There is significant scope to bring interest rates down to power through the current economic crisis caused by the coronavirus 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, 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,” he said.
“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 crore with the RBI, where they are earning a reverse repo rate of 3 per cent. Clearly, this money should be creating high powered money,” he said.
This places India at a starkly different advantage in a world where you have basically zero interest rate. Even countries that were going bankrupt recently in Southern Europe are raising money at 2 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 borrowing at negative interest rates. In this environment, the Government of India is raising money at 6 per cent. Kerala government recently raised money at 9 per cent. Clearly, there is scope for lowering the interest rates 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, oil prices low, even domestic 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,” Sanyal added.
While there has been nationwide chatter over direct cash transfers, Sanyal said they were managing it in the most sensible way possible. “The PM and the FM did not say they will transfer Rs 20 lakh crore to people’s accounts. While there have been direct transfers, a major part of it has been spent for reforms,” he added.
The tourism and hospitality industry is the most affected by the pandemic. Responding to a question from Prabhu Chawla if there would be any relief package for them to bounce back, Sanyal said 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 said.
The first thing the FM did was to push back all financial deadlines and make more food available to people over time, said Sanyal. “We ramped up the NREGA side. We don’t claim that this will dramatically expand 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 that are not strategic. Similarly, the labour laws have also seen reforms in states and the Centre has made 44 laws into just four. MSMEs and NBFCs also get the boost,” he said.
The major problem one faces when framing policy in a situation like this is the uncertainty, Sanyal said. 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 via feedback. We did exactly that on 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 plates; they had some money sent through direct transfers. Next, we need to make sure the smaller businesses stay alive. This is not reflation of demand,” he said.