Mitali Mukherji: Salman, thank you so much for joining in. Your quick overview first of these (Q1) figures. They are a little bit more depressing than people expected. But what did you make of it, and which details really stood out for you?

Salman Soz: First of all, thank you Mitali for having me. It is pretty grim news actually. It is towards the lower end of the projections. In fact, it came very close to 25 percent, which is what one of the agencies had suggested might happen. Now obviously this is the worst in decades, and while some might say that this is an act of God, as I think the Finance Minister said, I think there must be some accountability for why we have these numbers. This is, I think, going to be easily the worst GDP growth in Asia for this quarter. I think it also must be one of the worst among the big economies in the world. But also there are things in the data that are outrageous. It kind of boils the blood sometimes. We have manufacturing: it’s about negative 40 percent. You have construction: it is negative 40 percent or 50 percent. But shockingly, government expenditure is at negative 10 percent. At a time when governments around the world are trying to spend money to support the economy, support people who are living on the margins, the government of India, actually managed to contract everything.

I find that shocking. It’s a shocking dereliction of duty. And I don’t really understand what’s going on with this government, what exactly do they want from the people of India, how much “Atma Nirbharta” do they want? I mean, this at a time when everybody has been saying there must be a robust fiscal response!

I find that shocking. It’s a shocking dereliction of duty. And I don’t really understand what’s going on with this government, what exactly do they want from the people of India, how much “Atma Nirbharta” do they want?

We can talk about Covid-19, we can talk about what’s happening globally, and we must, because putting this in the global context is important to understand where India is. But just looking at these numbers frankly boils the blood because hundreds of millions of people are going to pay for this. Because, as any expert will tell you, when you have these kinds of crises, when you have the shocks to the system, the sooner you grapple with it, the lesser of the long−term damages. Because no matter what happens, no matter what kind of response you mount, there’s going to be some long−lasting damage. Scars will remain, some output will never come back.

But the key thing is, if you grapple with this quickly, if you grapple with this fast, in a robust way, you mitigate that long−term damage. I think the Government of India has clearly not learnt that lesson.

Mitali Mukherji: It also doesn’t capture what happened in the unorganised space, Salman, and I think that’s the pocket that’s really haemorrhaging. What surprised me though was that after these figures, there were some comments from economic commentators saying now’s when the government is going to throw caution to the wind and really come out with a lot of fiscal stimulus. Would you expect to see anything happen after these Q1 numbers in terms of, you know, “Now we’re really going to fire up the fiscal engine?”

Salman Soz: Mitali, your point is so important! Ever since demonetization we have just not fully understood what has happened to the informal economy. This whole idea that we’re going to formalise the informal sector, that magically the informal sector will go away, is obviously ridiculous because informal is normal. But what has happened over time in the last few years is that we’re simply not able to capture the devastation in the informal economy. Whether it is demonetization, whether it was GST, whether it is the lockdown. Think about where the impact must have been the most. It was in the informal economy and our estimates, to my mind, have routinely underestimated what is going on in the informal economy. How is it possible that the best growth year for this government was the year of demonetization? How’s it possible? It boggles the mind!

And that is, I think 8 percent or 8.2 percent. Since that time, we were on a downward trajectory. So, even before we went into the crisis, we were already going down rapidly. I mean we can talk about 4.2 percent in FY 2020, but the last quarter was, what, 3.1 percent? And now we’re at about negative 24 percent which is likely to be an underestimate.

But the key thing is, if you grapple with this quickly, if you grapple with this fast, in a robust way, you mitigate that long−term damage. I think the Government of India has clearly not learnt that lesson.

Now, when people say the government is going to throw caution to the wind, what caution are we talking about? These commentators don’t seem to understand that when you have a crisis like this, you can’t have any caution. Because your people are going to die, people are going to starve, people are going to lose their jobs, people are going to lose their businesses. And the sooner you act, you save as much as you can. You fight furiously to save whatever you can. It’s like your child, God forbid, is drowning, and you do whatever you can to save that child. That’s the attitude.

