Anju Grover for Indian Currents spoke to former Finance Minister Yashwant Sinha to know implications of the 23.9 % contraction in the GDP and ways to recover from this jolt. Sinha has squarely blamed the government for its incompetence, adding that the economy plummeted after demonetization and implementation of a faulty GST regime. He said that there is no money in market and Modi government is bankrupt. He suggested the government should focus on demand than on supply. In the current climate of demand depression, he further suggested, the government should monetise the economy by borrowing from the RBI and properly spend in infrastructural projects in order to create employment.

Yashwant Sinha is a former Indian administrator, politician and a former Minister of Finance (1990–1991 under Prime Minister Chandra Shekhar and March 1998 – July 2002 under Prime Minister Atal Bihari Vajpayee and Minister of External Affairs July 2002 – May 2004). He was a senior leader of the Bharatiya Janata Party before he quit the party on 21 April 2018.

Q: The Indian economy has shrunk 23.9 per cent year-on-year in the first quarter (Q1) of 2020, i.e. from April to June – much worse than market forecasts of an 18.3 per cent drop. This is the biggest contraction on record in India’s statistical history as the coronavirus-induced nationwide lockdown aggravated an already terrible economic situation. Why is the contraction in India so severe?

Yashwant Sinha: The figure of 23.9 per cent does not include the contraction in the MSME sector for which figures have not yet been received. If the MSME figures come, then the contraction would perhaps be between 35 or 40 per cent. In actual terms, the contraction of 23.9 per cent means a loss of almost Rs. 50 lakh crore in the GDP and that is nearly 25 per cent of the total GDP of Rs. 200 lakh crore. It will ultimately reflect on per capita income. This means that many people, including those who are above the poverty line, would have been pushed below the poverty line. Crores of people have lost their livelihood in the course of the lockdown. Those who have been able to retain their livelihood are getting much less than what they were getting earlier. The construction sector, which is the biggest employer in India, has contracted very badly. The MSME sector, which has the potential to employ people, is facing a crisis because many units have closed down. There is an overall suffering in the society as a result of the contraction. By and large, people do not understand the GDP, but the moment you relate it with their lives, they immediately understand what it means.

Q: For the first time in India’s recorded statistical history, all the eight GDP segments, except agriculture, have seen major contraction in the April-June quarter of 2020. Is lockdown the sole reason behind contraction?

Yashwant Sinha: It is now official that India’s economy had been contracted badly from the year 2018-19. And continuously for eight quarters, it came down from nearly 8 per cent to 3 per cent. The lockdown was an irrational step. Without understanding the implications of either coronavirus or the lockdown, Modi government announced the national lockdown on March 24. The announcement was done without taking into account the impact that the lockdown would have on livelihoods, on every walk of life. Lockdown has proved to be a disaster.

Among the G20 countries, India is the one that has suffered the most in terms of contraction of the GDP. Neither the U.S. nor Brazil has recorded that kind of contraction in their GDP. Like demonetisation and GST, this lockdown has badly affected the economy, which already had a delicate health before the lockdown.

Q: Since quarterly estimates rely on time series projection and in the absence of actual data, past values tend to influence upward bias, the contraction is much more than the 23.9 per cent announced...

Yashwant Sinha : Yes, you are right. The MSME data comes with a lag of three years in our system. Quarterly estimates are prepared on the basis of select number of organised industrial units and agriculture. The agriculture sector has recorded a decent growth in this quarter, which is a saving grace. But the government cannot take credit for growth in the agriculture sector. The agriculture growth is dependent on monsoon and winter rains in India.

Q: The data on agriculture is collected bi-annually and that on industries annually in India. Service sector data often is collected once in three to five years. The quarterly estimates are not based on surveys. It raises doubts on the process of data collection itself.

Yashwant Sinha: You are right. The process of data collection, compilation and analysis needs to be improvised. This is the first government that has interfered with data collection and presentation. Acting chairperson of the National Statistical Commission and another member were forced to resign because the government was not ready to publish jobs report. Dressing up with data has become a habit of the Modi government.

Q: The government has made efforts to address the problems by making two rounds of announcements in the form of enhanced rations and front-loading of payments for farmers under the Pradhan Mantri Kisan Samman Nidhi scheme and a set of guarantees for loans to be made by banks to the MSMEs and the agricultural sector, besides a host of structural reforms. But there is a financial crisis in the country, so what can the government do in it?

Yashwant Sinha: It is sheer incompetence on the part of the government. For two years, economists across the board have been saying that problems of the economy are on the demand side. The government, instead, is tackling problems of the supply side. The concession in income tax to the big industry or the Rs. 21 lakh crore package are the decisions for the supply side. The government has done precious little to raise demands in the economy. If proper investments are made based on borrowing to address the demand side, then there will be some hope for economy post COVID-19. If those steps are not taken even today, then there will be no demand, no employment and no industrial expansion. There will be more economic problems.

Q: In the current climate of demand depression, as former finance minister, what are your suggestions to the current finance minister?

Yashwant Sinha: The government should start making investments in the infrastructure sector. This is what we did when Mr. Vajpayee was the prime minister and I was the finance minister. We were facing the crisis post economic sanctions. We had started investments in national highways, rural roads, telecom, besides housing and railways to encourage demand. So, investments must be properly done to get the desired results. During the global financial crisis of 2008, the UPA government had tried to raise demand by directly putting money into people’s pockets. And that led to inflation. Make investments in infrastructure in order to create demand, put money into people’s pockets by creating employment opportunities through infrastructure. Investment in demands will encourage consumption. The government should ask RBI to print notes which it should lend to the government. The government then should spend the money on infrastructure, which will generate employment and that will reduce the transaction cost in the economy. Good railway and good airlines will always help in reducing the transaction cost in the economy.

(Published on 14th September 2020, Volume XXXII, Issue 38)