'It's too early to say whether the economy has bottomed out'
Business Standard, June 23, 2009, Page 6
Q&A: Pronab Sen
While there is talk of the economy’s downturn bottoming out, the central government’s Chief Statistician, Pronab Sen, says we still have a long way to go. In an interview with Devika Banerji, he says the monitoring of rural spending should be on top of the new government’s priorities. Edited excerpts:
Analysts have been speaking about early signs of recovery. Fourth quarter GDP has shown resilience and IIP (index of industrial production) has been the highest since September. Do you see some sort of bottoming out of the economy?
It is too early to say so. The various indicators, for example the GDP figures, have been primarily driven by agriculture because of good kharif and rabi crops. Industry in the fourth quarter continues to be down.
On IIP, we also have to consider the timing of the data, which incorporates the effect of the stimulus packages announced in December and January. Here we did not expect anything major to happen but for reduction in tax rates, which is the only way to ensure any immediate effect on the economy. Considering this, there might have been a slight blip on the purchase side. Along with this, the elections and the entire election expenditure acted as an added stimulus.
But none of these is sustainable in the long run. The greater part of the effect of the stimulus package would be on the expenditure side; not much of it has happened and we don’t know how much impact it has had till now. So I would not go so far as to say we have turned a corner in terms of sustainability.
There are two issues. One, that the purchasing managers’ indicator (PMI) has risen for two consecutive months and has improved some of the export-oriented sectors, which mean the worst for exports is over, and I am hoping this is the case. In which case, things can look up because you had an average decrease of 30 per cent in exports for 5-6 months.
On the flip side, look at agriculture. During the first quarter, there will not be much of a negative effect because it will still be dragging the good rabi crop effect. But the delay in monsoon and what it will do to the kharif crop is worrisome because rural consumer demand, which has really buoyed up the consumption side, may get negatively affected. So, it’s a mixed bag of news that we will see. So, its too early to say whether the economy has bottomed out.
What would be, in data terms, a firm indication that the economy has bottomed out?
Credit growth is at 17 -18 per cent, which a lot of people worried, but one has to remember the figure is in reference to what has happened earlier. Last year, credit growth at this time was above 22 per cent and that was not sustainable. Compared to that, 17-18 per cent is not bad and it can maintain itself quite easily. However, what we are not factoring in is the situation overseas. FDI is okay, but stuck since last year. All in all, on the credit side there isn’t any bad news and there isn’t any tremendously good news.
Working capital requirements could be low because of low inflation. Also in terms of real credit growth, do you think it’s at a higher level this year?
In a sense its true, 17-18 per cent credit growth is not bad at all in terms of working capital and in a sense, it squares out the PMI, which has said that inventory build up is taking place. So that’s consistent.
So, can one say that this 17-18 per cent credit growth is an indicator that some resilience is taking place?
What it basically suggests is that the demand side, as of now, is still okay. However, it is not factoring in the negative effects of delay in monsoons or the positive effects of the stimulus packages.
What sort of government expenditure would you recommend till private consumption and investment picks up?
It depends on the diagnosis of what is wrong. The upper end of the consumption scale is practically untouched by the slowdown. Consumer durables clearly show that. If you look at the lower tail, it’s held up mainly because of good rabi crop, partly because of the farm loan waiver. Offhand, I’d say that income tax cuts are unlikely to have any dramatic effects on consumption. People are already spending .What will probably happen when you give them more money, they will stash it in the banks.
But at the lower end of the table, on the positive effects of the actions that have held up consumption, two of them would be on the way out. One is the farm loan waiver- it’s not going to happen again. And the positive effects of rabi and the kharif might run out. Therefore, it does make sense to inject liquidity in income at this lower level. NREGA (National Rural Employment Guarantee Act) can be one of the pegs for such injection of capital.
What about the second instalment of the sixth pay commission?
That will again affect only the upper-end consumers, which are anyway holding up.
So, expanding the NREGA would be a good idea?
The main issue in NREGA is that if the people demand work it should be given to them. If the kharif goes bad, there will be a demand for work and the point is whether you are ready to provide that. Typically, there is always a bit of a problem at this point of time because during monsoons all public works are stalled - no construction works take place but the point is that as soon as rains are over and people demand jobs, you should be ready to give them that.
So, it’s really much more organisational than financial. I think the allocations at present are sufficient to tide over the present time. You may need allocations in the winter if the rabi goes bad, but at the moment that’s not the major concern.
As far as the middle end is concerned, there is very little the government can do. As far as income tax is concerned, the middle end does not pay that much, so a little change here and there does not really matter.
On indirect taxes, do you think a slight increase in some recovering sectors can be done?
As an economist, I would say the justification for giving the tax cuts simply does not exist. What we have from the accounts and tax data suggest that much of the benefits have been absorbed by companies to improve their bottom lines rather than passing it on to customers. On the whole, it is better to increase the tax rates.
There is a worry that fiscal deficit numbers would increase substantially in the current fiscal.
In the interim budget there has been padding up of all expenditures. So when the actuals come in, besides the indirect tax collections, you will also find a fair amount of saving on the expenditure side. I do not think that net fiscal deficit is going to be very different from the interim estimate.
Would monetisation of fiscal deficit be better to avoid the crowding out (of private borrowing for investment) effect?
There is no automatic monetisation, which does not mean that RBI cannot do this. The RBI is perfectly free at any given time to buy up government debt and put it in the system but its a decision of the RBI.
So, to talk about automatic monetisation I don’t think it makes a substantial difference. What makes a difference is RBI’s attitude towards monetisation.
