What Next - Ninad Karpe in Conversation with Ajit Ranade (Session Transcipt)





Mr Ninad Karpe: - Good Afternoon, Everyone! Thank you for joining this live 20-minutes session. I am delighted that Ajit is our first guest. We have a new format in which Ajit will speak for 10 minutes and we will have a Q&A for 10 minutes. The idea is to provide as much information as is relevant to the topic. The theme is ‘What Next’ and we couldn’t have gotten anyone better than Ajit Ranade. Ajit is the Chief Economist of Aditya Birla Group. He is a columnist in Mumbai Mirror. He has written in many papers. He has presented in many seminars nationally and globally. He is sought after by policy-makers and many industrialists. I have requested him to speak out about the immediate future of the Indian Economy. If you have any questions, please drop them in the box. After 10 minutes, I will ask him the questions. Over to you, Ajit, 10 minutes’ comments and remarks.

2:03 - Mr Ajit Ranade: - Thank you and congratulations on this new initiative! You have promised your participants 20 exciting minutes but these 20 exciting minutes are in the middle of pretty grim 12 months, optimistically. We are living in very strange and unprecedented times. Who would have imagined that the price of oil would go down to -37 dollars? Who would have imagined that we are in the middle of a global pandemic? But, the pandemic has not affected the usual suspects of backward countries like African countries or even India and South-East Asian nations. The epicentre seems to be developed countries.

2: 55 - Due to the nationwide lockdown, India faced supply as well as demand shocks. Supply shock was primarily due to the shutdown of 3/4th of the economy. The supply chain and logistics are hit. The demand shock was due to steep decline in demand not only in airlines, hospitality, tourism sectors etc but also in a lot of discretionary items because the consumers have become anxious and apprehensive about their own future, income supply, jobs. But, apart from demand and supply shocks, the nation also faced a financial shock. The destruction in the value of wealth in stock markets. But if you think that the markets are forward looking indicators from the bottom, they have reached up to 15% within the last couple of weeks. They can be notoriously fatal and they can change their views.

4:00 - This health emergency has exposed the inadequate healthcare investment by the Government of India. It was as low as 0.8% of GDP. It was wildly inadequate since health is a primary subject of concern for the state. It is less than 200,000 crores. So, to push forward in this slow-down, the investment in the healthcare sector needs to upscale significantly. It could be beneficial since the healthcare and pharma sector has the scope to attract many investors. Particularly, after the pandemic, the sector is expected to grow further in the future.

5: 09 - The Government, along with the RBI who will be a junior partner in this, will have a major role to play in saving the plummeting economy. The RBI will not be leading this unlike the Global Financial Crisis of 2008 and 2009. There will be a desperate need for fiscal and monetary stimulus.

5: 50 - So far, the RBI has provided decent reliefs in the forms of waiver of interest payments on loans for three months. The RBI has injected liquidity strength worth INR 400,000 crores. But we are looking forward to massive fiscal stimulus in this emergency from the Government of India, considering the Sovereign’s unlimited authority to increase the circulation and mint money. The hesitance for doing a massive fiscal deficit on the part of the Government could be due to a few reasons.

6:25 - It could be careful about exploiting its authority of minting money since the act could unleash inflation because printing money could be inflationary. Secondly, the Government could opt for borrowing from financial markets. But, it could result in excessive spending and could put upward pressure on the inter-states. Another reason is excessive spending could destabilize the Indian currency. The exchange rate may deteriorate further. Lastly, India’s country rating among international investors may suffer. Even though the above reasons are legitimate and noteworthy, they are benign.

7:12 - At this point, we ought to worry more about food inflation rather than economic inflation. The reason for the same is not because there is inadequate food but because of the supply chain and logistics issue. So, on one hand we have 80 million tons of food grains approximately in Government godowns and this is even before the arrival of the bumper crop ‘rabi’ but the crisis is still visible through pictures of people waiting in long queues outside the grocery store or the migrant workers crossing cities on foot.

7:45 - Economic inflation is not a major threat at this stage for the country. Concerns like low-interest rates and slipping currency are not major issues. The currency value is worried about usually because India imports crude oil on a large scale. The crude oil crisis has plunged towards a new low.

8:18 - And about country rating, since India’s debt is largely domestic it may not face consequences from the Rating Agencies. And also because most of the nations are afflicted. Even if actions are taken, there will not be effects on the Government debt since debt is owed and owned by Indians majorly.

8:42 - The Government needs to offer a fiscal package of at least 3-4% of GDP which is roughly 800,000 crores.
The package should be in the following forms:- 

  • Clearing pending vendor dues from the MSME Sector. The medium and small enterprises are hit adversely during such times. Stoppage of revenue is equivalent to nil working capital for them. Thus, delay in their dues could harm their working capital cycle. The evident example is the fertilizers sector that is worth INR 80,000 crores. 
  • The income tax refunds of the last financial year must be processed immediately. 
  • Floating Covid Government bonds could be introduced. They could be long term- for example- 10 or 20 years, tax-free status and deep discount. 
  • Private investment of debt directly between the Government and RBI directly bypassing the bond markets.

9:55 - Also, the National Infrastructure Pipeline announced by the Finance Minister before the lockdown worth INR 105,00,000 crores could prove to be advantageous. 80% of it would come from the Government debt and equity resources. Apart from public infrastructure like roadways, bridges, highways etc., the initiative would also pave the way for low-cost housing. India has an official shortage of 27 million houses.

