New Delhi: The Indian government has to provide a lot more support to sustain demand, said Martin Wolf, Chief Economics Commentator at The Financial Times, adding that the government could directly provide more money to the people.
In a conversation with Editor-in-chief Shekhar Gupta at ThePrint’s digital Off the Cuff, Wolf said the Centre should have gone stronger on the fiscal stimulus, especially given that the economy is forecast to be headed towards a contraction in 2020-21.
Read extracts from the interaction here:
Shekhar Gupta (SG): Martin give us a helicopter view or the satellite view of the global economy now
Martin Wolf (MW): It’s become quite complex and quite diverse. Broadly speaking, the great shock of Covid-19 can be attributed to governments’ deliberate policies that have caused a cessation of a great deal of economic activity around the world while governments try to get control of the disease. It’s pretty clear now that the second quarter of 2020 will see quite an extraordinary, dramatic decline in world output, probably the biggest peacetime recession in terms of speed and extent, probably even bigger than the Great Depression.
We obviously don’t know yet the scale of the decline but it would be very large. It started with China, which closed down to a large extent in the first quarter and in the second quarter it was laidback pretty well, all the developed countries whose economies contracted in a quarter by about 20-30 percent. I mean this is just extraordinary. Of course this has also hit many emerging and developing countries but apart from China they are still experiencing economic shock. It is clear in the developed countries, particularly in Europe, Japan, Australia, that the economic collapse is now past us. That is to say we have been having economic recovery probably since the end of April, we have had a couple of months of recovery and we will see positive growth in the third quarter and the fourth quarter. Clearly this year as a whole is going to be a very very significant economic contraction in the developed countries. IMF recently concluded this would be about 8 percent I think this year. The world economy will contract about 5 percent again considerably worse than I thought a couple of months ago. This economic crisis is related to the disease. Quite a number of developed countries have brought the disease pretty well under control, the US is an exception.
If you look at the developing countries, the disease came to them later. The lockdown and reactions came later. Sustained lockdowns aren’t feasible. But they are also being economically hit directly by governments that have done lockdown as in India and elsewhere. But also indirectly because initially at least there has been a huge collapse in world trade, collapse in commodity prices, huge fall in tourism, and there was a big financial contraception too. All that created enormous turmoil for most emerging and developing countries. Some that have been better managed, better cushioned, like India, get through it.
South America and Africa are very vulnerable to all these shocks in different ways. Fortunately they are getting to the end of this, the developed countries’ central banks have acted very dramatically, much more so than in 2008-2009. They have stabilised the financial market pretty well. Emerging economies are beginning to be able to borrow again, stock markets are back up … that’s been managed very well.
There has been massive fiscal support in developed countries. Quite a bit of it in emerging countries too. Quite a lot of money coming from the International Monetary Fund (IMF), so the shock has been smaller than we feared two or three months ago. Because of these actions, emerging and developing countries are, on the whole, not yet strongly recovering. There is a lagging effect upon them.
At the global level, I think we should be past the worst, but this is a very big recession this year. Next year, I think we will see recovery but it will be weak and it will continue. We won’t recover fully at the global level next year, some countries might have done so. It looks like we might be through the worst of it within a year or so. It all depends on the disease. And if there are massive further waves — that is what happened with the Spanish flu — then all bets are off and we could be back in serious trouble.
SG: The three major countries that have done the best and that have done that worst?
MW: I think that in terms of curbing the disease, one has to admit that China has done very well.
Of the larger economies, Japan, South Korea and probably Germany are the ones that stand out in the way they have managed the disease pretty effectively and had relatively small economic hits and they are recovering very well.
In terms of the worst, well, the larger countries are the hardest hit in terms of death … and close to hardest hit in terms of economy is probably the UK. The other countries that were hit very hard economically and by the disease are Italy, Spain and France.
The US is sort of in a category in its own way in the sense it hasn’t had an extraordinary death rate, we have to recognise that. It hasn’t had an extraordinary economic shock because it didn’t close down the economy, (though) now closing down bits. So I wouldn’t say they haven’t been the worst hit because they are so decentralised — such a big country, lots of space. But I would say that the US is one of the major countries that has mismanaged the situation most completely.
