Outlook Money Interview | Dr Pronab Sen
#IndianEconomy #PronabSen #Budget2020
Just a few days ahead of Budget, In an interview to Rajat Mishra, Pronab Sen, economist and former Principal Advisor to Planning Commission discussed everything wrong in the Indian economy.
#PronabSen #Budget2020 #IndianEconomy #OutlookMoney #Money #OutlookGroup #OutlookMagazine
Just a few days ahead of Budget, In an interview to Rajat Mishra, Pronab Sen, economist and former Principal Advisor to Planning Commission discussed everything wrong in the Indian economy.
#PronabSen #Budget2020 #IndianEconomy #OutlookMoney #Money #OutlookGroup #OutlookMagazine
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NewsTranscript
00:00 Hello and welcome you watching Outlook Money Interview. We are back with a brand new episode.
00:14 Well, one of the big debate that has divided the experts and the economists is about the
00:19 state of the Indian economy. And the data coming in are quite worrisome. The GDP number
00:24 has plummeted to 4.5% which is one of the lowest in last 6 years. And if we go by government
00:30 on projected GDP for financial year 20 is 5% which is one of the lowest in last 11 years.
00:36 Inflation with editable inflation which has just come out has inched up to 7.35% which
00:41 is also one of the worst since July 2014. And the unemployment rate is also at the highest
00:47 level in last 45 years. So even though the economists and experts are having a divergent
00:52 view point on this, but there is a clear recognition that something has gone wrong in the Indian
00:57 economy. So who should be held responsible for this? Was it demonetization or GST or
01:03 the effect of both? And what's ailing the Indian economy? So these are the key questions
01:07 we are asking today to Mr. Pranab Sen who is a former chief statistician and an economist.
01:13 Thanks Mr. Sen, thanks for joining us and talking to us.
01:16 A pleasure.
01:17 So firstly I would like to start off with a question that former Prime Minister Dr.
01:21 Rohan Singh warned in November that seeing the current economic scenario, we are entering
01:26 in a stage of stagflation which constitutes the plummeting GDP, high inflation rates and
01:31 higher unemployment rate. And now we are seeing that GDP has plummeted to 4.5% which is lowest
01:36 in last 6 years, unemployment rate is at 45 year high and inflation is worst since July
01:42 2014. So it would be appropriate to say that we are entering in a stage of stagflation?
01:49 Not really, because what you are seeing actually is that the inflationary numbers are being
01:55 driven essentially by agricultural products and to a smaller extent, a recent number,
02:02 it was telecom. The coal inflation continues to be subdued and if I take out the telecom
02:10 effect it's actually going down. So what we are really looking at is that if we exclude
02:16 agriculture from this picture, what we are looking at is almost a deflation. Stagflation
02:24 is when output is not growing but inflation keeps moving up. That's not the case that
02:31 we are seeing. In fact we are seeing that in a lot of sectors, prices are actually coming
02:37 down and in some cases going negative. Some have already gone negative and more will go
02:42 negative.
02:43 So there is a discussion about the nature of the slowdown, stirs up. So there is one
02:48 segment that says that it is a structural slowdown. There is one segment which says
02:52 that it is a cyclical slowdown. And there is another segment which says it is partly
02:56 due to structural elements and partly due to cyclical. So I want to ask you which segment
03:02 you belong to and according to your analysis is this structural, cyclical or partly cyclical
03:07 or partly structural?
03:08 Again it's difficult to say because if you look at the cyclical component, we should
03:14 have, the economy should have been peaking at around 17-18 and post that we should be
03:19 on the downward side of the cycle. But in 17-18 you had two structural shocks. One was
03:29 demonetization and the second was GST. Now my sense is that those two shocks have much
03:39 more dominated than the cyclical feature. So what we are looking at the moment in my
03:46 mind is a largely a structural problem. The cyclical component I think has been pretty
03:52 much wiped out.
03:53 As in many experts and economists are saying that we are looking at a prospect of entering
03:58 into a recession. So do you think that this argument holds currency?
04:03 Well, unless something is done to reverse the process, the possibility exists. We should
04:10 not underplay that. To believe that if we just keep our hands off somehow the economy
04:16 is going to turn around may be over optimistic.
04:20 And so whenever we talk about the GDP numbers, like this is the only parameter to see how
04:26 economy is faring. So whenever the discussion about the GDP starts up, the central point
04:32 is about the mechanism of estimation. And it was not a very long ago when Armin Subramanian,
04:37 former chief economic advisor said that India's GDP has been overestimated by 2.5% between
04:42 2011 and 17. So right now the GDP is at lowest 4.5%. Do you think that it is far more lower
04:49 than that because informal sector is something that we don't have a proper data of?
