 Hello and welcome to NewsClick. Today we are having with us Professor Prabhat Patnaik and we'll discuss the state of the Indian economy which by the figures which have been released now has taken a 24%, nearly 24% hit on the GDP. Prabhat, this is the biggest drop of the GDP that we have seen post independence but also amongst all the countries which are the large economies in the world, which can be designated as large economies, this is the biggest GDP hit of any country. In fact it is absolutely unprecedented but it's not surprising, in fact large numbers of economists are of the view that even 24% is an underestimate that really the draconian lockdown which the Modi government ordered is something that should have resulted and would normally result in fall in the GDP which is much greater than 24%. You see the reason you get 24% is because of preliminary estimates of GDP on which this is based, really estimate industrial output on the basis of large scale industry, company finances, while really a very substantial part of output, almost 45% of the GDP is in the unorganized sector, informal sector, including agriculture. Now there the fall has been far more drastic and that does not get captured in the preliminary estimates of GDP. As a result many economists are of the view that the real fall would be even larger than this 24%. So in fact the agriculture doesn't seem to have taken too much of a hit, in fact it seems to show a marginal increase on remaining at roughly the same level. So what if we put the informal sector which as you said are never really brought into this kind of calculations, we could see a GDP hit of nearly 40% almost as large as 40%. 35% to 40%. So that's the extent of the hit that would have taken place. But also if we look at the sectors particularly in terms of employment, informal sector by some of the surveys which have been done seem to show that out of five, about four people have lost their jobs or not getting their necessary employment or income. So that's a huge hit again on terms in terms of employment. Exactly and if that's a hit in terms of employment there would be a corresponding hit in terms of output as well. And so you can imagine the informal sector has been virtually wiped out. That is visible because at the end of it it's the domestic workers, it is the industry also supplying various inputs that come to the industry. There are all different ways that the informal sector really supplements the formal sector. So the first hit on all of this would be the informal sector. Yes. Now if we take this into account, you've talked about the draconian lockdown and the unfortunate part of the draconian lockdown, it had no public health benefits because the numbers have grown consistently. In fact throughout the lockdown, the so-called unlockdown periods, in all of this the growth of the coronavirus infections have been steady. So it doesn't seem to have affected this at all but it has had a huge impact on the economy and on the livelihood of the people. But you know there are two things about the lockdown which we should note. One is the lockdown itself which basically means that production stops. By production I mean of services as well. That's what is causing the first round of the hits to the GDP. The second is that during this entire lockdown, not a paisa was paid to any of the workers who were thereby made unemployed. You know the Indian lockdown was not only more drastic but the Indian lockdown also was associated with a complete absence of any cash payment to those who lost their jobs because of the lockdown. This was unprecedented. This didn't happen even in the United States where everybody who lost his job was actually paid a certain amount of money. But this did not happen in India while it happened everywhere else. Now this basically meant that those who lost their jobs were rendered completely incomeless because of the lockdown, had to dip into their whatever cash reserves they may have had, whatever accumulated savings they may have had or alternatively they actually borrowed money from their neighbours and so on, who in turn would have run down their cash reserves. Because of that what would happen is that even when the economy begins to lift the lockdown, even when production can in principle start, people instead of spending their incomes on consumption, on buying goods would then try and replenish the lost economic cash reserves that they had used up or to pay back the debts they may have incurred during this period of the lockdown and therefore consumption demand would be less than the income they get. Now when that happens then even the output that you produce cannot be sold because of which you actually find that the effect of the lockdown in terms of the reduction in output continues even after the lockdown has been lifted. This is what is happening. So there are two aspects to this and I want to cover both of this with you. One is that what you are saying is because what could have been done wasn't done which is given money into the hands of the people. So the expenditure would have at least remained and that itself would have brought a certain amount of demand in the economy. But also after that because of the depletion of the reserves, there is a continued loss of consumption that is still taking place and therefore even if there is capacity to produce and the workforce that can produce, there is effectively no demand or low demand. So this is one part of it. But you know this has an implication. The implication is that there is a certain belief that okay this is only a temporary thing that what we are seeing is this 24% drop is really of the first quarter of the current fiscal. But as a matter of fact this is going to continue. In other words the fact that there will be no demand and therefore output would be less is something that is going to continue into the future quarters unless the government injects demand into the economy. We'll come back to this issue because that's a way what is the way forward issue. But I also want to draw your attention to the other part. You see that even if for instance there is the willingness