Business Standard, June 23, 2009, Page 6
Q&A: Pronab Sen
While there is talk of the economy’s downturn bottoming out, the central government’s Chief Statistician, Pronab Sen, says we still have a long way to go. In an interview with Devika Banerji, he says the monitoring of rural spending should be on top of the new government’s priorities. Edited excerpts:
Analysts have been speaking about early signs of recovery. Fourth quarter GDP has shown resilience and IIP (index of industrial production) has been the highest since September. Do you see some sort of bottoming out of the economy?
It is too early to say so. The various indicators, for example the GDP figures, have been primarily driven by agriculture because of good kharif and rabi crops. Industry in the fourth quarter continues to be down.
On IIP, we also have to consider the timing of the data, which incorporates the effect of the stimulus packages announced in December and January. Here we did not expect anything major to happen but for reduction in tax rates, which is the only way to ensure any immediate effect on the economy. Considering this, there might have been a slight blip on the purchase side. Along with this, the elections and the entire election expenditure acted as an added stimulus.
But none of these is sustainable in the long run. The greater part of the effect of the stimulus package would be on the expenditure side; not much of it has happened and we don’t know how much impact it has had till now. So I would not go so far as to say we have turned a corner in terms of sustainability.
There are two issues. One, that the purchasing managers’ indicator (PMI) has risen for two consecutive months and has improved some of the export-oriented sectors, which mean the worst for exports is over, and I am hoping this is the case. In which case, things can look up because you had an average decrease of 30 per cent in exports for 5-6 months.
On the flip side, look at agriculture. During the first quarter, there will not be much of a negative effect because it will still be dragging the good rabi crop effect. But the delay in monsoon and what it will do to the kharif crop is worrisome because rural consumer demand, which has really buoyed up the consumption side, may get negatively affected. So, it’s a mixed bag of news that we will see. So, its too early to say whether the economy has bottomed out.
What would be, in data terms, a firm indication that the economy has bottomed out?
Credit growth is at 17 -18 per cent, which a lot of people worried, but one has to remember the figure is in reference to what has happened earlier. Last year, credit growth at this time was above 22 per cent and that was not sustainable. Compared to that, 17-18 per cent is not bad and it can maintain itself quite easily. However, what we are not factoring in is the situation overseas. FDI is okay, but stuck since last year. All in all, on the credit side there isn’t any bad news and there isn’t any tremendously good news.
Working capital requirements could be low because of low inflation. Also in terms of real credit growth, do you think it’s at a higher level this year?
In a sense its true, 17-18 per cent credit growth is not bad at all in terms of working capital and in a sense, it squares out the PMI, which has said that inventory build up is taking place. So that’s consistent.
So, can one say that this 17-18 per cent credit growth is an indicator that some resilience is taking place?
What it basically suggests is that the demand side, as of now, is still okay. However, it is not factoring in the negative effects of delay in monsoons or the positive effects of the stimulus packages.
What sort of government expenditure would you recommend till private consumption and investment picks up?
It depends on the diagnosis of what is wrong. The upper end of the consumption scale is practically untouched by the slowdown. Consumer durables clearly show that. If you look at the lower tail, it’s held up mainly because of good rabi crop, partly because of the farm loan waiver. Offhand, I’d say that income tax cuts are unlikely to have any dramatic effects on consumption. People are already spending .What will probably happen when you give them more money, they will stash it in the banks.
But at the lower end of the table, on the positive effects of the actions that have held up consumption, two of them would be on the way out. One is the farm loan waiver- it’s not going to happen again. And the positive effects of rabi and the kharif might run out. Therefore, it does make sense to inject liquidity in income at this lower level. NREGA (National Rural Employment Guarantee Act) can be one of the pegs for such injection of capital.
What about the second instalment of the sixth pay commission?
That will again affect only the upper-end consumers, which are anyway holding up.
So, expanding the NREGA would be a good idea?
The main issue in NREGA is that if the people demand work it should be given to them. If the kharif goes bad, there will be a demand for work and the point is whether you are ready to provide that. Typically, there is always a bit of a problem at this point of time because during monsoons all public works are stalled - no construction works take place but the point is that as soon as rains are over and people demand jobs, you should be ready to give them that.
So, it’s really much more organisational than financial. I think the allocations at present are sufficient to tide over the present time. You may need allocations in the winter if the rabi goes bad, but at the moment that’s not the major concern.
As far as the middle end is concerned, there is very little the government can do. As far as income tax is concerned, the middle end does not pay that much, so a little change here and there does not really matter.
On indirect taxes, do you think a slight increase in some recovering sectors can be done?
As an economist, I would say the justification for giving the tax cuts simply does not exist. What we have from the accounts and tax data suggest that much of the benefits have been absorbed by companies to improve their bottom lines rather than passing it on to customers. On the whole, it is better to increase the tax rates.
There is a worry that fiscal deficit numbers would increase substantially in the current fiscal.
In the interim budget there has been padding up of all expenditures. So when the actuals come in, besides the indirect tax collections, you will also find a fair amount of saving on the expenditure side. I do not think that net fiscal deficit is going to be very different from the interim estimate.
Would monetisation of fiscal deficit be better to avoid the crowding out (of private borrowing for investment) effect?
There is no automatic monetisation, which does not mean that RBI cannot do this. The RBI is perfectly free at any given time to buy up government debt and put it in the system but its a decision of the RBI.
So, to talk about automatic monetisation I don’t think it makes a substantial difference. What makes a difference is RBI’s attitude towards monetisation.
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