04:54 Well, I disagree with Arvin, frankly, in his assessment. The GDP may be slightly overestimated,
05:05 but I don't think it is consistently overestimated by 2.5%. It may in fact have been underestimated
05:12 for all we know. I think there is a presumption that is going there. The main reason why this
05:19 whole debate crops up is that the GDP estimates by and large tend to pick up only the corporate
05:27 behaviour other than agriculture where we do have independent data. Now if the corporate
05:33 and the non-corporate sector are behaving roughly similarly, the GDP estimates are fairly
05:38 accurate. But post 2017, 17, 18 onwards, I think that connect has broken. So we had,
05:47 first we had the situation where the non-corporate sector went down because of these two shocks,
05:54 but the corporate sector actually went up. And so the two are moving in different directions.
06:00 And since we are extrapolating using corporate data, we may have overestimated the GDP. The
06:07 point is at this moment, the corporate sector is coming down. That's what the GDP numbers
06:12 are telling us. What is happening to the non-corporate sector, we still don't know. It could have
06:18 turned up. We have no hard numbers on it. But Arvind's point was from 11, 12 to 17,
06:25 18, where this part of the story doesn't play out. And on this I disagree with him and I
06:32 have a long record on that and it's something we can take up because it is a little more
06:38 technical.
06:39 Sir, recently according to NSO's Leaked Consumer Expenditure Survey in November 2019, the real
06:45 per capita household expenditure has fallen for the first time in last 40 years. So the
06:50 immediate conclusion that can be drawn out of it, the poverty headcount ratios in India
06:54 between 17 and 18 has been increased. So how do you see this situation and where we are
06:59 heading into this and what has gone wrong that the poverty headcount ratio has been
07:03 increasing?
07:04 Well, you see we don't know whether it has been increasing or not. 17, 18 as I said is
07:08 a special year. Now think of what happened post demonetization. All of us had to cut
07:18 our consumption quite substantially because we simply didn't have the cash to buy things.
07:23 Now this is particularly true of the poor whose all their transactions are cash driven.
07:32 So in 17, 18 the fact that consumption has come down compared to 11, 12 should not necessarily
07:40 be interpreted as the culmination of a process over six years. It could be simply the effect
07:48 of demonetization in that one year. We don't have any way of actually being able to say
07:57 which is the case whether it's six years of continuous decline or one year of sudden decline.
08:04 My tendency is to think of it as the latter, that it is one year of sudden decline. We
08:10 will know when the next consumption happens, which way the trend is going.
08:16 Sir, when we trace the history of slowdowns in India, there was one in 2002-03, then there
08:21 was the effect of a tapered time frame in 2012-13. So how do you differentiate the slowdown?
08:26 Because the GDP number also fallen to 4.5% during 2003, but the fundamentals were quite
08:31 strong. But now fundamentals have been shaken. So how do you differentiate this slowdown
08:36 in comparison to the previous slowdowns?
08:39 You see, this slowdown is mainly a demand driven slowdown. The earlier slowdowns really
08:47 came from all sorts of supply side disruptions that had happened. Whether we are talking
08:52 about the 2000 and 2003, in fact it starts from 99 or you are talking about by 13, they
08:59 were all supply side disruptions. This is not. Here the supply side was alright. This
09:05 is a demand side. Now on the demand side, the tendency for the economy to continue slipping
09:11 is stronger than if it's a pure supply side. You fix the supply problem and you are back.
09:16 You are fixing the demand problems along with your activity. You really have to work hard.
09:22 And sir, don't you think that as of now we are caught in a very bizarre and sort of a
09:25 baffling situation, when the all indicators and the economy is sputtering. The Sensex
09:31 and the all markets are like indicators are in battle, Sensex is powering ahead. So how
09:36 do you decode this situation?
09:38 Well, you see, there are two things. The first is the external environment. No matter how
09:47 bad things are, India still looks reasonably good to external portfolio investors. The
09:53 portfolio investors have continued to be reasonable. On the other side, there is the domestic element.
