'RBI is buying time'

'RBI can only take care of survival, not recovery.'

Dr Pronab Sen, former chairman of the Indian Statistical Commission, tells Prasanna D Zore/Rediff.com why the government should hold its horses as far as stimulating the economy is concerned amid the COVID-19 lockdown.

About a slew of measures announced by Reserve Bank of India Governor Shaktikanta Das in an unscheduled briefing on May 5, Dr Sen believes that the RBI is on the right track.

To boost the speed of building critical healthcare infrastructure necessary to to fight the COVID-19 pandemic and provide adequate liquidity to small finance banks, Governor Das unveiled an on-tap liquidity facility of Rs 50,000 crore (Rs 500 billion) to provide enough cash needed by economic agents involved in these two sectors.

Are the relief measures announced by the RBI on May 5 adequate to ring-fence the financial services industry from the impact of the second COVID-19 wave?

RBI has done what it can do. Now, whether it's going to protect the financial services sector is difficult to say, because essentially, the whole task has been to draw out the time frame over which the (financial) stress will show up in the books of the financial sector in the hope that the economy recovers very strongly.

So, everything depends upon what your take is on the economic recovery process because otherwise, what will happen is that the stress which could have shown up tomorrow is now pushed down the line by a couple of years.

But in terms of its (policy measures announced by the RBI) effect on the financial sector I don't think it would be much.

You are essentially relying on economic recovery.

And what is the probability that we will see some kind of economic recovery going ahead?

That's the million-dollar question. RBI's current situation is such that they can only take care of survival, not recovery. The recovery part of it is really dependent upon the fiscal.

What's your assessment about the chances of an economic recovery given that we are already in the midst of a second COVID-19 wave and experts are cautioning that soon we will be facing the third wave too?

My own forecast hasn't been as optimistic as the RBI or the government has been saying. Now, things have started looking even worse, even if we don't have a third wave, which, when it happens, will make it (the economic recovery) even worse.

Everybody seems to continue to hope that this year, because of the base effect, the growth will be somewhere in the 10 per cent plus range. I don't believe that at all.

The point is the base effect is only a denominator issue. But the base effect has another part to it, that is in (financial year) 2021 the economy lost about Rs 20 lakh crore in income compared to (financial year) 2020.

The point is this (the loss) is going to play out somewhere. And it will play out over the course of this (financial) year (2022).

In this context, what measures do you think should the government and the RBI initiate to protect the economy?

The RBI is doing the right thing; what it is doing is buying time.

Basically, the monetary policy can affect economic activity, but its ability to influence economic activity in the positive direction is not as strong as its ability to rein down the economy when it is overheated.

That's when the monetary policy is much more effective. And the RBI is very conscious about that regardless of what you do to interest rates, it's not going to boost investment.

That is going to be driven by a whole set of different factors. So, what they (the RBI) are doing is focusing on keeping entrepreneurs alive and viable, which is what they have done (through their policy measures). And I think that is the right approach.

RBI is also praying right now that fiscal policy kicks in at some point.

In terms of the recovery, we simply have to look at what's going to happen to fiscal policy.

So, the ball is now effectively in the government's court.

At the moment the government is in a bit of a bind and my sympathies are with them.

In the absence of any certainty about the progress of the pandemic, for the government to take any strong fiscal action, is kind of pointless because if you cannot get a supply response (to fiscal incentives), because the supply side is choked up because of pandemic restrictions, then, doing a fiscal stimulus simply will not work.

So, you have to hold up till the possibility of the supply side opening up. Hold your horses till then.

Given that we are just not on the upswing of this particular wave, which hasn't peaked yet, the idea of doing a large fiscal stimulus is not a very good idea.

The point is you shouldn't hold it off for too long because you are not talking about strategic decision that as the pandemic recedes, as people begin to start going out and doing things, that's when fiscal policy must kick in.

The question remains: What can government do to stimulate demand?

At the moment not a whole lot; at the moment it shouldn't even try. They should be focusing essentially on controlling the pandemic.

Demand support works, if and only if the supply side is ready to respond and the supply side is not ready to respond because of COVID-19 related restrictions.

What about the MSMEs which are likely to be the worst hit? What could be done to give this sector at least a semblance of hope?

As far as MSMEs are concerned, you really need to be able to distinguish between the micro and the small and medium.

The micro sector is inherently more resilient simply because it has very low levels of capitalisation. They can afford to grow shop and restart.

The small and the medium (enterprises) on the other hand are not. They have already taken loans, so they have a lot of capital to service. And if they plan to restart then they will have to borrow roughly the same amount of money again.

The small and medium enterprises is what I am worried about. They are also facing a different set of problems, which is given the problems you've seen in the last one year, a lot of the market share that the small and medium enterprises used to have, has actually been taken over by the corporates and these guys will then have to claw back that market share, which will be not that easy.