Cogencis, Tuesday, May 12
By Adrija Chatterjee
NEW DELHI – The central government should quit its "Test cricket" approach to fight the deadly coronavirus, says West Bengal Finance Minister Amit Mitra, an economist-turned-politician.
"This is the time to come out of the 'Lakshman Rekha'; come out of the crease and bat with a cross bat," Mitra told Cogencis in an exclusive interview. "This is not the time to play Test cricket. This is the time to play T-0, not even T-20."
"Yet we find a leadership, which is very timid, incremental in nature – which is not what we need today," the minister said.
Mitra advocated for an immediate announcement of a 10-trln-rupee stimulus by the Centre to stave off the economic impact of the pandemic, the biggest crisis in a century.
The central government should also ask the Reserve Bank of India to monetise its deficit, thereby reducing pressure on borrowing by the states. "The additional borrowing from the market is a wrong policy, this should have been borrowed from the Reserve Bank of India," he said.
"The minute you do this kind of borrowing from the market, the bond market will show very, very dangerous signs. So when the states go to raise their bonds, the whole interest rate structure will go haywire," Mitra said.
Many economists, including some former RBI governors, have favoured monetising part of the higher fiscal deficit due to additional expenditure on combating the deadly virus and its economic impact.
Below are the edited excerpts of Mitra's interview:
Q. How do you see this crisis affecting the Indian economy?
A. In the first quarter of 2020-21 (Apr-Mar) you will see a huge negative growth in GDP. In fact, it will shrink significantly and we already have tell-tale signs of that. Even in the second quarter, there will be a huge shrinkage, in my view. If there is a re-occurrence of COVID-19, after the second quarter or if the pandemic is still not controlled, then the third quarter will also be bad. So GDP in 2020-21 can be expected to be negative. If the first two quarters have a huge contraction and the third quarter also has difficulty, then we have only the fourth quarter to depend on. If the third and fourth quarters pick up with aggressive animal spirits, then we may see close to 0-1% growth. But from the current prognosis, growth in the first quarter being deeply down, second quarter suffering the same fate, and third quarter growth unknown, even if the growth in the fourth quarter makes up for the decline a bit, the GDP of India would have shrunk in absolute quantum, which means there will be a negative growth.
Q. The lockdown has been especially brutal on revenues of states…
A. Revenue figures are beginning to show up. For example, revenue of West Bengal in April was 13% of the normal collections. For other states, it is apparently even lower. Within this 13% collection, 70% comes from the goods and services tax. The GST collections have been insignificant. Then obviously, there has not been growth in GDP or value added compared to last year.
In any given month, our collections are usually 4,500 crores (45 bln rupees). But we have collected only 600 crores (6 bln rupees) in revenues in April. And in May, it is likely to go further down. In April, there was still some impact of some stocks remaining and some inventories, which may have been sold, but now there are no inventories.
This is a very interesting data giving an indication of what is happening to the GDP. There is no doubt in my mind with this hard data for April that the first quarter GDP is going to be mayhem, and the second quarter will suffer the same fate with little improvement in absolute figures. The third quarter will depend on what is the coronavirus situation by then. What is the level of opening of economy? And how much of the supply chain, which is destroyed, begins to work itself up? So third quarter may have to be the quarter when supply chains have to be re-constructed. And, fourth quarter, if coronavirus is relatively contained in most areas, it may work for the economy, but nowhere close to making up for the first quarter and second quarter and partly the third quarter.
Q. A lot of criticism has been hurled on West Bengal's handling of the pandemic. Your views?
A. The initial testing kits that were given to our state, and maybe other states, were giving inadequate results. The kits were giving false negative, and therefore, we were not able to increase the level of testing. The Indian Council of Medical Research subsequently admitted there were problems with these kits, and the reliability of these kits ranged between 6% and 71%. Therefore, the testing was stopped for two days and West Bengal was unable to conduct tests due to the inaccuracy of the kits. Once this testing kit issue was addressed, we significantly increased testing.
Today, in terms of increase in testing, we are perhaps the highest in the country. We had only four testing centres because they had to be accredited by the ICMR, which then moved to 14 and now going to 18. And, also there were 44 tuberculosis testing centres, 10 of which have been now accredited by the ICMR and will be available for (COVID-19) testing. Two private testing centres have also been confirmed by ICMR and they are operating now. And, some big private hospitals are trying to set up testing centres and some universities with bio chemistry labs may also be allowed to conduct tests. This is a huge change in terms of number of centres. That is how the testing numbers have increased and with a larger denominator, the other negative aspect showing up earlier with smaller number of tests, is now beginning to even out.
For the number of tests, we are also dependent on the Centre because the ICMR accredits the centres. So the criticism was without knowing that test kits were giving erroneous results. It is completely the fault of the central government that they sent kits, which they did not themselves know were faulty. The ratio of testing has improved significantly, but there is still some way to go.
Q. States have been asking for an increase in their FRBM-mandated borrowing limit of 3% of GDP. Has there been any progress on that?
