of them, what do you think of the role of the IMF? Do you think it can bail out the global economy?
Mr. Sen: No, as far as the IMF is concerned, its principal utility is really helping countries who are facing a balance of payments problem. Now that’s not a problem that we face, but there are other countries whose exports have been hit very badly and who are dependent on imports even for essentials. Those are the countries where the IMF can step in and help to a very large extent. You take a country like India, we’ve gone from a large current account deficit to a large current account surplus which means that the huge bunch of countries out there who were earlier running a surplus against us, will now be running a deficit.
7. Over time, there have been demands that the government provide a large fiscal stimulus through monetization of the deficit. Could you please talk us through the potential implications of the RBI financing the deficit?
Mr. Sen:The mechanics of deficit monetization is actually pretty straightforward. What it involves is that the government issues bonds that are directly sold to the RBI for cash. At the moment, the system is that the government has to float bonds in the primary market. The RBI is not allowed to participate in the primary market. So, the yield on the government bonds then gets driven by the market mechanics – the demand and supply of the government bonds. So, if there is a large issuance of these bonds, then the yields will rise. That is not a desirable thing to happen because this is the time where investment sentiments are at their lowest anyway. Now, if in the middle of this you have the government bond yield going up, this is going to put an upward pressure on all interest rates in the country. That is not a good thing to happen. So whatever little investment intentions there are, will simply get wiped out and it will go completely against what the RBI is trying to do. The RBI is trying to bring the repo rate down in order to stifle the interest rates. This will have exactly the opposite effect. So, in this situation it is actually better for the govt to monetize it.