NEW DELHI—India’s first Chief Statistician Dr. Pronab Sen, who is currently the Programme Director of the International Growth Centre’s India Programme, believes that demonetisation was the “initial trigger” for the current economic slowdown. In this interview with HuffPost India, Dr. Sen said the “principal source” of the economic slowdown in India was the “liquidity crunch” that resulted from the controversial demonetisation exercise of 2016.
The former Chief Statistician said the poor performance of the global economy is only a “contributory factor” to the current slowdown and not its cause.
Finance Minister Nirmala Sitaraman’s decision to merge India’s public sector banks, Dr. Sen said, was unlikely to fix the ailing economy, and neither is the much-discussed demand for a reduction in the Goods and Services Tax (GST) on automobiles the solution for addressing the current economic slowdown.
“This is the result of a much more fundamental problem which is not going to be cured by bringing down the prices of automobiles,” he said.
He appreciated the PM Kisan scheme which transfers money directly into the hands of farmers but said that money allocated for the scheme “has not been spent, and there doesn’t seem to be any sign of money being spent.”
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Edited excerpts from the interview:
How do you make sense of the current slowdown and what do the numbers say about the health of the economy in the medium term?
Well, they are two separate questions. As far as the reasons for the current slowdown are concerned, the answer is a lengthy one so we can come back to that. As far as the future is concerned, given what is happening, it does not look good at all.
We know that, for instance, sale of motorcars and two-wheelers has fallen. Which means that the consumer has not been buying cars and two-wheelers and that reason goes back to the slowdown story. But something more important has happened more recently. The sale of trucks and commercial vehicles has fallen, and fallen quite sharply. This is more serious because these are things that are used for the transportation of goods. What it means, in effect, is that the trucking industry doesn’t see the need for more goods movement. They don’t want to invest in this particular activity. This is serious because what they are saying, in effect, is that “our existing capacity is more than enough to handle whatever goods movement is necessary”. So this is not a good sign for the future. What it means is that the slowdown is probably going to persist.
As far as the reasons for the slowdown are concerned, it really goes back into history. It starts with the problems we have had particularly in farming. Now that has a longer history. For various reasons, it started certainly in 2014 but its roots are older than that. The crunch actually comes with demonetisation. What happens with demonetisation is that the farm prices fell dramatically because the market was not able to buy farm produce. The farmers were having to practically throw away their produce. But now this problem continues because what has happened subsequent to that is the major effect fell on agriculture traders—people who buy from the farmers at the village or mandi. They do not have cash. Now because of that even if there is a need for food, the cash availability is limiting the ability to buy from the farmers. Which means either the output is not being sold or whatever is being sold, is being sold at a relatively low price. This is really at the heart of increased farm distress that we are seeing today.
When agriculture is in distress; remember most rural activities directly or indirectly depend upon farming. So, on the one hand, we have agriculture labour either is not getting employed, and it is showing in the unemployment figures, or when they are not getting employed, they are not getting the wages that they should have been getting. And this is coming out in the rural wages data, which have been falling. So rural India is in distress.
Is this how you see the current slowdown?
Yes, at its heart is this problem. Because remember rural India accounts for 70% of our population. It is really the growth of incomes of rural India which forms the basis of a large part of our demand for all goods and services. So if 70% have seen a reduction in their income then demand is not going to grow. Up to a point economies can be propped up by the growing incomes of the middle class and the urban areas. But the point is that, after some time, people start hitting saturation. You bought your car, two-wheeler, fridge, washing machine, after that you are not going to buy another one—maybe four or five years later. So you start hitting saturation.
This argument resembles the one made by Mr Rathin Roy. Do you also believe that we are in a middle income trap now?
No no this is not a middle income trap. What Rathin was talking about is a longer term process. He was saying that countries which have gone in the middle income trap have essentially witnessed a large discrepancy in their income distribution. Where income only in the top classes are growing and not in the bottom. Now, in India, some of that has happened but not entirely. Income of the lower income groups is also increasing. But post-demonetisation it has stopped. So it is an event. It is not a middle income trap. The middle income trap is really a longer term development path. This is an event. And the event has led to a situation where the effect is immediate. It is now. It is not a long term process.
To my mind, that (liquidity crunch) is the principal source of the slowdown. Because when 70% of your consuming population is seeing no growth in their income and you are starting to run into saturation of the remaining 30%, a slow down will happen.
What is the evidence for inferring that demonetisation is the sole reason for the current slowdown?
It’s not the sole reason but it was the trigger.
So you are saying that demonetisation is the trigger for the current slowdown?
It was the initial trigger for the current slowdown. Yes, I am saying that.
Could you explain why you say that?
Yes, what demonetisation did was that it sucked out the liquidity, the cash, from the cash economy. That liquidity hasn’t come back. Because what you have done, in effect, is that you have made the use of cash very much more difficult. We first had a rule which said that, if anybody draws Rs. 50, 000 or more from his bank account, this will automatically inform the Income Tax department. This is happening today also. So what has happened is, people who may have money in their accounts, but they are very careful about withdrawing in cash. So the cash is there, it’s not that it is not there. The remonetisation has happened. But the problem is that people do not wish to take it out because of their worry about where it is getting reported.