10:30 - This sector entails tremendous scope for innovative solutions. I have seen that in Pune and Bengaluru, people opted for innovative solutions like using discarded containers to equip habitable and affordable homes. The solutions would also support the traditional construction industry and reduce the demand for steel, metal, cement etc.

11:28 - The consumer goods sector is facing slow-down because 50% of the consumer goods are produced in the Covid Red Zones. So, the FMCG sector is looking stagnant for a few months due to the lockdown. The nationwide lockdown is not expected to be lifted immediately. It will be done progressively and with restrictions. The restoration of this sector could be slow and time-consuming.

12:10 - Also, this crisis has led to development and encouragement of usage of the digital space in service and media sectors. So, there could be innovations in this space to use such resources optimally.

12:25 - Mr Ninad Karpe:- Thank you! The Covid bond is a great idea. We could be looking at positive side innovation. We have a lot of questions. So, I think you will have to be crisp and brief.

12:38 - Mr Ranade:- Sure.

12:40 - Mr Karpe:- First question from Yasmin Javeri. Do you think capital will flow to lesser affected economies like India when things have simmered down a bit in the future?

12:50 - Mr Ranade:- The instinctive reaction in our recession-like circumstances is the capital to flow out of the emerging markets as it flows to the US through treasury bonds since they are secure and free. But, among the emerging markets, if there is a sentiment reversal, then India would benefit from this sentiment. IMF projects a 2% growth for India in 2020, unlike other nations that have negative values. India will also benefit from the large scale disinvestment by large international corporations in China.

13:45 - Mr Karpe:- Politics and Economics between India and China have largely remained unrelated. With the new changes in the background of Corona, how do you see it playing out in the medium term?

13:56 - Mr Ranade:- The India-China trade relationship has always been dynamic and asymmetric. But, it has grown around 40 times in the last 20 years. It has surged from 2 billion dollars in 2001 to 100 billion dollars in 2020. The trade deficit in India can be fulfilled from China on the capital side. China sits on 3 trillion dollars of foreign exchange. It is exposed mostly to US treasury bonds or European bonds and if even 1% comes to India in sectors like infrastructure, then it would nullify the bilateral trade deficit. Apart from this, China has announced an Import Expo. They have pledged to import 15 trillion dollars of goods and services. Indian SMEs could digitally tap in it and benefit. 

15:32 - Mr Karpe:- Better for the Government to abolish direct and indirect taxes than give stimulus. The money will be in the hands of the citizens and the velocity of circulation of money will be faster, leading to greater consumption.

15:40 - Mr Ranade:- Any kind of tax reform will not provide relief at this time where most of the companies are foreseeing losses. Even the reform of the corporate tax rate of 25% is not of much benefit since larger corporations are tied in Minimum Alternate Tax credits which are deferred taxes worth 75,000 crores. So, not too many companies migrated to the lower tax bracket. So tax relief will be helpful in the long term but this year only direct fiscal stimulus can help.

16:15 - Mr Karpe:- Do you think the Government has resources available to announce some fiscal stimulus packages?

16:20 - Mr Ranade:- As I said earlier, the Government is Sovereign and has unlimited authority to mint money. Only the concerns would be the downsides mentioned earlier.

16:50 - Mr Karpe:- How shall the Government direct the Public Sector Banks to push them to help MSMEs?

17:00 - Mr Ranade:- India has 63 million MSMEs. The consequences suffered by MSMEs are due to working capital scarcity due to delayed payments. The Government should introduce a blanket scheme across all sectors of providing working capital to MSMEs. In fact, the Government has a system in place to provide aid to MSMEs via targeted LTRO (Long Term Repo Operations). It focuses on providing funding to SMEs. Innovation could be used in this area of lending. The GST data could be used in examining the financial credibility of the vendors and not merely assets and liabilities. One more fiscal stimulus that can be recommended is across the board cut in GST, down to 12%. So there will be just two rates - 5% and 12%.

18:40 - Mr Karpe:- What is your opinion on UBI and will it be effective?

18:49 - Mr Ranade:- The Universal Basic Income policy could be tried out but not during a pandemic. At this hour, the priority should be food security since masses like migrants are mainly dependent on external sources for food like community kitchens etc. So that is where the concept of mid-day meals came.

19:45 - Mr Karpe:- What is your call on salary payments by corporates?

19:55 - Mr Ranade:- The appeal by the Prime Minister, while morally sound, was unfair for employers in non-essential sectors. Practically, if they have zero revenue, then they would not have enough monetary resources to pay off their employees or other fixed-cost obligations. The Government can provide aid to the corporates if they want to prevent mass layoffs and retrenchments. They can reimburse 70-80% of the salary with the help of EPFO data available online. The corporates would have to prove that they paid salaries.

21:10 - Mr Karpe:- Let me ask you the last question. It is a bit personal. I noticed that you are an IIT-B Engineer, IIM-A graduate and then went to Brown University for Economics. Are you an accidental Economist? 

21:21 - Mr Ranade:- I am just a student of Economics. Economics is everybody’s domain, incidentally. The domain is so wide that on one hand, it looks like Sociology, Political Science and Demography. On the other hand, it looks like Statistics and Maths. Because of my Engineering background, I got to do the Maths part of it. In India, it is an exciting place because you get involved in so many aspects of developments of monetary policy, fiscal policy.

21:57 - Mr Karpe:- I’m glad you chose Economics and that you are here today to share your views. Thank you, Ajit! You spoke about Covid bonds, UBI, fiscal stimulus and GST rates. You covered a lot of ground and I am sure that our viewers enjoyed this 20-minutes session on ‘What Next’.

- 100X.VC Team

Published on: April 23, 2020