I know that the Indian government does not have the resources of the advanced economies in the world. But this is the time to borrow and spend. Actually it was! These months of delaying are going to have a huge long term impact on India. Do not for a moment think that we’re going to recover in a year or two. I think we’re talking the loss of a decade, maybe decades. That’s where we are.

Mitali Mukherji: Within that decade perhaps of trouble, Salman, I think what’s worrying is the trajectory that you mentioned for the GDP, which got to 3.1 percent till the last quarter. But for this time round, what bothered me was the services figure: minus 20.6 percent. Trade in hotels: minus 47 percent. And this has really traditionally been the only outlier for an economy that was floundering. People were going out! They were consuming things, there was some trade and tourism. Nothing has come by way of support for that space. What do you see specifically for services and trade and tourism going ahead, Salman?

Salman Soz: This is such a complicated thing now. (The only area that has shown some resilience is the agricultural sector: I think the farm sector is growing at about 3 or 4 percent.) You’re going to have disruptions in trade or disruptions in travel industry, we know that, we understand that. But the question now is what do you do to keep these people going?

The government never really discussed any policy measures. of a major, you know, they said, they talked about liquidity and all the stuff, you know, the RBI came out with a lot of things. In fact, if you look at what the government has done so far, the government and the RBI, mostly on the RBI side. Right? The government… has mostly done perception management in saying things like they are going to have 10 percent of GDP as a stimulus and all that stuff. That’s nonsense! The government basically comes up with announcements like we will not have a penalty on late filing of GST or something. What is the government talking about? Do you think anybody cares?

If you’re going to tell people the support to them is in the form of a loan at a time when there’s so much business uncertainty, how do you expect them to invest? It’s a totally rational decision to not invest. And by the way, that household savings have also been depleted in India. Household debt now is at a record high. (I think at least it was in 2019.) So, as far as these sectors are concerned, how much does this loan moratorium business which ends I think in September? And we haven’t even spoken about what’s going to happen in the banking sector. If you have a moratorium and your interest is piling up, what do you do? Because that becomes the new loan in a way, at a time when you have no business.

We need to provide direct support to businesses that are viable. And we should not rely only on government experts. This is the time to bring in everybody to the table, all stakeholders, MSME associations, big business associations, economists from the outside, economists from the government, and discuss what we should do now in this emergency! It was an emergency months back; it is now a dire emergency!

Maybe you can tell how much I feel this! Because I know the impact of this is not going to be, Mitali, on people like you and I that much. It’s going to be on hundreds of thousands of people who were walking back home, people living on the margins. And we need to do something. I do think that this is the time to come together and get the best minds, get the stakeholders, and discuss how we can do something for them.

We should get to the banking sector, because I don’t see how this can be mitigated right away. I think the government has to start thinking about serious spending of money. I don’t see what other sector is going to pick up. Nobody is going to invest right now. You think the business environment in India is good? Don’t go by the World Bank’s ease of doing business rankings, I’m sorry to say. Although I’m a former World banker myself. But if the ease of business was that great, then everybody would be investing in India. Everybody would be, nobody is!

Mitali Mukherji: What are the repercussions for the banking industry, Salman, because at this point, anecdotally, you can see that there is enough liquidity parked with them but there is a logjam because the banks simply do not want to lend. They’ve got enough NPAs on their books. They don’t want to take this on in a post Covid-19 situation. Where from here for the banking space?

Salman Soz: Very tough situation. And by the way, thanks to BJP’s politics, this is part of what happens: you start vilifying a sector, and sure enough, as rational human beings, managers and those decision makers who have to give loans, they will basically be extra careful, very cautious. And they know what’s coming. So, let’s think about what’s coming: A person takes a loan, his business is finished, he has a moratorium, is not paying his EMI, six months later his time is up, that interest has compounded, but he still has no money. What does he do? If he has an asset−backed kind of loan, what is the bank going to do with that asset? For example, if it is land, is the bank going to sell the land? Imagine what will be happening in the banking sector with all such cases.

