Forget inflation & fiscal deficit, get money out to people: Swaminathan Aiyar

You had warned of a virus triggered recession in your recent note. How severe could it get in your view? Are we looking at some sort of a full blown global recession and how do you see it compared to 2008?
There are three scenarios; we have no idea how long it will take for the virus to play out. In the best case, it would be over in three months in which case there will definitely be a recession, but after the recession we may see a reasonably fast recovery.

On the other hand, if it takes six months, then we are in very deep long term trouble and it may carry on for nine months which would make it as long as the Spanish flu of 1918-19 which at that time infected 200 million people and took 50 million lives.

If it continues, at our population level, several billion people will be infected, tens of millions of people will die, the economic damage will be extremely deep. It will be of a different nature from 2008 which was a narrow financial crisis. But if we have this continuing for a full one year, then the financial sector will also be affected. There will be a very large number of bankruptcies, a large number of banks are going to be in bad shape because the corporate sector has been borrowing a lot. They have taken advantage of lower interest rates. They have been borrowing a lot and so debt is a problem.

If we suddenly find companies are unable to have the cash to repay the loans, we can get another full blooded financial problem as we had in 2008 in the worst scenario of this coronavirus continuing for 12 months.

How can the RBI and the government prepare for this recession? What steps could they take?
There is a health issue and there is an economic issue. As far as the health issue is concerned, we can only do our best. The fact is there are no vaccines, there are no medicines. Our medical facilities are pathetic. We will not be able to do very much. Our capacity to do anything is not very much. There are attempts by the government to lock down movement and say let there be less tourism, less travel and up to a point, it may work.

Let us also hope that the virus is not able to stand up to high Indian temperatures and that the coming Indian summer will reduce it. These are the positive things we can hope for. Beyond that, on the economic side, all the normal economic rules should go out of the window. There is a case for having a massive handout of cash through schemes like PM Kissan and MNREGA to get additional purchasing power into the hands of people. There is a case for the Reserve Bank of India to be very relaxed and monetise the entire fiscal deficit which in normal times, it is not supposed to do because it might be inflationary.

In the current situation, inflation is the last problem. Your problem is everything except inflation. The RBI needs to be aggressive. The government can say forget about the fiscal deficit at 3.8%, let it go wherever it is going to go because this is such an exceptional year. Any normal rules, any FRBM rules do not apply now.

So let us get money out to people. Whatever we do is not going to be enough. Whatever we do, there is going to be a recession.

What should happen in order to cushion the fall?
As I said, this is not determined by policy, this will be determined by the disease, this will be determined by how long the disease continues, how fast it spreads, whether it is checked by high temperatures in the summer. We do not know any of these things. As I said, in the best case, this will blow over in one quarter. We will have a very bad time to begin with but by the end of the year, we may have a substantial recovery.

But for all we know, this will continue for six months, nine months. If you go back to the great Spanish flu of 1918-19, it continued for nine full months and that was at a time when there was much less international travel, much less international trade, medical facilities were less. But the fact is today we have no medical defence against the coronavirus.

How would you assess the state of Indian economy versus the rest of the world? Are we relatively immune? How would you rate the global central bank commentary action so far?
India is relatively well connected. Credit as a percentage of GDP is high. We will be affected. On the other hand India is not that urbanised. Indians do not travel abroad that much, the tourism, travel part of it is somewhat less, to that extent it is positive. The most important may turn out to be temperature. If it is true that the coronavirus will not be able to stand high temperatures very well, then India will certainly come out much better than other countries.

However, as a note of caution Singapore which is a very hot country, is reporting a lot of coronavirus. So let us not just be complacent and say hot Indian temperatures will kill the virus. The example of Singapore right now is not very promising.

What are you making of the oil collapse? Obviously, its aftermath will be an impact on the oil related sectors and economies around the world, shale gas in the US and obviously even in the Middle Eastern regions.
The oil collapse is an unexpected consequence of the coronavirus. We had a problem earlier because of the rise in shale oil production. OPEC and Russia had agreed to cut production. But when there was such a collapse in demand, they are saying you have to fight for market share. All of us need to sell more and let the prices crash because if the prices crash, that in due course may kill the American shale oil industry and provide stability again.

So, we have a deliberate attempt on the part of Saudi Arabia and Putin to increase oil production to the extent that we try and depress prices so much that the American shale oil industry gets substantially destroyed. That will be a huge negative for the American economy. For the Indian economy and the world economy, it means lower oil prices, which in itself is good. But the negative effect of collapsing world demand is going to be much worse than any positive effect of this oil price cut.

Let us face it, in every single recession, oil prices fall sharply but the fact that the oil prices fall sharply in a recession does not make a recession a nice time. It does not mean we got a great deal out of it. The negatives are much more than the positives.

So yes, the oil price has some special characteristics because of what Saudi Arabia and Russia have done but overall the fall in oil prices is part of the overall disaster. Please see it as a disaster and not as a blessing.