'No doubt' on GDP contraction in Q1: CEA Krishnamurthy Subramanian

Subramanian also said that the Centre had gone beyond its means to support states, was keeping its options open regarding deficit monetisation, and that the new privatisation policy would be out soon

Chief Economic Advisor Krishnamurthy Subramanian on Friday said he saw a downside risk to his assessment of 1.5-2 per cent GDP growth for FY21 but declined to give numbers, citing uncertainty. In a wide-ranging interaction with Arup Roychoudhury, Subramanian also said the Centre had gone beyond its means to support the states and was keeping its options open regarding deficit monetisation, and that the new privatisation policy would be out soon. Excerpts:

We have just had the Q4FY20 GDP numbers. What are your projections for Q1 and FY21?

It is useful to put Q4 numbers in perspective. We have looked at many high-frequency indicators. If you look at railway freight and passenger numbers, airline travel, data on mobility, electricity, … they started declining in February. That was because of the uncertainty that was created once people knew about the virus. So, while the lockdown was only for seven days in March, the impact of that on consumption and investment started manifesting in February.

Covid-19 came at a very inopportune moment for India. Things were starting to look better, if you had looked at the PMI for manufacturing and services and the index of industrial production in February. There was a slowdown last year, yes, but some of the measures taken since July had started showing results. There is significant uncertainty on whether or not there will be a vaccine. This affects spending on discretionary items — what we economists called the cautionary motive to save. And so, whether or not we’ll have a V-shaped recovery in the second half of the year or next year is what will determine growth numbers.

So are you ruling out any recovery towards the latter half of this year?

I am not ruling it out, neither am I able to confidently say there will be a recovery because it depends on the pandemic. Unlike in the case of other crises, which were primarily economic, this is a crisis that has come from the health side. If a vaccine does come about, the uncertainty will go away and you will expect demand to come back.

In Q1 there will be a perceptible contraction. My worry is that often the nuance with which I give the numbers gets lost, and it is only the baseline that is clung on to. So, I am reluctant to give specific numbers and I would rather emphasise the uncertainty that surrounds the pandemic. In the early weeks of lockdown, we had estimated GDP growth for the year to be 1.5-2 per cent. I think now there are downside risks to that. How deep the risks are depends upon whether or not we see a recovery in the latter half of the year.

The Centre will borrow Rs 4.2 trillion more and it’s clear revenue collection will nowhere be close to what was budgeted. Is there a need to wait for the next Finance Bill to amend the Fiscal Responsibility and Budget Management (FRBM) Act? Can’t it be done now?

FRBM aspects are being kept in mind and will take due course. At this point, given the 50 per cent or thereabouts increase in borrowing that has been announced, it is a reasonable estimate to say that an increase of 1.7-1.8 per cent on the 3.5 per cent budgeted fiscal deficit target is being anticipated. As with other projections this year, this is also subject to frequent revisions.

With the Moody’s rating downgrade, is the Centre expecting cuts by others?

Since the pandemic, there have been 33 sovereign downgrades by rating agencies. Of them, nine has been done by Moody’s. So, I think there is information in there.

We have been in constant engagement with the rating agencies. And, we have highlighted to them that finally, the debt rating is essentially a mapping of the probability of default. This is a function of two things — the ability and the willingness to repay. India’s willingness to repay has always been gold standard. In 1991, when we were facing a severe crisis, we decided to ship gold. When it comes to the ability, 96 per cent of our loans are in domestic currencies, even the 4 per cent of loans that are in foreign currency are with multilateral institutions. So, our ability to repay also is close to 100 per cent. So, I think India’s probability of default is very low.

One of FM’s announcements was regarding privatisation policy. Can you throw some light on that?

What we have to keep in mind is the important change in policy stance that has been advocated. Despite almost three decades of liberalisation we’ve not clarified the role of the private sector we expect in the economy. For the first time, it has been clearly articulated. Looking at the gains that privatisation generates, the Centre has come and said that there will be strategic and non-strategic sectors. In the non-strategic sectors, they will basically be no state-owned firms. Even in the strategic sectors, the private sector will compete with PSUs and the number of entities will be limited to one to four. This is a huge change in policy stance and a very clear strategy of how we see the private sector as the most important. Details on which sectors will be non-strategic are being done and as the finance minister has said, it will be announced very soon