10:00 And this again I don't think people have interpreted properly. So what happened is that if you
10:05 look at the last one year, a little more than one year, the RBI has aggressively pumped
10:10 money into the Indian economy through open market operations. Now open market operation
10:16 essentially means buying government bonds. What makes a lot of difference is who is selling
10:23 the bond. Now by and large government bonds are headed by two types of institutions. It's
10:28 either the banks or other financial institutions and some corporates, who hold it as a part
10:35 of the treasury operations. Banks don't. Now if it's the bank who has sold the bond, then
10:43 the bank is getting cash for it, which it can then use to expand its loan portfolio.
10:49 But that did not happen. It's not the banks who actually sold the bonds. It was the other
10:57 institutions which did. Now as I said, for them, this was a part of the treasury. So
11:03 when you sell one asset and you get cash in return, you will buy another asset to replace
11:09 it. Because at the end of the day, it's a part of your assets rather than your flow.
11:14 Now for these institutions, the only other assets are in the stock market. So they put
11:22 their money, so the increase of money supply that came into the Indian economy, its first
11:27 round effect was it went into the stock market and gave the stock market a boost, which it
11:32 would not have happened otherwise.
11:33 And so about two and a half weeks from now, Finance Minister Nirmala Sitharaman is going
11:38 to present the budget in the parliament. It's such a precarious situation and it's going
11:42 to be one of the daunting tasks in front of her, to boost the dampening spirit. So according
11:47 to you, what it will take for the government to unleash the animal spirits in the economy
11:51 and to boost the sentiment?
11:53 You see, animal spirits are about investors. I think focusing on investors at this time
12:01 is the wrong approach. You should really focus on the consumer and ask yourself the question,
12:07 what would it require to revive consumer confidence? Because if you look at the RBI series on consumer
12:15 confidence, that's taken a massive drop. That's the one you should be focusing on, not investor
12:22 confidence. Once this has stabilized and preferably gone up, investor confidence will come back.
12:28 So what are the various steps Finance Minister can include in her budget to boost the consumer
12:34 confidence and consumer spirit in the economy?
12:36 You see, that is relatively difficult to do. I mean, there are some fairly obvious kinds
12:40 of things that can be done. I mean, for instance, PM Kisan. PM Kisan, the rollout has been very
12:47 poor. Can we speed it up? The other is NREGA. Provide more funds. The state governments
12:57 are crying. But you know, that apart, I think what the government needs to do is to give
13:08 enough confidence to those who are at the base of all consumption in India, which is
13:20 the rural sector as a whole and the informal sector at the centre. Now, the government
13:28 doesn't have any direct steps. But in terms of, for instance, on agriculture, on things
13:36 like price support, making sure that all the payments, all the subsidies are going out,
13:41 all of this will have to be done. Saying that, you know, whatever the government can do to
13:45 support consumption, we will do. But directly addressing confidence, the government does
13:52 not have a role. On the investment side, the government does, but not on the consumer side.
14:00 Sir, my next question is that we are seeing that we are dealing under a severe slowdown.
14:05 So do you think that it's going to end anytime soon? Or do you see that it's going to get
14:10 much more severe with the passage of time?
14:12 Well, that's difficult to say. You know, what has happened is that after the shock of demonetization,
14:21 I think the unorganized sector is starting to limp back. Now, how strongly that growth
14:29 will happen will depend very largely upon what kind of income support is provided during
14:37 the interim period. So much will depend upon what are the kind of interventions that the
14:42 budget talks about. If it does support this income support and strengthens them, then
14:51 we, it may not last that long. But if that doesn't happen, and income expectations, particularly
14:58 among the poor, continue to fall, then it could be much more prolonged.
15:03 Sir, when we talk about the slowdown, the government from time to time has said that
15:10 there are visible signs of recovery in the economy. In terms of GST collection that have
15:14 crossed over 1 lakh crore, two months in a row, then index of industrial production,
15:20 first time after contracting for three consecutive months has gone in a positive territory. Do
15:25 you think that these are the visible signs of recovery and we should be satisfied?
15:29 Yes, there are some signs of recovery. As far as the IIP is concerned, I mean if you
15:34 look at it a little more closely as to what has happened, almost the entire growth, all
15:40 other components of the IIP are in fact in negative territory. The only one that is really
15:46 large and strongly positive is intermediate growth, which means that the de-stocking that
15:55 was happening earlier, that seems to have stopped and a certain amount of restocking
15:59 is taking place, which is a good thing. But it is a good thing only if and only if demand
16:06 continues or starts picking up. If it doesn't, then it will reverse itself again.
