Q: Since the time that we last spoke it has been a few weeks, we have now gone into phase 3 of the lockdown with some relaxations being added to the list of activities that were previously allowed. We just gave you some indication of what the data is telling us. But I would imagine in your work with the Punjab government and also looking at what you have been able to sense with the economy in general what have you been able to identify as what needs to be done and more importantly what it will cost?

A: A lot of what you said is shared perception of many people. Clearly, I think the lockdown was necessary to slowdown the spread of the virus. The purpose of the lockdown is not actually to somehow solve the problem of the spread of virus, it is really to give yourself more time so that you can put in a lot more investment into health infrastructure, so that you build up the health infrastructure for the period when a lockdown is removed and you have more patients coming in. I have no idea what has happened across the country in terms of that building up on health infrastructure. That is a very important thing, I think we need to know more about what states and the centre have been able to do.

I know they have done something, but the really question is what did they think would be the rise of coronavirus cases after a lockdown is removed and how far has a health infrastructure increased in order to cope with that. So that is one set of issues and clearly if the health infrastructure is not felt to have increased sufficiently then most probably the phasing out of a lockdown will get stretched a bit. At the moment, we have got this red zones, green zones and orange zones, I am sure that there will be some relaxations. But the crux is that after the relaxations what does it look like? I mean if some of the orange zones becomes red, then you will tighten up the restrictions there and frankly nobody quite knows, so there is a lot of uncertainties.

The second thing is what is going to be the impact on the economy. Clearly, if we have imposed a lockdown, we are actually preventing production from taking place. So supply is constrained and that is going to lead to a big a loss of GDP. Depends on whether the lockdown ends on the 18th or slips over little further. Many people have made calculations on what the current year’s GDP performance is likely to be and I think most of them saw zero percent growth to somewhat negative. Now there is a range because there is uncertainty, but I would say that mildly negative would be the best guess we can make. We need to look at what are the implications of that and how do we handle that.

As you said there is already clear evidence that the GST revenues have declined very sharply, so both for the centre and for the states there will is going to be a big decline in revenues. This is naturally going to lead to an increase in the fiscal deficit unless you cut expenditure. Now look at the scale of what we are talking about. As far as the central government alone is concerned, people are talking about a loss of revenues of somewhere between 2-2.50 percent of GDP compared to budget projections and almost no revenue is going to come from disinvestment. So the 3.50 percent fiscal deficit is going to be very significantly increased.

I personally think that people will understand and that is what is happening everywhere, people are not trying to respond to the cut in revenues by cutting expenditure to the same amount. I don’t think the government has announced what it intends to do by working on it. I believe there are different groups and consultations going on, but as some point, we ought to come out with a clear statement that look the fiscal deficit is going to be larger and this is how we are going to finance it and you shouldn’t worry too much because it is not a permanent spending binge. We are going to bring this down from next year onwards.

There has been a lot of discussion that if you have a big fiscal deficit there will be negative consequences, that is always true. Rating agencies may tend to downgrade you, but I think you need to sort of take this point across to the rating agencies explaining to them that this is a blot from the blue from outside, nothing internal and the right thing to do for this year is to increase the deficit, finance it which almost certainly will involve one or other kinds of monetisation by the Reserve Bank of India (RBI). There has been a lot of talk about borrowings from abroad. I don’t think that when you are talking about expenditure which is essentially in rupees, but it makes sense to finance that by borrowing from abroad especially if you are going to offer much higher interest rates than the interest rates prevailing in those countries and that is not a win-win situation. So, we need to expand the monetary support for a larger borrowing program.

I would go further, since the frontline of the battle are the state governments, I mean the central government has to off-set the decline in resources that they are going to experience which is actually very large and probably of the order of at least 1 percent of the GDP. So, the central government needs to add that to its deficit and provide it in the form of a special grant to the state governments. If somebody would do the sums on that making some assumption about the GDP growth and frankly, we should not pretend that the GDP growth is going to be good. There is nothing wrong with saying it is going to be marginally negative and simply say that look for this year we are going to do this and for next year we are putting in place a return to fiscal rectitude.

Now you have to carry conviction and we have done that before, but there are many ways in which the government could very clearly indicate that this time we are really serious and frankly in the post COVID world and there will be a post COVID world. I mean we don’t know whether this thing is going to end in July or August or September or October, but I would certainly think that somewhere in this year we will get down to some degree of normalcy. Next year around, we have to stop. For the current year the talk of fiscal stimulus is a bit loose, because you know normal view of fiscal stimulus is you stimulate the economy to get into produce. But here you can’t produce because it is lockdown. So you have got a supply constrained introduced in policy terms. The purpose of the fiscal stimulus is simply to keep the expenditure at the budget level plus a little bit more for the poor and for health and then next year we need to do more.

In doing that you have to make sure that not only the needy and small industries, but also the large industries don’t go bankrupt. Because quite frankly I mean if they don’t have any revenue at all for two months and they are bearing all the cost, wage cost etc. their profits would collapse and many of them do not have enough strength in equity to survive and I think this is what you are seeing. I think the Reserve Bank has done a very good job of providing the banks with liquidity. The banks are flushed with liquidity, but they are not willing to on-lend because they are not sure whether these companies that they are lending to are actually viable or they are just going to collapse.

