Dr Thomas Isaac, the Finance Minister of Kerala, is that rare communist who knows his John Maynard Keynes. At a time when India is grappling with the biggest crisis of our lifetime, he is categorical the "central government should at this moment dare to spend more".
The well-respected economist warns that if the Centre fails now, we are faced with an unimaginable humanitarian crisis and major social unrest will follow. In his India after Corona interview with The New Indian Express Editor GS Vasu, Dr Isaac also shares his ideas, including a three-point plan on what must be included in the fiscal stimulus package which has to follow.
By now, we have a fair idea of the kind of destruction caused by the outbreak of the virus. How long will it take for the country to bounce back to normal?
I don't think it will bounce back. The ill-effects are definitely going to be spread through the year.
I will speak for Kerala. Now, this lockdown month our GST growth will be 50 to 60% lower. Under partial lockdown conditions in the coming months, it may climb to about 40% (lower). That's it. Because, the remittance income is going to sharply come down as predicted by the World Bank. They are expecting 23% reduction in the remittance flow to South Asia.
Even if the COVID situation is over, this year's GST for Kerala will definitely be 30% lower. We've appointed a committee to look into it but this is what I foresee.
There are a large number of smallscale industries which had to be closed because they have suffered heavy losses. Their products would have gone bad, raw materials would have gone bad. Unless you give special support for them to reopen, it will be worse than demonetisation. Most of them are not going to come back to life. So, that means it will be a long recession. Things are not going to be jumping back to normal.
The Telangana Chief Minister, I'm sure you would have noticed, has pitched for quantitative easing to enable states to raise resources. Do you agree with his view?
Yes, all state ministers, in the last meeting of the GST Council and during the pre-budget discussion, have demanded that the fiscal deficit ceiling be increased to 4%. That was before the COVID-19 epidemic. Now, everybody is demanding it to be raised to five per cent. So, we fully support it.
Our demands are --- one, raise the fiscal deficit ceiling to five per cent and enable the states to directly borrow from the Reserve Bank. Not from the banks, not from the market. Because, the market has become very conservative. They don't want to lend, they want to hold on to the money.
Second would be that the government of India take on the entire expenditure regarding international migrants and inter-state migrants. What they have permitted is totally insufficient. The reason being inter-state migration and international migration is a union list subject. This is entirely the federal government's responsibility. The Centre cannot wash its hands off the return of international migrants or inter-state migrants. A scheme for rehabilitation of international migrants and inter-state migrants has to be implemented by the central government.
Third, the central government must give GST compensation. In April there is no GST. So, the entire money has to be compensated from the compensation cess fund. Now there is no money in the cess fund to pay such a large compensation. So, in that contingency, it was agreed upon at the GST council, before the law was passed, that the cess fund would borrow from the market and make the payment. And the cess which is for five years can be extended for another year or two till whatever money is extended is recouped. I don't know why this has not dawned on the central government.
And fourth, is that for the health sector, the National Health Mission outlay should be increased by at least four or five times. Because no tinkering will do. I think all states are in agreement. Sushil Kumar Modi has submitted a written demand for increasing the fiscal ceiling. This is a common approach of all states in India.
In terms of monetary help to states, there is only that much the Centre can possibly do. Apart from the steps that you have already mentioned, what are the other fiscal reforms that you would suggest to help states tide over the crisis, the relaxation of borrowing limit apart?
See how the central government instead of providing more money to states is forcing the state governments to cut expenditure. This is the last thing you can think of in a slump.
Forcing the states to cut expenditure? Can you elaborate on that?
Now you have a situation where supply chains are broken but there is also equally a collapse in income. Nobody has income, so nobody is spending. Even if the lockdown is lifted, demand is not going to pick up. In this situation, the only agency that can intervene in the economy to revive demand is the government. The banks are refusing to lend. There are reports that banks do not want concessional money that they can lend to NBFCs. There are no takers for the option of the Reserve Bank.
So, they still seem to be okay with parking the money in the RBI?
Because everybody is afraid of a collapse. And they don’t want to be caught in the middle. They want to keep as much liquid money as possible. This is what Keynes called extreme liquidity preference. You don't want to lose your money. In this situation, the only agency that can intervene is the government. Not investors, not financial institutions. So, the government should at this moment dare to spend more. It doesn't matter what the fiscal deficit is and so on. You don't borrow from the market. Because, then you will be exhausting the money which should be available for private players also. You borrow from the Reserve Bank and pump in money.
That is what for example the US is doing. They are pumping in new money, about 10% of the GDP as a stimulus package, and the entire thing is financed by the Federal Reserve. The European Central Bank is making similar efforts. So, the government of India should understand this is not the time for reforms and prudence. We are facing a calamity. You have the COVID crisis and soon you will have a humanitarian crisis. Don't allow things to slip to that level.
Yeah, but you mentioned that states are being forced to cut expenditure by Delhi. Can you elaborate?
The reason is unlike central government which can borrow from the Reserve Bank or can just increase the borrowing from the market as they want or sell some of their assets, the states have no option. Their main revenue is GST which is zero. And with the lockdown, there is no other revenue. So, if the Centre doesn't permit them to borrow more or make money available to them, they will be forced to cut expenditure.
Now, they are cutting the salaries of employees. But they are also cutting development schemes -- capital expenditure -- to tide over the crisis. This is crazy macro-economics. Macro-economics teaches you that when demand collapses, you have to stimulate it. And, instead, we are being prudent people. We have no revenue, therefore we don't spend. This is bad and will create a financial fiasco.