to spend a certain amount in the fact that they have some income, the point is if also the coronavirus epidemic, the COVID-19 epidemic continues in the form it is and we are now the biggest in the world in terms of daily new COVID-19 cases. If that happens there is also a disinclination to spend. You don't know what's going to happen. You hoard money. You don't want to go to the markets. You don't do your normal shopping. You will postpone it. So even if it had resulted in a lowering of the epidemic numbers we could have seen an increase in consumption even that benefit which most countries have got. Lockdown has brought down the epidemic numbers. They have been able to resume normal activity at some level not as good as China for example but certainly in most countries there has been an effect of the lockdown. Here it was a double whammy. We neither saw the benefit of the lockdown in terms of lower numbers of infections nor do we see it you know after it's been lifted also the increased consumption because now people are able to go around buy things and so on. Exactly. And I think that effect you know I see it in terms of a two-part scenario. One is the period when the epidemic is raging. During which you can have lockdown even if you don't have an actual lockdown people don't go out much and so on. My point is even after the epidemic is over because during the epidemic you had got into debt and you had run down cash reserves and so on for quite some time after that your consumption would not be as high as your income and that in turn would act as a drag on your production. So the so-called V-shaped recovery would not take place as it's been argued but that's that ignores the fact there is state dependence that means the past determines the immediate future. Exactly. So that's why it's not like a rubber ball it bounces back the way a rubber ball would. So coming back to the point that you were raising earlier that what is the way forward obvious I thought obvious from any textbook to common-sensical economic understanding would be to create demand by the government injecting liquidity into the economy and one of the easiest way for it to do is to basically print notes what is called the helicopter cash these days. So all of this would demand as you were saying a different outlook what is this outlook which prevents them from doing so and we will come to the state governments at the center issue later but what is this specific understanding which prevents them from doing what seems to be common-sensical. You see this government's thinking is totally dominated by the outlook of finance capital the outlook of finance capital is that fiscal policy is out basically you rely on monetary policy which means interest rates and so on and so forth and that the government must not therefore do anything other than leaving it to the central bank to lower the interest rates whenever they think that the economy needs to be distributed. Now if you lower interest rates then the way that that is supposed to work is through increasing investments. Now capitalists don't invest because the cost of borrowing has gone down they suppose it is the case that you expect that the market is not going to grow suppose you expect that next year's output is going to be the same as the current years in that case why should you add to capacity because then any addition to capacity is empty held as unnecessary capacity holding and now nobody is going to kind of go in for that no matter how low the cost of borrowing because after all there is a cost of building capacity and that is something that they would not like to incur unless there is an expected growth of demand. Now if there is no expected growth of demand if actually demand is going to continue to languish then investment is not going to happen. Now that being the case you are also not going to have monetary policy working very well in stimulating the economy in fact it won't work at all to stimulate the economy as you know in the even in the United States now the interest rates are virtually again driven down to zero but even so nothing much is happening by way of a stimulus for the economy therefore the only way that the government can actually stimulate the economy is by using fiscal policy. Now that means that either it has to run a larger fiscal deficit which of course it has to in the short run and later on it has raised you know that's an interesting interesting issue here when you say that when you bring down the interest rates they won't invest now they're not therefore not borrowing they are borrowing for two reasons one is to retire their old debts which might be of higher interest therefore rescheduling or reshuffling their debts and the second is stock market investments which then the stock market is doing pretty well that also means that investing in stocks is a better option if we have capital then to invest in production if there is not going to be any demand you know the the way the way that financiers actually think is that if you lower the interest rate investment would maybe larger but even if it's not then it might stimulate a stock market bubble. If it stimulates the stock market bubble then those who hold stocks would feel that they are wealthier and when they are wealthier they might demand more but in India an average ordinary poor person doesn't hold stocks so the stock market is really limited to a very small number unlike in the advanced countries in the US or in the UK large numbers of people people teaching in the university who will be holding stocks but in India that's not the case as a result what you find is that the stock market route which finance capital often implicitly actually has at the back of its spine doesn't work the investment route which is standard what is taught in textbook economics doesn't work and that's why monetary policy doesn't work. In fact even in the US or in other countries the people who hold stocks are a very small fraction less than 1% so it's only forcing the people not to have savings except in stocks as forced the middle class also to buy stocks but it's really getting their money into