SG: IMF sees India’s economy contracting by 4.5 per cent this year. Do you think it’s an optimistic view, realistic or pessimistic view? 4.5 per cent negative
MW: I really don’t know. It’s amazing how little we know. This is a thing that is unfolding in real time, our statistics are very delayed … I must say, given that the death rate is relatively modest so far — it’s a relatively young country — I find that rather pessimistic. I find it disappointing. I would have hopes that India could have done better than that. Whether it will, I can’t really comment.
My own view is that the Indian government has not reacted using the fiscal tools, particularly as strongly as they should have done. I have discussed with Indian audiences that they could have done stronger on the fiscal stimulus, but we can always debate this. I sense that a 10 percentage points swing from the normal growth is pretty bad. It will matter to Indian people, a lot of people will be hurt.
SG: Please tell us what could the Indian government have done or should still do on the fiscal side.
MW: If it is true that you are headed for a contraction of this scale, which will self affect the fiscal position, you are opening up the economy again. The government has to provide a lot of support for demand. The simplest thing to support demand is to give people money.
To directly support people, I think you have systems that allow you to do that. On a scale such that even the many people who have lost their livelihoods and jobs can go out and freely spend. That way, their living standards are maintained and demand is maintained.
One should be pretty generous about this. It is important to manage the debt situation of companies, which they are trying to do. The key thing is to sustain demand from the people, sustain incomes throughout this difficult period.
Therefore sustaining demand in the economy is sustaining small businesses on which Indians depend. And don’t worry about the fiscal deficit. I think India can afford to borrow. India finances itself overwhelmingly through domestic savings, which are quite high. The relationship between growth and debt interest is favourable in India. That way the economic decline will be smaller, business confidence will be stronger and health of people will be maintained. This is not a time to be conservative. India is in a better state to manage a fiscal shock of this kind than most emerging countries.
SG: Would you put a figure, an upper limit, to where India can let its fiscal deficit go?
MW: I would have to discuss that. I see no reason why the debt ratio, after the economy has recovered, to rise by 20 percentage points in a shock of this scale. After that, fiscal policy has to be tightened as the economy recovers.
SG: You are asking for Indian govt to be bold, bureaucracy to be bold?
MW: Your Prime Minister is bold. Sometimes his boldness is unwise. The demonetisation wasn’t a sensible policy and I didn’t think the overnight lockdown just like that was very sensible either. But he is bold.
I think he should say that: look, a contraction of our economy by 4 or 5 per cent is horrible. This swing we are talking about is a 10 percentage point decline, which is horrible. We have to minimise the cost. This will mean the livelihoods of millions of people, let’s go for it fiscally.
I know that there is a lot of resistance, I have written about this. But that’s what they should be daring to do. India is one of the few emerging economies that has the capacity — financial, fiscal and bureaucratic — to manage this in this way. Yes, there are risks, but letting the economy shrink this much is very problematic. There is an employment problem in India already even before this crisis, which must now be worse. The government has to prevent this.
SG: So you called our prime minister bold. He has done a few interesting things lately. For example allowing coal mining on a commercial basis in the private sector, given how strong coal unions are and how politicised the coal issue is. That’s bold. At the same time there is also the invitation to private sectors to run a bunch of trains. Again, given how strong the railway unions are, that is bold. Last year there was a big tax rate cut for the corporate sector. Now what are the two-three things he can do, by way of reform aside from raising money by borrowing more … by way of reform to make India more attractive to global businesses, particularly those who might want to shift out of China?
MW: Ahh, that’s an interesting question. I have been reasonably persuaded that the short term, immediate biggest problem is fixing the balance sheet problem in the private sector. Particularly, the overhang of debt, the weakness of the banking sector and the non-bank financial sector, and weakness of corporates in terms of over indebtedness, which is clearly dramatically constrained investment … So I have been completely persuaded by the writings, particularly of (former chief economic adviser) Arvind Subramanian, but also others that is a very high priority.
While steps have been taken in this direction, my sense is they haven’t been dramatic enough. I think cleaning up the balance sheet of the banks. I am in favour of actually privatising a lot of the banks; I understand this is politically difficult, but at least some of them because they have not been well run.
And cleaning up the balance sheets of the corporations, which of course does mean taking on the position of the promoters. Put some of these businesses into new hands.
Now, you also asked about deeper structural reforms.