To take the point that you have made forward, there are some really scary projections on the kind of economic impact that COVID-19 can unleash and as you said the Centre has already begun measures like putting a freeze on DA and states are paying only 50% of the salaries and all that. Do you foresee a situation where the Centre may be compelled to look at some sort of a financial emergency?
See, financial emergency is a technical thing. I can understand states cutting salaries because they have no money. But the central government should not set this example. If they cut salaries and the private sector cuts salaries, income for the people as a whole goes down. They will buy less and you will have a big recession. You won't be able to get out of this.
I can only pity the future of the Indian economy. There is going to be major social unrest. Just think when the lockdown came, how many tens of thousands of migrant labourers had to march by foot to their villages. Now you are going to kindle social unrest of this kind. A financial emergency will only facilitate the government cutting wages and salaries and keeping people down. It is politically and socially unacceptable.
Even without declaring emergency, there are so many options. All the states in India are demanding raising the fiscal deficit ceiling. All the states in India are demanding GST compensation payment. There is something called national consensus. The central government should accept that rather than thinking of a financial emergency.
We have a GST council where all of you discuss what needs to be done and make amendments that are required. Do you feel that the Centre should also set up a similar panel of finance ministers to prepare a roadmap on how the country should navigate through this economic crisis?
We don't need a new council. I am very wary of all councils after the experience with the GST council where the Centre can have veto power on any decisions even if the rest of the GST council members want something. I don't see what purpose these councils will serve.
But definitely consultation is important and relevant. The Prime Minister is consulting the Chief Ministers. The third round of consultations is coming up. Therefore, similarly, the Union finance minister should have a regular consultation with the finance ministers. In fact, when we met the last time in the GST council it was agreed that there will be a special meeting of the council to discuss the compensation payment. But the Parliament session ended one and a half months back. Even if she can’t have a physical meeting, I do not understand what prevents her from having a video conference. This is unacceptable.
Am I to understand that the finance minister has not consulted any of you so far post the economic crisis that has come about?
No, no, no. The only consultation was the general economic situation in the pre-budget meeting. Now that budget has become irrelevant.
That was much before COVID-19, right?
That's right. That was the last consultation we had. There was a GST council meeting later but it was for things related to GST. And there was a general discussion on the financial situation in India, the pre-budget discussion. So it is most urgent that a serious consultation is immediately arranged.
Have some of the finance ministers demanded that a consultative meeting be held on a priority basis? Have you written to Delhi in that regard?
Yes, I have sent three letters. Most of the state ministers would have done that.
So far there has been no response?
No, no response. Absoutely not. Normally whenever you send a letter, you receive some polite comment but not even that.
On the positive side, some are of the view that post-COVID, businesses will start looking at moving out of China and India could be one of the attractive destinations. Do you concur with that view. What kind of reforms do we need to bring in to make this happen?
Yes, that is a possibility because international businesses wouldn’t want to put all their eggs in one basket anymore. Therefore, they will be willing to spread out. Their primary preference would be to move to Southeast Asia, Vietnam and so on, but India also. So, we have to be prepared to welcome them. We have to start discussing what should be done.
But I don't think putting restrictions on FDI from China is a good signal for that. What should we be afraid of? I’m not arguing for opening up of FDI. I'm not an ideologist of that kind. I prefer FDI in sectors in new technologies. But it is very strange that people who want to invite or attract FDI to India, taking advantage of the new situation, should immediately also put restrictions on FDI from China.
Is there any plan for finance ministers of states to meet irrespective of whether you have an invitation from Delhi or not. The state finance ministers could possibly meet and put up a joint proposal before the Centre. Have you been in talks with your counterparts in other states.
Yeah, I’ve been trying my level best to see a discussion of that kind. But political considerations have come in the way. Kerala has organised four such major discussions in various parts of India and we are having a webinar on April 27 and 28. We have invited all finance ministers and about 100-120 top academics in India. I don't know how many finance ministers will accept the invitation and nobody from the BJP side has responded. That is understandable. But I see some of the others are also not very interested.
It's a very sad state of affairs when the states, even those in the opposition, are not able to take a united position. And, this is precisely the situation the central government likes and precisely why despite all rationale being on the side of the states on issues like GST compensation and increase in the fiscal ceiling, the central government has been able to stonewall. We will continue the efforts to bring together as many states as possible in favour of a restructuring of Centre-state financial relations.
Indications are that the Centre will sooner rather than later come out with a fiscal stimulus package. Can you quickly tell me three most important measures that Delhi needs to incorporate as part of the package?
One, large-scale income transfer to the people. Say, Rs 7,500 immediately for all households. Advance payment to MGNREGA workers and increasing the old-age pension.
Second, I don't need to argue for corporates. They have been given so many concessions even without them asking, like the corporate tax concession. What I demand is for the farmers and the MSME sector. Now if you want them to start working again, you should extend the (loan) moratorium till the end of the year with no interest. That should be met by the government of India. The interest will come to something like Rs one lakh crore. If you can just give Rs 1.75 lakh crores to corporates, then farmers and small scale industries can also demand it. And then along with it their working capital, existing loans must be restructured. There should be a package for the MSME sector.
The third will be a package for the states. These are the three things the government of India is not serious about and they should revise their stand.