Former Chief Economic Adviser and ex-IMF member,
Arvind Virmani feels that the current crisis is much graver than what India faced in 1991. In an interview with ET’s
Prerna Katiyar he said that this crisis thus presents an opportunity to make bolder reforms. Here’s an Edited Excerpt:

What are the steps that the government should take to revive the economy, especially for MSMEs, automobile, aviation and real estate?

I have not come across any evidence that MSMEs are more affected by the lockdown, or even the pandemic without lockdown, than the corporate or large sector, in either an absolute value or in percentage terms. However, MSMEs and startups with lower cash reserves, ones which are more indebted or are concentrated in the heavily affected sectors (e.g. tourism, restaurants, retail trade), will suffer more.

Do you think Covid-19 is a greater crisis than what India faced in 1991? If yes, then is it time for even bolder reforms?

Having dealt with Global Financial Crisis (GFC) as Chief Economic Advisor and with post-GFC problems as ED in the IMF, I can unambiguously say, yes. The pandemic affected both demand and supply simultaneously shutting down large parts of the economy, while the initial effect of the GFC was to reduce demand. Having a part of a broad range of economic reforms from 1990 to 2003, I can also unambiguously assert that the pandemic presents both the highest necessity and the greatest opportunity for radical reform.

How exactly do we turn this crisis as an opportunity especially for the economy?

As 60% of the economy is already under lockdown, and some of this will take one or more quarters to be restored, any temporary adverse effects of policy change are even less than usual. At the same time the positive effects will start appearing as soon as the pandemic crisis is over. So the cost-benefit ratio of reforms is increased and resistance to change will be lower. Thus this a great opportunity to undertake agricultural trade (domestic and international), labour, land, taxation and subsidy-welfare reforms to facilitate faster growth of agriculture, mining and manufacturing.

What are the steps to make India a manufacturing hub of the world as many countries are already contemplating shifting bases from China?
The tariff defense initiated by the US President Donald Trump vis-a-vis Communist China, has alerted the world to the latter’s mercantilist policies and initiated a movement towards diversification of supply chains out of China. The pandemic and the supply chain disruptions that it created after its initiation in Wuhan city, Hubei Province in Central China, have brought the dangers of over dependence of every country on Chinese supply chains. Almost every country in the world has discovered that it was critically dependent on China for some intermediate good, part or component. Consequently, the movement for diversification of supply chains out of China, particularly for products in which China has monopoly or near monopoly of the global export market. In India, the public learnt how dependent we are on APIs from China for our drugs and pharmaceutical industry. India has a once in a generation opportunity to attract elements of supply chains which are labour- or skill-intensive and also backward integrate in the sectors such as pharma and chemicals, automobiles and Information Technology where we have demonstrated comparative advantage or in sectors like consumer electronics in which we have a large current or potential, consumer market.

What are some specific steps that India can take for greater public-private partnership?
The government must create a competitive environment in which efficient enterprising firms can thrive, by undertaking long pending labour, land, subsidy, tax and external reforms. Beyond this, the government and industry must cooperate to remove industry-specific bottlenecks and to attract anchor investors from across the world. Vietnam is better than us in this critical area, despite being lower ranked on all major Ease of Doing Business parameters and has therefore attracted far more supply chains from us during the last two years. Finally, the government must also cooperate with academics with deep knowledge of those who have studied the success of East and South East Asian industrial policy and carefully focused and limited subsidies to promote import substitution.

Do you see this as an opportunity to deepen our financial market?
Financial markets are generally affected adversely in a crisis. The critical task of the central bank and the government is to ensure that there is no contagion and to provide adequate short, provide ensure that every segment of the market and ever category of financial institutions have adequate liquidity.

Do you feel making our gram panchayats self-reliant is the solution, as the PM has suggested?

Agricultural reform, particularly the decontrol of domestic and international trade in agricultural and allied goods is critical to modernizing the sector, promoting productivity growth and raising farm incomes. Development of skills in agricultural processing and rurally relevant skills is critical for expansion of productive, higher wage employment. Panchayats can play an important role in both these areas by digitizing governance (e-governance), access to technology and its dissemination and raising the quality of education and health services by accessing e-health, e-education and e-skilling services from the web.

Tax revenues and foreign remittances will continue to be a concern post-Covid. Do you think this will hit us badly?

Tax revenue growth is closely related to GDP growth. In a crisis, this is a good thing not a bad one. We call it an automatic stabilizer. In the Global Financial Crisis, which I handled as Chief Economic Advisor in the Finance Ministry, this contributed about one-third of the stimulus. Another third was contributed by accelerating payment of subsidies, which were questionable to start with, but could be accelerated quickly and turned out to be highly beneficial in the crisis. The final one-third was contributed by tax reduction. Revenue negative (in short term) tax reform of GST and PIT/DTC can still provide a boost to the economy in H2 of FY21, while raising tax buoyancy and raising more revenues in the medium-long term.

The recent tussle between Russia and Saudi Arabia has highlighted the need for becoming self-sufficient in oil & gas? What should be done to achieve this? If not this, then what should be done to save us from external shocks?
On the contrary, the dramatic reduction in oil prices reduces the pressure for and incentive for self-sufficiency in oil and gas. It is positive shock for our economy, and we welcome it. Reduction of oil prices will be accompanied by a reduction of remittances from the oil producing Gulf States. However, the reduction in current account deficit due to lower prices is generally larger than any reduction of exports to these States and remittances from Indians living in these States.

Do you feel Covid-19 has highlighted the need to cut government expenditure and the need for better Centre-State coordination?

The COVID-19 has highlighted the need for a welfare system that I first proposed in a 2006 paper. That is an Aadhaar-linked Direct Cash Transfer system that pays government subsidies and transfers directly into the bank accounts of the poor and needy. The pandemic has highlighted the importance of such a system as we have to ensure human survival during the lockdown, by getting funds directly into the accounts of the effected. Since then the development of mobile banking and payment apps has made it possible to reach women and men in the remotest parts of the country, by transferring life-saving funds directly into their hands. This ensures physical distancing and saves travel costs to or from dispersed bank branches in rural areas. The Union and state governments should cooperate to put such a system in place, by converting all subsidies into Direct Cash Transfers. If needed all rural, poor women can be given free cell phones so that funds needed by them and their minor children go directly into their hands instead of their men-folk.

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