There is significant scope to bring interest rates down to power through the current economic crisis caused by the pandemic, said Sanjeev Sanyal, Principal Economic Advisor in the Ministry of Finance. He was in conversation with Prabhu Chawla, Editorial Director, The New Indian Express and author and journalist Shankkar Aiyar on TNIE's Expressions - a series of live web casts with people who matter.
The government has some fiscal ammunition left and lots of 'monetary ammunition', said Sanyal, referring to the current situation as being much worse than the slump of 2008. "Indian interest rates are way higher than world interest rates and we can bring them down. This is a marathon. Other countries have taken the big bang approach, but we have not. We are going for a much more calibrated approach, deliberately, because we expect this to be a marathon. In a world where everyone is being downgraded the fear of being downgraded gets diluted. The question is how much space we have," said Sanyal. "We have a lot more space in the credit and monetary side than on the fiscal side. The banks have parked around Rs 8 lakh crores with the RBI where they are earning a reverse repo rate of three per cent. Clearly this is money should be drawing down creating high powered money. You really want them to draw down this money and lend again. This will also have a multiplier effect," he added.
Which is what places India at a starkly different advantage of sorts. In a world where you have basically zero interest rate, even countries which were going bankrupt recently in Southern Europe are raising money at two per cent, said Sanyal. "The ones in Northern Europe are raising it at negative rates — even Britain, with all kinds of issues related to Brexit and COVID, is, as of yesterday, borrowing at negative interest rates. In this environment, the government of India is raising money at six per cent. The Kerala government recently raised money at nine per cent. Clearly, there is scope for lowering the interest rates very significantly," he said. "There is no threat to this — global liquidity is going to be easy for a long time, there is no inflation anywhere in the planet, not only are the oil prices low, even domestically real estate rates are low. Food prices might have been affected by some supply disruption but as soon as we open up that will decline. There is no inflation. The exchange rate is not a problem either. The exchange rate is a relative and not an absolute measure," Sanyal added
While there has been nationwide chatter over direct cash transfers, Sanyal explained that they were managing it in the most sensible way possible, "The PM and the FM did not say that they will transfer Rs 20 lakh crore to people's accounts. While there has been direct transfers, a major part of that has been spent for reforms," he added.
The tourism and hospitality industry has been dubbed the most affected in the COVID crisis. Responding to a question from Prabhu Chawla whether there would be any relief package for them to bounce back, Sanyal said that a tax holiday will not help anyone. "People are not going to hotels. A tax waiver at this point will be useless. Even a tax holiday for individuals will not be helpful as they will have to pay back the debt at one point," he added
The first thing the FM did was push back all financial deadlines and made more food available to people over time, said Sanyal. "We also ramped up on the NREGA side as well. We are not claiming that this will result in a dramatic expansion of the economy but we expect this to help us stay afloat as we open up the supply side. We have begun to open up the agriculture sector along with reforms and an unapologetic framework for privatisation. We will privatise sectors which are not strategic. Similarly, the labour laws have also seen reforms in states and the government of India has made 44 laws into just four. Meanwhile, the MSME and NBFC will get the boost they needed," he said.
The major problem one faces when framing policy in a situation like this is the uncertainty, explained Sanyal. One strategy to deal with such a situation is what the financial market calls the barbell policy. "It says that you hedge for the very worst and for the rest of it you respond step by step through feedback. We did exactly that on the health front. We now have a much better idea of the disease. We are doing something similar in the economic front as well. We had to make sure the poor had some food on their plate, they had some money sent through direct transfers. While this is not going to solve poverty it will sustain them. Next, we need to make sure the smaller businesses stay alive. Which is also very important. This is not reflation of demand," he said.
Responding to comments made by SpiceJet CMD Ajay Singh on an earlier edition of Expressions that they had offered to fly migrant workers back home during the crisis but did not hear back from the government, Sanyal said, "Of course, we want people to move back where they have to but its not something we want to encourage. We want to do it in a calibrated way. We would have had to pay the airlines as well. Railways is another way to do it more cheaply."
The ratings agencies have been asking for balance sheets of the last quarter, the worst-hit one. Will they ignore what the balance sheets say? There will be some downgrades, said Sanyal. "If everyone's ratings go down, normally, it wouldn't have mattered. But, the problem that we have globally, over the past 15-20 years, ratings have got hardwired into regulations. As a result what has happened is that the capital that is kept aside is based on your ratings. Worldwide as you lower the rating, banks will have to keep aside capital at a time when you should be expanding. We have provided a sovereign guarantee to these monies that we are giving out to SME's. The banks can do this lending with zero risk capital," he added.