If I were asked what from my perspective is the biggest failure of India, I would say education. You asked why wont people come in and set up businesses the way they set up in China. I think part of it is that they are concerned whether they will get a sufficiently large, high-qualified literate but still manual (labour) … we are not talking about IT graduates, (but) manual labour force.
Where will they get these people and I think that reflects a bigger problem. But I think in terms of taking over from China, this is something I have been interested in. I have been interested in Indian trade policy for 50 years. My very first book was on India’s trade policy … it was published in the early 80s. India has consistently refused this mindset to get involved in the labour intensive, export-oriented manufacturing world. In the ’70s it was Korea and then it became China and India never really competed.
And of course, now businesses are going to Vietnam. And in other areas … they have actually done well in Bangladesh also.
Technology is shifting against this, a lot of reassuring is going on because labour costs matter less. But what do you need? You need absolutely first rate infrastructure and the Chinese have supplied absolutely world class infrastructure. You need world-class internet connections. You need a very hard working, very well trained, very disciplined labour force which will do whatever you want and you need to be able to organise this seamlessly without any interference from the bureaucracy whatsoever.
The interesting thing about China is that it is a very bureaucratic country with a terribly powerful government but they don’t get in the way of this at all. And I think this is a mindset. And I just don’t think this is the mindset of India. Basically, there is almost a de-facto consensus — nobody says it openly — that we don’t want to be like that. We don’t want to be vulnerable to the world like that, we don’t want to be open like that.
Your Prime Minister is still quite suspicious of trade and foreigners. He has quite an inward looking focus and the world knows this. So when you talk of world investors, they say it is a great potential market … 1.5 billion people, tremendous potential as a consumer market, lots of very clever scientists and technologists who can work. But we are not going to run our businesses on the basis of supply chains, part of which are in India. It’s just not what India wants to do.
I think foreigners will want to invest in India because it is one of the great rising markets of the world … That’s not going to happen without a very profound change in mindset and I don’t see that. To my interest, when the Modi government first came in, I thought well will this be a change, but the truth is not really.
SG: Martin, (ThePrint’s journalist) Remya Nair wants to know, do you trust the economic data coming out of India?
MW: The answer to that is that for the first time in my life, in the last few years, the answer is I am afraid no. And this is not because of my expertise. Obviously, I follow quite closely the debates in India. I have read some of the commentary with some care and it seems to me that there are inconsistencies between particularly the GDP data, sectoral data and aggregate GDP data that are so glaring that I have not seen in other countries in the past. That suggests to me that something is wrong.
If data is this inconsistent, it looks as though something is wrong. I don’t know what it is but it is clear that many economists that I respect highly — who I won’t embarrass by mentioning their names, though some of them are well known — share this concern. So I would say — that also relates to our earlier discussion about how India’s GDP might grow because of course I was using the official data — but I would say it is plausible to me that for some years actual growth has been significantly lower than reported growth.
So I have become a bit concerned about this, but what’s important to me is many outsiders have … and this of course affects the credibility of India in the world.
SG: One big thing that is going on in India right now Martin, in lieu of what is happening with China, is that there is a strong anti-China mood. So that reflects in bans and discouragement of imports from China and also the popular view of ‘let me not buy anything that is made in China’. How sustainable is this and if this continues, can India then substitute, through domestic production, what it buys from China?
MW: I haven’t looked at the entire range of products that you import from China, but China is the world’s largest manufacturer. It produces more than any other economy in manufacturing by far. It has a huge range of manufacturing production which is generally cheap and high quality. I don’t think there is any country in the world that can replace all of that at a competitive cost.
The whole of Europe couldn’t and the whole of America couldn’t. So obviously India can’t.
I mean, you could do it if you are prepared to pay a big enough price but that has costs and that affects producers and consumers here. Displacing the whole of China’s supply, at the very least, is a very costly thing to do and it is pretty clear in the American case — and I have followed that closely — they have been unable to do it. It is unbelievably difficult to do and their capacity to do so is much greater.
Nonetheless, I also think that relations between China and its major trading partners are getting worse. They are getting worse for both economic and political reasons and applies not just to India but the Western countries and Japan. So I suspect countries will try to substitute away from Chinese products and to some extent that will happen but there will be real costs associated with that and you have to be prepared to bear them.
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