And, by the way, the banking sector has been in trouble for seven−eight years at least. Now, when people ask me about UPA people, phone banking, all that stuff, I say, “Are you mad?” Do you think that all loans were disbursed on the phone? People made bets during the time when the economy was growing really well. As Raghuram Rajan also said, there were genuine defaults. But there was also, maybe, some corruption. It’s not fine that the corruption happened. But we understand that happened.

So, NPAs were rising when this government came in. I’m sure the RBI gave a briefing on the NPAs situation which was still manageable at that time, but they didn’t focus on NPAs; they focussed on administrative efficiency. The NPAs grew and have become a much bigger problem now. And now it will require a lot of government resources, and somebody has got to bite the bullet!

The banking sector is the lifeblood of the economy. Basically, what’s happening to the economy is because of the banking sector. It has been happening for some time: it keeps getting kind of periodic heart attacks. Because the arteries are clogged. Now it’s going to go for a massive cardiac arrest, because a lot of these loans are not going to be repaid. So, the government has to step in, the RBI has to do something, the banking sector needs to be protected. Because otherwise, the Indian economy is going to be in huge trouble.

Mitali Mukherji: So let me ask you to paint a picture on two counts, Salman. One is that you said you foresee many more years of pain. It’s not going to be a couple of quarters. What do you think that’s going to look like? And secondly, there is this fear now that perhaps we are going to get some kind of permanent unemployment situation: you know what I mean when I say permanent? It means quarters and quarters of no jobs, basically, which really leads to this glut of people staying unemployed for an extremely long period of time. On both counts, what do you see in the next few years?

Salman Soz: Okay, so, the IMF has been doing research on these kinds of topics: what happens when there’s an external shock to the economy, the economy goes into recession, what happens to the output? They did the study cross country, studied about 190 countries over a period of time; they’ve done it periodically, and they’ve been updating their data. So, they give the example of the US from the global financial crisis of 2008, and what they say is that it took the US more than 10 years to get back to that pre−crisis trajectory. This has been corroborated by the Federal Reserve Bank in the US as well.

Now, that was a financial sector kind of crisis. Of course it affected the US, Europe, and advanced economies much more than it affected countries like India and China. But what the IMF researchers say, and again this has been corroborated by a variety of experts, is that some part of the output is lost forever.

What does that mean? What that means is: take the example of an employee and of a business. You are a worker and you lose your job because of the crisis, and after some time there is some recovery, and you can potentially get your job back. Right? It may be easier to get your job back. But if you lose your business, it’s not like you can just turn the switch and the business comes back. Many businesses, basically, do not come back. That output is lost. Forever.

Now you say maybe new businesses will come up. Yes, but new businesses come up all the time. But some of “those” businesses will never come back. That output will be lost. And employment associated with that output will be lost. Okay? So, we must understand that we will hopefully soon see growth will start rebounding, but it’ll be of a very low base. Because even during this time we have seen that there is some activity and industrial production is kind of not contracting. I know the IIP today contracted again. But the contraction has slowed down. So, eventually, this will come back up again. But, some of that output will be gone. And to get back to the pre−crisis trajectory, I think it’ll take India, based on what other countries have seen, to my mind, decades. At least a decade, if not decades.

Now, getting to the employment situation: you see, in India, unemployment rates as we calculate them are fairly low because everybody’s trying to do something or the other. Everybody’s trying to eke out a living. So you can say that these people are employed. But what could happen is, because you have loss of output in some parts of the economy, and that’s not going to come back, people who had relatively decent jobs may be forced to take up jobs that are less good. So, you may still be employed, but not as, you know, you may actually fall down on the income ladder. And, I think, that is definitely going to happen.

The other thing is, regarding poverty in India. We have the older data which says that about 21 percent or 22 percent of Indians live in poverty. Imagine the poverty line: so, 21 percent or so are below this line, but there are hundreds of millions of people just above that line, and when these kinds of shocks happen, they fall below the line. So poverty is India is going to increase too. That means malnourishment of children is going to increase too. That means our productive citizens, the future, those poor babies right now, kids right now, their productivity in life is going to decrease. So, this is going to have repercussions. That is why I feel so frustrated. That is why we must do everything we can to, throw the kitchen sink at this thing, because there is no other way. Because otherwise, we would be reducing India’s potential for a long, long time.