This is where the central government again has to step-in with some form of credit guarantee. I think these points need to be spelled out, made clear as soon as possible and then present it to the world as India strategy for the year 2021 and I believe this has been suggested, many people in the government are aware of it and I suppose they are consulting as per their role and maybe they are going to come out with some package, so I think we should have that packages.

Q: Several important issues that you have put on the table, but I want to address the issue of states because as you rightly pointed out the state governments find themselves in a very difficult position. We talked about GST revenues, and with the collapse of GST revenues it also means that compensation to states which has already been lagging will be a further challenge for the centre to fulfil that obligation. We have also got the 15th Finance Commission that will be submitting its report later this year. What would your expectation be on how the Finance Commission reacts to what is happening in this post COVID era especially when it comes to states?

A: Chief Minister of Punjab wrote to the Prime Minister making this suggestion that the central government should give for the next three months a special grant to the states to ease their resource position and to change the terms of reference of the 15th Finance Commission to tell them that look for the current year your recommendations are now completely irrelevant because the revenues on which you have based those recommendations just are not going to be there. So the 15th Finance Commission could be asked to recommend a COVID-19 grant to the states which will enable the states to off-set as much as possible, the decline in revenues. The chief minister of Punjab has also suggested – this I think is very important that the terms of reference of the finance commission should be modified so that they don’t submit the next five year projection in October.

We will actually not be in a solid position even to say what the growth rate of the current year is going to be in October. I mean the government hasn’t yet announced what it thinks the growth rate is going to be and realistically I don’t know whether they would want to acknowledge that it will be negative, but certainly the finance commission, if it is making a five-year projection, should not be making the projection in this October.

I think they should produce another interim report for the year 21-22 and they should be asked to submit a revised five year projection from the year 2022 onwards when they would have a more reasonable basis for judging what the growth rate of the GDP is going to be. By then we will know whether we are throwing our way up and how fast we can grow. Unless their terms of reference are changed, the finance commission cannot do anything. I mean they have already submitted their recommendation for the current year and they are supposed to submit their recommendations for next year onwards in October. I think that should be changed.

Q: I want to go back to the point that you were making on financing, and how that could be done. You said that you don’t believe borrowing abroad is the way forward. Member of your panel that is looking in to the affairs at Punjab Rathin Roy has suggested a COVID bond, do you believe that that might be the best option at this point?

A: One view is that we should look at all options and in fact I have set up these 5 subgroups with very distinguished members including Rathin, so we are looking to see what comes out of that. But you have got two problems here, first in order to have COVID bond by the states the centre must relax the state’s fiscal deficit target, otherwise they can’t borrow because the COVID bond is the bond like any other. My own view would be that since the states have a huge problem with debt the states should not get into foreign indebtedness.

In other countries getting the states involved in foreign indebtedness has been the sources of major macro-economic problems in the future. The entity that is best placed to undertake sovereign borrowings abroad is the central government that is the government that people will actually have faith in. If the states start doing it we will just get a completely unruly mix of initiatives, so I am not in favor.

But I am strongly in favor of trying to bring in investment from aboard. If states can get people to invest in some new infrastructure vehicle even through borrowing, but those will not be state government bonds. They have to be bonded for special purpose vehicles and if states can do that is a good idea.

Q: You spoke about the need for the fiscal package from the centre to be announced as quickly as possible, time is running out, but what kind of fiscal support would you like to see and should it be linked to financially viable, financially sound companies, because once again there is the question then of the moral hazard and perhaps that is what is holding banks from on lending as well. So how would you like the government’s fiscal package to be structured especially when we talk about sectoral effort?

A: Well there are experiences elsewhere I mean for example; you could narrow it to all those companies that have no debt servicing problems as of last year. They were not bad borrows, they were not in trouble, but they are now running into trouble. So that would be a very clear way of distinguishing a set of very good companies to whom you extend a little bit of a credit guarantee. Now how much should that be that varies?

In the United States, they have set up something called the Main Stream Financing facility which is actually the US Treasury has set it up with an equity investment of USD 15 billion or something like that and the Federal Reserve is lending to this facility a much larger amount. This facility when uses these resources to buy up eligible loans, extended by the banks to middle and small businessmen which meets certain criteria and they buy up 95 percent of the loan. That means in The United States the central government in a way is guaranteeing 95 percent of this additional credit.

The CII has recommended something like that in India but with the much smaller extent of central government guarantee. I think that is a matter of detail, but my point is I like the idea of an SPV doing it because it makes the bankers feel that they are partnering with a government entity. If they lend to a company then the government has blessed that act by buying up a large percentage of those loans. So that they will not be felt to be ultimately vulnerable.

I think this is a major problem which has crept in over the years that we have made bankers extremely reluctant to lend and it is no good saying you know you don’t have to be afraid bonafide mistakes will not be penalized etc. I think you have to find mechanisms that will reassure bankers that the government really means to do things differently.