What were measures taken during the Covid period? What preparations were done for the post Covid world?
Right from the beginning, we stated that look the Covid virus will not lead to a normal demand shock. We took it as a supply shock. Yes, there were some demand after shocks but we saw it right from the beginning as a result of a supply side shock which required a very different response than simply re-inflating economy by burning all the monetary and fiscal resources.
So what we did is we provided for a safety net. It came in the way of liquidity for the poor, it came in the way of providing free food or small amounts of money that were transferred through the Jan Dhan system and so on and so forth.
So the idea was to hold it altogether using a safety net but then when the economy began to open up, the rebuild of demand was by essentially constructing infrastructure.
We have used our fiscal resources and monetary resources very carefully and most of it has been directed towards infrastructure building. Simultaneously we also made the case right from the beginning that look this is a situation of uncertainty. It could last for a lot longer than anybody thinks and in any case the post COVID world will not be a re-inflation of the pre-COVID world. So whatever happens in the post-COVID world will have its own logic, its own supply chains, technology, consumer behaviour, geopolitics. Everything will be different. All these things will interact in unpredictable ways so rather than try and guess how this whole new world will emerge, we invested heavily throughout this COVID period in essentially getting the supply side as efficient as possible.
So if you will remember there was a lot of criticism as to why this country was doing supply side reforms in the middle of a crisis. Well it was because we were preparing for the post COVID world. We got the drone sector open, the space sector open. We removed all those old telecom regulations on the BPOs and OSP sector.We opened up geospatial sector. We even privatised Air India in the middle of all of that.
So what were we doing, we were basically trying to make the system more flexible and fluid. We even tried to do a certain kind of farm reforms. We have not worked with the political reasons but I think you can see that it was consistently in the right direction.
I will like to draw your attention to two necessary conditions, they are sufficient and necessary conditions for India’s growth – requirement of capital. Our savings are going down. We are still dependent on foreign capital for India to move from three trillion to five trillion, five trillion to ten trillion. Eventually you would need a lot of foreign capital. Do you think we are in a position to attract that kind of foreign capital?
I do not think our savings are going down that is probably harsh. We have a fairly robust savings rate and it is percentage of a growing economy so in that sense it is growing but yes we need even more capital given that we are now the world’s fastest growing major economy. We have insatiable sort of hunger for capital given that we are still building out our infrastructure. We want more investment to go into manufacturing, into real estate all kinds of things that need capital.
So yes we are capital hunger country and that capital has to be allocated. Now we had a problem till about five-six years ago that our financial system had major weaknesses. First of all the banking system having gone out on a bit of a splurge in the previous decade had basically ended up with these huge NPAs. There were lot of concerns about all the pile up of NPAs and also about the processes, lot of questions asked about the integrity of key individuals in that system and so on. So there was a lot of debate about the whole thing, the ability of the banking system to sustain the process of risk. After all in the end financial system is about risk taking so we are able expand, take risk and support the creative destruction of the economy.
I am happy to report the effort we have put into cleaning the system has mostly worked. There is, of course, the cumulative effort on the financial market side which has cleaned it up and I think many of the issues tightened up successively. I think more or less Indian companies, the governance and all these kinds of things are reasonably good. There may be issues but I would say something like FTX for example I do not think our regulations today would allow something like to happen. It may happen in the US. It may happen in Europe, but it cannot happen any more in India that easily.
Same thing has happened with our banking system. We have really worked hard in cleaning it up. The insolvency and bankruptcy code was a very key tool and again culture of governance has been introduced, may not be perfect here. But certainly the impunity with which promoters in the past may have behaved or bankers in the past may have behaved I think that has been to very significant extent been unwound and we are continuously renewing ourselves, we saw that even with the case of cryptocurrencies.
I hope the demonstration of administrative capacity and policymaker ability has been done in the sense that we have a responsible central bank, finance ministry which can deal with these things and deliver the goods. So banking system today despite the shock of COVID is radically cleaner than what it was five years ago and I can say that it is now clean again and can sustain a period of rapid expansion without having too much trouble because the system is deleveraged, it is well capitalised and hopefully the lessons of the past have been learnt.
Sovereign rating of India has not improved and we have made a lot of argument on various forums. Why do you think that is not changing and if it changes it really changes India’s scope on bond inclusion, the foreign capital. Do you think it is high time that it needs to be done and rating agencies need to take serious note of it?
The credit ratings whether sovereign or corporate are all lagging indicators whether on the upside or on the downside. I am quite confident if our economic performance remains in good nick, we will begin to see these improvements. However, I would add that the important point here is that someway between 18% to 20% of the weightage of this comes from soft factors very often derived from these opinion based indices on happiness, democracy and freedom.
I have made a big fuss about the small handful of west based think tanks who have a monopoly in this conversation and for a variety of ideological reasons have run agenda based approach to downgrading India on many of these indicators even though there is no basis for it. This is a topic on which I have extensively written in recent times and I think our traditional approach of simply ignoring them is not going to help us because these things do creep into concrete things like sovereign ratings.
So I do think there has to be a push back, an intellectual push back rather than just cribbing. I have hopefully contributed to that again in working paper on the prime minister’s economic advisory council website on this issue few weeks ago.
Viewers are welcome to go and have a look at it but I think this is important debate that we need to have and we need to be willing to push back against this western dominated narrative.
First we need to challenge their methodologies but I think over time we need to have our own ability to judge the rest of the world. We have to now as I said punch our own weight and turn the gears the other way.
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