Jahangir Aziz, global head, EM Economic & Commodities Research, JP Morgan, shares his perspectives in an interview with ET.
What does the past one year look like?
By accident or by design, despite a stretched public health system, India coped very well on both infection and mortality rate. In that journey, we also had a huge disruption in the economy due to the lockdown. As a result, the growth in the second quarter declined massively. When you look back, you get the sense that the policy choices the government had taken around lockdown might not have been right. You knew back then that lockdowns required would be much longer and that income support should have been more forthcoming.
Also, this crisis is different from other crises India has faced in the past. Policy choices of the government should have been different, too. The mistake India made was in mistaking this crisis for another typical emerging market crisis in the past and then used the same policy responses. Unlike most other emerging markets, which reacted in similar ways to the virus, India did not loosen its purse strings early and sufficiently.
All past crises in India right from 1981 have followed a set pattern. Two-three years of loose macro policies, bloating balance sheets, asset prices, and overheating of the economy that runs into a sudden stop of capital. Then a financial crisis ensues that requires a painful economic adjustment to clean up the financial excesses. This time, none of that happened. The economy was already slowing and there was no financial crisis. It was pure economic shock due to the pandemic that triggered shutdowns. It wasn’t a financial crisis that triggered the economic crisis.
What do you say to the argument that the Indian government did not have fiscal bandwidth to respond?
That’s not really true. The usual way to assess fiscal bandwidth is to see how much debt the government has, what is the amount of the budget used up in servicing debt and over the medium-term can the size of debt go out of hand. But that’s a cookie-cutter approach that does not take into account the immediate circumstances. In a normal year, India borrows 2% of GDP, which is the current account deficit.
But this year so far, instead of borrowing from abroad, India had so much excess savings that it lent abroad, i.e., run a current account surplus. The demand for funds is so low that India, via, for example, the RBI’s foreign exchange purchases, is funding other countries’ fiscal spending. So far, this year, the RBI alone has purchased foreign securities worth about 3% of GDP. So on one hand the Indian government says it did not have fiscal space and on the other it goes and funds fiscal deficit of countries like the US.
The need for fiscal support, however, is more than just providing support to near-term demand. In October-December quarter, the economy contracted by 7.5%. In that same quarter, profits of listed companies grew by 30% in nominal and 20-25% in real terms. This arithmetically means that income of the rest of the economy, made up of households and MSMEs, must have declined by more than 20% that overall income fell by 7.5%. We are the most optimistic on the street on India’s growth.
We believe that GDP growth will come around -6.5% in FY21 and in FY22 it will grow above 13.5%. But even with these optimistic numbers, the level of GDP by end-March 2022 will still be 4-5% lower than India’s pre-pandemic growth path. This suggests an income loss of an average of $200 billion over two years. If you have an economy where SMEs and households are losing that kind of income, imagine what’s happening to their balance sheets. And we know from history, that such extensive impairment to balance sheets seriously scars medium-term growth.
So the question to ask is — by showing fiscal rectitude in a year when India’s GDP growth rate was the worst in its recorded history, has it impaired India’s mediumterm economic growth? If this were to happen, then, ironically, India will have worsened its fiscal benchmarks instead of improving them with its budgetary rectitude for one year.
Why do you think the Indian government made such calls?
I think the problem was with the diagnosis and that we know only one way of handling a crisis, i.e., tighten policy. But as I mentioned before, this crisis is unlike the previous ones. It requires loosening policies in the face of the crisis. Hopefully, the government will correct this.
The budget is around the corner. What are some of the areas you would want the government to focus attention on?
If our estimates are right, then India’s GDP growth could swing massively from -6.5% to 13.5%. The government needs to be aware that this massive turnaround in growth will also increase revenue on its own. But it will be a grave mistake for it to think that the worst is over. If the government decides to use the added revenue to only cut down the deficit, then it will not be able to mitigate the likely extensive damage to balance sheets.
One hopes that the government uses part of the higher revenue to only partly reduce the deficit and uses the rest on two things: (i) provide income support through the Jan-Dhan Yojana and Mudra bank to households and SMEs and (ii) funding public health infrastructure. This crisis was made worse because of India’s weak public health system. And this is not just for providing better access to the poor. One of the big changes that the pandemic has done is to change the drivers of FDI. Previously, they were ease of doing business, cheap skilled labour and the size of the domestic market. From now, the quality of public health will also be key. What this pandemic showed was that private healthcare is not a substitute for pubic healthcare.
Looking ahead, what are some important shifts that you see?
The world changed in 2020. Earlier, after the entry of China in WTO, globalisation took the form of horizontal expansion of the supply chain. Emerging markets benefited enormously from this horizontal expansion. Post the pandemic, this is likely to change. Diversification of risks no longer implies that one spreads the supply chain across geographies. Instead, it might mean vertically deepening supply chains in a few geographies. Geographies that not only provide the usual benefits of skilled labour and ease of doing business but also protection of intellectual property rights and adequate public health support. So, the way we think about a country’s competitiveness will likely change and we could see some of the biggest structural shifts because of that play out over the next 10-15 years.