16:15 Sir, in May last year, Rathin Roy, then the member of Prime Minister's Economic Advisory
16:19 said that India's growth is going to be, India is going to be middle income trap, going to
16:26 fall in the middle income trap. Basically, he also said that we are going to treat the
16:30 same path, countries like Brazil and South Africa, we can't replicate the growth trajectory
16:35 of China and South Korea. So, what's your viewpoint on that?
16:38 You see, the point he is making I think is a very basic one and pretty much ends with
16:42 what I have been telling you. If you want sustained growth for a long period of time
16:48 and not getting trapped, what you need is people to consistently move up in terms of
16:53 their income status. So, if you are thinking of an income pyramid, where the rich are at
16:58 the top and the poor are at the bottom, the entire pyramid should be moving up. What is
17:02 happening in India, or at least was happening, is that the top part of the pyramid was moving
17:07 up, the bottom actually stayed where it was and may have in fact gone down a little bit.
17:13 That is not sustainable. You are not going to get sustained growth. You need the whole
17:17 system to move upwards together. And that's what he is talking about that if you don't
17:21 focus on the incomes of the poor, then sooner or later what you are going to get is that
17:29 the middle class will stagnate and their demand for goods and services from within the country
17:38 will hit a plateau. They will be looking for things, imported goods and services and so
17:44 the growth will then get aborted. And that's the problem he is talking about. That's the
17:50 genuine problem. So that's why you need to focus at the bottom of that pyramid and make
17:56 sure that those incomes continue to rise.
17:58 Sir, there is one big speculation just ahead of the budget that the government is going
18:03 to slash the personal income tax for the middle class people in a hope that it is going to
18:08 revive the consumer confidence and spirit in the economy. Do you think that it's the
18:12 right step?
18:13 No, I mean this will just worsen the problem that Rothian is talking about. I mean who
18:18 does the tax cut affect? It affects the middle class or not? Now you may give rise to a huge
18:26 amount of consumer confidence among those, but Rothian's point continues to be valid.
18:33 That they may just spend that money on imported goods, which doesn't help you very much.
18:39 Sir, few days back SBI EcoRAP report says that India in next financial year is going
18:44 to create 16 million jobs less than in comparison to the previous year. And also periodic Labour
18:52 Force survey of 2017 shows that 50% of the Labour participation has dropped out. Presumably
19:00 because they didn't have any jobs.
19:01 No, it's not 50% has dropped out. It is that the Labour Force participation rate has fallen
19:05 by 6 percentage points, which is about a 10% decline. So about half the people in the working
19:12 age group are not in the Labour Force. It used to be about 45%.
19:20 How do you see this situation?
19:21 No, that's a serious situation because you know what it is saying in effect is that people
19:26 don't see the utility of spending time in looking for a job because they don't think
19:32 jobs exist. So the lack of jobs is getting compounded by people believing that jobs don't
19:41 exist. This is again an expectations thing, it's a mind thing, but has very strong economic
19:47 effects.
19:48 Sir, if you will rate the economic prudence of this government in comparison to the UPA,
19:55 what would be your comment on that?
19:58 Well, I think it's a mixed bag. Now, UPA 1 was actually fairly prudent. If you look
20:09 at all the indicators, UPA did very well. UPA 2 started off on a very bad footing because
20:17 of the global crisis. But I think it did fairly well until 2013. And then of course, everything
20:24 broke down. It was also the period where in 2008, which was still UPA 1, the fiscal prudence
20:38 was simply thrown away. And there was a massive increase in the fiscal deficit in a single
20:43 year. And that fiscal deficit actually helped us in the following year when the global crisis
20:48 broke. So it was good that it was there, but it was completely out of luck. More importantly,
20:55 it took us a long time to roll that fiscal profit. And this government did well to start
21:01 the process of fiscal consolidation. But my sense is that again, post 17-18, what has
21:08 happened is although on paper fiscal consolidation is happening, in reality, it's moved in the
21:15 opposite direction. So if you look at the CAG report for 17-18, it says that the fiscal
21:20 deficit was not 3.5%, it was actually 5.85%, which would be roughly what it was during
21:26 2008, which is, as I said, the high point of the fiscal deficit.
21:31 So my last question is seeing all the poorly performing indicators all across the sector,
21:37 Prime Minister's dream of creating a $5 trillion economy by 2024, do you think that it's feasible?
21:43 2024, I don't think so, because you have lost two years in a row. This year is gone. Next
21:49 year is not going to be a whole lot. It will be a little bit, but not a lot. Making that
21:55 up in three years is virtually impossible.
21:58 Thank you, Mr. Singh. Thanks for talking to us.
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