Second, you have a rule which says, in effect, holding cash above Rs 2 lakh is illegal. That again creates the same problem. A large point of the Indian economy which is working on cash is now in a situation where the availability of cash in the quantities that are required is simply not there. So we talk about liquidity all the time: “How Indian industry needs liquidity”.
The fact of the matter is that everybody needs liquidity including the farmer, informal sector. It’s just that the two kinds of liquidity are different. Industry needs liquidity in terms of bank credit whereas the farmers and informal sector requires liquidity in the form of cash. So what business papers would call a liquidity crunch that is what has happened. To my mind, that is the principal source of the slowdown. Because when 70% of your consuming population is seeing no growth in their income and you are starting to run into saturation of the remaining 30%, a slow down will happen.
So it took two years for that to happen?
It took less than two years, but it has finally hit us now when it has come to 5%. The decline started five quarters back, more than a year ago.
What are the other reasons that contributed to the current slowdown?
Well, you see, the problem is fairly clear. The problem is a demand side problem. There isn’t sufficient demand and, as a result, capacity utilisation across sectors, particularly the corporate sector which we measure very well, in the corporate sector the capacity utilisation is low. Now when you have excess capacity available with you, you are not going to invest. Because you are not being able to sell your current production capability. So you are not going to invest until your capacity utilisation goes up. So that then leads to the second effect which is that investment demand starts coming down. So that becomes the next stage in the process, which is the stage we are at now. All of this may not have been so bad if the global economy was doing well and we could export.
But the fact of the matter is global economy is not doing well. Our exports have been dead flat for five years. So exports are not providing an alternative market for your production. So that has compounded the problem. It’s not the cause of the problem but it means that one possible way of getting out of the problem is not working. So the global economy is a factor, certainly. But, as I said, it is not a causal factor, it is only a contributing factor.
What do you make of the misestimation made by Finance Minister in her budget of 12% growth?
I think the 12%, in any case, was wishful thinking. It was wishful thinking because what 12% requires is that your real growth should be 8% and inflation of 4%. Now since the beginning of this calendar year, we have known that inflation has been hanging around 3%. So 4% assumes that inflation would actually accelerate. Now that’s not what a government should have wanted anyway.
As far as 8% is concerned, the thing is that, you know, the last time we did 8% was two years ago. Since then we haven’t done 8%. And that was only for one quarter. After that it has been steadily coming down. So I would have seen logic in saying, no it is cyclical, it is going to turn up. But even then, I don’t think even then the estimate should have been anything more than 7% at best. So you would then be looking at something like 10% instead of the 12%.
It may have been driven by the fact that Mr Modi has given a target of becoming a 5 trillion dollar economy and a 5 trillion dollar economy is only possible if you grow, nominally, at 12%. Maybe that is where the figure came from. So 12% is consistent with the 5 trillion dollar target. Even earlier when we were growing faster, the nominal GDP growth rate has been hanging around 11-11.5%.
So 12% I think was essentially motivated by that, saying that how can we set a target in the budget which is not consistent with the 5 trillion dollar economy?
I don’t know what the internal workings in the Finance Ministry that took place to come up with the number, but you know am sure that the estimates that they had would have been lower.
What do you make of the announcements made by Finance Minister Nirmala Sitharaman in her press conference? Will they be helpful in tiding over the slowdown?
Well, no. Look, most of the announcements were essentially rolling back some of the provisions of the budget. Which were obviously objected to by various constituencies within the country, and by foreign investors. So this was going back to status quo ante i:e going back to what we had before the budget.
So you wouldn’t call them any new measures per se.
Well, there was only one major new measure which was to announce an accelerated recapitalisation of the banks. 76, 000 crores to go for recapitalisation of the banking sector. Now, in itself, this is a good step. It should have been done , and needs to be done. The problem, of course, is that it doesn’t solve the slowdown. It’s not a cure for the slowdown. Because the day immediately after the Finance Minister’s announcement, the CMD of State Bank of India, the largest bank of India, said that the bank has 1 lakh crores it wants to lend but there are no takers. This is true not just of the State Bank it is true of some of the other banks also. They have the resources to lend but they are not finding takers. So now if i recapitalise the banks, then I am increasing that 1 lakh crores to, maybe, one and a half lakhs. But If I don’t have takes for one lakh, I am certainly not going to have takers for one and a half lakhs as well.
The second big step, which is the merger of the banks, has exactly the same effect. The logic of the bank merger is that you now make it easier for the banks to lend. Because six of these banks were under RBI restrictions and could not lend. With the merger they can lend now. So again you have increased the ability of banks to lend both through recapitalisation as well as through merger. But in a situation where demand for loans does not exist. So it is of no particular help at this point in time. Later when the economy starts picking up and people want to invest, and they want to borrow, these steps will help. But that is after you have turned around, not before.
So this was not the step for addressing the current crisis then.
