Decline in 2020-21 output part of Modi govt’s working assumption: CEA Subramanian

In April, Modi govt had estimated that India may grow by 1.5-2%. But that was based on assumption of V-shaped recovery in second half of the year, says CEA Krishnamurthy Subramanian.

Chief Economic Adviser Krishnamurthy V. Subramanian | Twitter

New Delhi: A decline in output in 2020-21 is one of the working assumptions of the Narendra Modi government, Chief Economic Advisor Krishnamurthy Subramanian said Thursday, without giving any estimates about the level of contraction.

His comment comes at a time the Reserve Bank of India governor and most members of the Monetary Policy Committee have said the economy is headed towards a contraction in 2020-21 as the Covid-19 pandemic and the subsequent economic lockdown adversely impacted sectors such as manufacturing and services.

Most of the economists and multilateral institutions have forecast that the Indian economy may contract between 3 and 12 per cent in 2020-21 — the first such contraction in 40 years.

“At the start of this financial year, we estimated growth to be 1.5 to 2 per cent (in 2020-21). That was conditioned on a V-shaped recovery in the second half of the year. What is uncertain now though is whether the recovery will happen in the second half of the year or next year. The actual growth therefore depends critically on when the recovery happens,” Subramanian said during a virtual press briefing Thursday.

“For this year, growth being very low and possibly there being a decline in output is part of our working assumption,” Subramanian said, adding that the range that the finance ministry is working with is wide at the moment.

‘Pandemic could be long drawn’

A lockdown that lasted two months and halted economic activity in key states forced both the government and the RBI to announce a slew of measures to provide a reprieve to borrowers and different segments of the economy, including micro, small and medium enterprises. The Rs 21 lakh crore economic package to combat the pandemic mainly comprised liquidity support measures with less of direct cash transfers.

Asked if the government is preserving its fire power to support the economy at a later date, Subramanian quoted economist Joseph Stiglitz and said it is important to be ready for measures over the period the battle against Covid lasts. The pandemic could be long drawn, he added.

Subramanian also hinted that the government may not pursue a proposal floated by banks for a bad bank. He pointed out that there are many asset reconstruction companies in India at present who do a job similar to that of the bad bank. He also said creating a new structure may not work.