A. There is no question that the limit mandated by the Fiscal Responsibility and Budget Management Act has to be increased from 3% to 5%. Chief Minister Mamata Banerjee wrote to Prime Minister Narendra Modi asking for an increase in the FRBM limit so that we can borrow 5% of the GDP. No response has come so far. Only thing they have done is that they have increased the ways and means advances limit to 60%, which is a very small amount. That is a repository fund where you have 30 days–earlier 15 days–to replenish it. What states need is an increase in FRBM limit to 5%.
The Centre had told us in March that West Bengal could borrow 4,300 crores (43 bln rupees) more if we passed a legislation amending the FRBM Act, which we did. But that ended in March, when the year closed. Now the Centre is unresponsive on the request for hiking FRBM limit to 5%. Other states are also in favour of this. I have also followed up with a letter to Finance Minister Nirmala Sitharaman, and there has been no response on that as well.
The WMA limit hike is not debt. In that sense, basically they have done nothing on the FRBM request. On top of that, the Centre owes West Bengal around 50,000 crores (500 bln rupees). They owe us 36,000 crores (360 bln rupees) in centrally-sponsored schemes, 11,000 crores (110 bln rupees) in devolution, which they reduced in 2019-20, and GST compensation of over 3,000 crores (30 bln rupees). Even if they give part of the dues, the state will have something to work on.
Q. Many have advocated RBI directly monetising government's debt to ensure spending for the pandemic. Your views?
A. West Bengal has told the Centre to bring out an incentive stimulus package of 10 trln rupees, which is 6% of GDP. The US has done 10% of GDP, the UK has given a stimulus worth 15% of GDP, and Japan has done 20%. There is economic logic for India to go for a stimulus worth 6% of GDP.
We are in favour of 10 trln rupees worth of stimulus. The answer to that is very simple, yes, monetise your debt and produce a 10 trln rupees worth of package. States cannot borrow because FRBM limit is 3% and states don't have revenues, as you can see in case of Bengal. And other states, I am told, are worse in terms of revenue collections. So, how does one run the state, in terms of the COVID-19 expenditure and other committed wages, pensions, salaries, how do they run it?
Q. The Centre is yet to come out with a second stimulus. Many say the later it is, the worse it will be for industries and economic agents?
A. The informal sector has been destroyed. Micro, small and medium enterprises are practically dysfunctional. The unorganised sector in India employs 93% of the workforce, and they have been impacted by the lockdown. The MSMEs have no liquidity, and they cannot pay their workers and don't have working capital.
We had a meeting of state-level banking committees, in which I pushed the issue of MSME lending. But the central government has to provide the necessary loan guarantees to the banks. Even for large industries, banks are not lending. They would rather park money via reverse repo and sit quiet.
The MSMEs are in a bad shape and nothing is being done yet. The only way you can do it is, you have to do a double shot. One is through a fiscal stimulus worth 10 trln rupees, and the other is RBI's efforts to provide other kinds of guarantees and facilities.
The economic impact is very severe because of closure of these vital sectors and practically no large industry is functioning due to the lockdown. The supply chain is completely broken and reconstruction is required. Liquidity will have to come to MSMEs. Loan guarantees and moratoriums for longer periods have to come from banks.
My worry is that this is going to very soon lead to stagflation. The unemployment rate today is huge, even if half of the 93% workforce is unemployed you are taking about 240 mln people without any livelihood.
Yet, the central government has no decision-making process to come up with a stimulus. What they are doing now are incremental measures. But this situation requires big leadership. Other countries have come out with huge stimulus packages, and we are sitting here looking at a model of increment. This is not correcting a business cycle. This is a situation which has never been seen in 100 years, since the Spanish Flu and prior to that 400 years ago during the plague. This is of that magnitude.
Where is the central package? The operating entity is the states; the states will spend the money. This is a very significant shortfall in leadership. This is the time to come out of the 'Lakshman Rekha'. Come out of the crease and bat with a cross bat. This is not the time to play Test cricket. This is the time to play T-0, not even T-20. Yet, we find a leadership, which is very timid, incremental in nature, which is not what we need today.
Q. What are the options for states to raise money to fund COVID-19 expenditure in view of lack of support from Centre?
A. States have no option to raise money unless you increase their FRBM limit. As far as Centre increasing their borrowing from government bonds is concerned, a significant portion of that should be passed on to the states because the expenditure on COVID-19 will be made by the states. The health ministry is not buying personal protective equipment and ventilators. That spending is being done by each state. The stimulation to MSMEs and unorganised sector has to be done by the states.
First, the additional borrowing from the market is a wrong policy; this should have been borrowed from the RBI. The minute you do this kind of borrowing from the market, the bond market will show very, very dangerous signs. So then when the states go to raise their bonds, the whole interest rate structure will go haywire. This is the time to go to the RBI and say I am going to borrow from your window at the repo rate.
Q. What are the concerns states have in relation to devolution of taxes and lower GST? How can we improve it?
A. For 2019-20, from the devolution as per Budget estimates, they cut 11,000 crores (110 bln rupees) for West Bengal after revised estimates. I am certain they cut similar amounts for other states also. So already for 2019-20, states have lost money in devolution. The Centre should pay states immediately and compensate for the cut in devolution, and also pay GST compensation dues. As far as food and basic items are concerned, there is no GST. Since the lockdown, GST is only coming from hand sanitisers and ventilators. But, as industry opens there might be some improvement in GST figures. End
Edited by Ramya J.S. D'Rozario