the stock market that has been the game rather than there is enough wealth there for you buy stocks but that's a different discussion but clearly you can have a stock market bubble but it will not lead to the force and code demand picking up and that we see in the United States as well as in India the two examples where you have a situation where the epidemic is still raging. Even the stock market bubble would not be as strong a bubble as it was in the early part of this century or in the 1990s because after all one's bitten by shy so that you don't I mean nobody is going to madly speculate if the prices of the assets have gone up beyond a certain point and therefore automatically caution would set in which would put a limit to the magnitude of the bubble. So but it still is interesting to see that the stock markets are not behaving the way you might expect them to behave considering what is happening to the economy so there is a some amount of this chunk between the two which is quite interesting. The last point that I wanted to ask you about was not only is the government shy of essentially stimulating the economy it also seems to say instead of the center borrowing somehow the state borrowing is okay and therefore the GST shortfall which is from the central government's account should be met by the state's borrowing what is this logic that is there I don't give you money but you borrow. The most bizarre argument has come across normally I could have understood the government saying because that is fiscal conservatism that borrowing should not occur but the point is the government by saying the state government should borrow is actually admitting that yes borrowing can occur but on the other hand we are not going to do the borrowing. You see is there constitutional obligations and they got rid of the sales taxes and and state government taxes to introduce a GST. There was an act in 2017 past parliament which actually said the government could give them GST compensation therefore their duty bound to give this compensation if it is the case that they cannot do this out of that fund that is nourished by the GST says in that case they need to either give revenue from some other tax source or alternatively they need to borrow. Now at this time when government borrowing can possibly do no harm on the contrary as I've been arguing that actually the government unless it borrows and spends cannot even get the economy out of this current status the government should be welcoming this as an opportunity to kill several birds with one stone firstly get the economy out of the status secondly you meet fulfill your constitutional obligations and sadly you keep your state governments happy I mean you you you keep the federal structure going but the instead of that they are doing nothing of the sort and they're asking state governments to borrow. It was bizarre argument you know the finance secretary wrote a letter to various state governments saying that look if we borrow more in that case our cost of borrowing is going to go up while if you borrow that would not happen which of course is a ridiculous argument what is more there is absolutely no reason why the government should not borrow from the reserve bank of India at the repo rate which is which is the kind of minimal rate at which the banks borrow from the RBI government can easily borrow this is after all an emergency situation it's a it's a kind of exceptional situation so they can get the reserve bank to lend them at the repo rate. So while it can definitely get money borrow at the repo rate from the reserve bank it is pleading an act of God now have you heard we haven't heard of an act of God force measured which which companies invoke when there is a natural disaster of some kind for fulfilling contractual obligations to fulfill constitutional obligations. This is this is an unheard of to my mind argument that there's an act of God involved here epidemic therefore we will not fulfill constitutional obligations but you take the same measure that I could in order to fulfill that same obligation. It's a most bizarre position that the government of India is taking is absolutely indefensible absolutely indefensible. You know it also appears there's a laissez faire in terms of the economy there is a laissez faire also in terms of the public health policies there is no attempt really to see how to stop the epidemic now what are the measures to be taken what in analysis of what has gone right and gone wrong so that you can at least learn from the experiences as you go along none of these measures and all of this is going to hit the economy as well. I agree in fact this is obviously the most unthinking and the most inhumane government anywhere in the world you just see even in the US under Trump he announced a relief package that was 10% of the GDP elsewhere say in Germany it was 5% Japan much higher but in India the relief package was no more than about 1% of the GDP when it was first announced. So the point is that the government's efforts throughout has been to basically prevent any expenditure being undertaken even during this health emergence which is which is quite incredible. So no good science as yet either in the epidemic or the economic front and at least we could talk about the infections being an act of God but not combating it is not an act of God and in the economy certainly it's not an act of God so we have a clear scenario where the finance minister seems to have given up the health minister doesn't seem to be appearing now to talk about the health situation in the country but the powers of the central government are still being asserted in fact they have said states can take various measures but ultimately we hold the ministry of home holds the guidelines and all the states have to adhere to that. So another case of center state mismatch of what is the expectation of the state and the obligation of the center. Thank you Pramod for being with us spending this time with us and we hope that we'll be able to continue the discussion further on other occasions. Thank you very much. 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