It was not the step for turning the economy around. It may be a good step for accelerating growth when growth is increasing anyway.
At the moment if you again look at what the business newspapers are saying, the focus seems to be primarily on the automobile sector. That you know you are thinking of reducing GST rates on automobiles and so on. To my mind this is simply the wrong diagnosis.
How does the government help stimulate demand if the current slowdown is demand-driven?
You have to recognise what to consider the source of the demand crisis. At the moment if you again look at what the business newspapers are saying, the focus seems to be primarily on the automobile sector. That you know you are thinking of reducing GST rates on automobiles and so on. To my mind, this is simply the wrong diagnosis. This is the result of a much more fundamental problem which is not going to be cured by bringing down the prices of automobiles.
So what would it require to stimulate demand?
What it would require is to transfer income into the hands of that 70% of our population which has been hit the worst and where the problem originates. Now PM Kisan was one way you could do it. But if you look at the budget, what you find is that the provision that was made for PM Kisan was shown as unspent. In the interim budget a provision had been made and in the final budget that amount was shown as unspent.
This is a little counterintuitive, right? Because the whole point of PM Kisan was to help the ruling party before elections.
Yes. Yes. So, a certain amount of it happened prior to election. Because remember this was done last November. In December, through a supplementary demand for grants, money was allocated and that money was spent.
What was the scale of the sum spent?
I think it was somewhere in the vicinity of Rs 18-20, 000 crores...Now, the extent of beneficiaries has been expanded under PM Kisan but money has not been spent, and there doesn’t seem to be any sign of money being spent.
So that was one thing which could have addressed this problem, it may not have solved it; that depends upon the magnitude. The second, of course, is increasing your rural spend. So the government has been doing rural roads, rural housing…
Yes, the government has kept infrastructure as a priority area for spending on projects, right?
It has been doing that, though sums can be increased substantially. Because the need is there. So the focus should have been to get more of this kind of work done.
By “this kind”, you mean rural infrastructure?
Rural infrastructure where you are increasing small contractors and local labour, not national highways or airports where you are using large contractors, heavy machinery with relatively few workers. So you don’t necessarily need more money, all you have to do is a reallocation of money from large, capital-intensive projects to these small, localised, labour-intensive projects. That hasn’t happened.
The third is MGNREGA. MGNREGA continues to languish. So the instruments that you had available to give that 70% of our population a lift in their incomes have simply not been used up.
And why do you think that has not been done?
I do not know.
But increasing farmers’ income has been a recurring refrain of this government over the past several years, right?
This is true. But the only way in which you are going to be able to increase their income is through increasing their (farm products’) prices. So if output is growing by 2.5-3% but prices are falling by 1%, then income is growing only at 1-1.5%.
Which is negligible.
Which is negligible. This is in total. And remember population is growing, so per person income is actually going down.
Coming back to the question about the bank recapitalisation, there is a stream of opinion that holds that public sector banks need to be privatised if these issues have to be resolved. What do you think about that?
You see that again is a long term thing. And I think a lot of it is ideological. Yes, it is true that the public sector banks are forced into giving all kinds of loans because of political pressure. The solution lies not in the bank but in the political system itself. So you are blaming the bank for something which they have been forced to do by the political system.
What about urban demand and the performance of the corporate sector?
It plateaued last year, and is now going downwards. That’s what is showing up in the numbers. This secular fall in the growth rate is primarily on account of that.
As far as the urban economy is concerned, till last year the corporates were doing quite well. Remember urban India is much more driven by corporate activity, though there is a large informal sector but that informal sector itself also, indirectly, has links to what is happening to the corporate sector. As opposed to rural India where those linkages are primarily with agriculture. That’s the big difference.
So if corporate India was doing well, urban Indians were ok. They may not have been doing great, but it was ok. Now when the corporates have started coming down, you have seen the auto industry shedding 3, 50, 000 jobs. The problem has obviously hit corporate India as well. Now when that happens what you are going to see is again people who are going to be laid off jobs, they are going to compete fiercely for whatever casual work is available so the wage rate of casual labour is going to come down. So you will start seeing in urban India what was happening in rural India for the last two and a half years. It is a continuation of the same story about demand in the rural sector.
When the latest GDP figures were announced, the 5% number shocked everybody. But one stream of opinion holds that even this looks suspect, it believes that the true figure could be worse because of the questions regarding the way GDP is calculated as well as the overall controversies concerning government statistics.
See this is problem not just now. This is a problem that has existed always. The GDP figures that we have had for the past several years, particularly post-demonetisation and GST, have been based essentially on corporate performance. So you have agriculture which is measured separately, the rest of the economy basically is driven by corporate data.
Now if you are seeing a difference in the behaviour of corporate India and informal India, then our growth has been overstated for a while now. When we talked about 8% growth, that was probably an overstatement because Corporate India was growing at 9%.
It is assumed, and it is not a bad assumption under normal times, that non-corporate India behaves more or less similarly to what corporate India is doing. But that no longer holds because the two have been moving in opposite directions for a while now.