And please, I keep hearing about 8 percent potential, 10 percent potential. There is no guarantee of such growth! I don’t understand, I think some people are smoking something! Eight percent is not India’s birthright, 7 percent is not India’s birthright. There’s only one large economy in the world that has grown around 9 percent plus over the last 40 years: that’s China. But China is an outlier. It doesn’t mean India is going to have the same thing, if India doesn’t do the right things, if India doesn’t do the right kinds of reforms, if India doesn’t actually go in the direction of looking at whatever’s happened in the world and then trying to see what we can do better. There’s no birthright 8 percent growth or 7 percent growth. I think we need to come out of that. It’s like people are smoking something!

And to get back to the pre−crisis trajectory, I think it’ll take India, based on what other countries have seen, to my mind, decades. At least a decade, if not decades.

Mitali Mukherji: I want to swivel for a second on what this means for state finances, as well, Salman. That has really been the big battle. I think, states have been presented with a fait accompli which all the finance ministers of the states have said is both unfair and wasn’t discussed. Where do you think this leaves the states, which are, really hamstrung right now?

And please, I keep hearing about 8 percent potential, 10 percent potential. There is no guarantee of such growth! I don’t understand, I think some people are smoking something! Eight percent is not India’s birthright, 7 percent is not India’s birthright.

Salman Soz: So, you know, obviously this GST battle is going on between the state and the Centre. I think the Centre has taken a position which is, frankly, dishonest, a very dishonest position. And I think what the Centre must realise is that the only way for India to progress is if you decentralise more. Not centralise more. And if you’re not going to devolve powers, if you’re not going to devolve finances properly, you are going to hurt this recovery.

I mean how else shall we explain the activities in the states? There is no such thing as India is growing and the states are not growing! All of this growth business is in the states. That’s where activity happens. If you’re going to cripple them, you will cripple India’s economy. I mean, this is such an obvious point, but seems to me that somehow, the government of India, New Delhi, seems to think that this is “their” problem, not “our” problem. That they should be “Atmanirbhar”. We have our own things to deal with.

If the government of India starts thinking that the states and state finances are divorced from what is happening to the broader economy, then I think there’s a serious problem. They don’t seem to then get the basics right. And I don’t understand how that happens. Because, for example, the Prime Minister’s Economic Advisory Council has some really good people. I mean, they had them earlier, they had Rathin Roy earlier. I know there are some good people right now. Maybe they’re not heard! Who knows? Because, if you’re not taking advice from these people, I don’t know whose advice you’re taking! I mean, I know that some people felt that the government should not be spending too much, fiscal deficit problems and all the stuff, what the ratings agencies are saying, etc.

I want to kind of disabuse the notion that the economy is something else, and everything else is something else. Economy is health, economy is education. That’s how you actually build economies. So, unless you get the health crisis under control.

Are you mad? Which ratings agency right now is going to downgrade a country for fighting this battle? That ratings agency would basically be laughed out of town. Right now is the time to fight hard and you cannot fight if you cripple state governments, because that’s where the rubber hits the road. They need money. They need money to protect people too. If you cripple them, you’re crippling India. I don’t understand, I don’t understand. Honestly!

Mitali Mukherji: One final question, Salman. It’s the biggest contraction in 40 years. It’s also the first one since liberalisation. There are some generations that are going to experience this whole thing for the first time. What would you expect to see, like, what is it going to look and feel like? Because some of it is happening now: people are on furloughs or they’ve been laid off. They can’t consume the way they used to, they can’t make up rent for the metros they live in. Over the next few months, what is India going to look and feel like, you think?

Salman Soz: I mean, this goes back to your unemployment question. You know, obviously, things are going to be very difficult. I think things are going to be very difficult in India, and the longer this goes on for… and by the way, we did not talk about the health crisis. Right? I mean, because that is the driver of everything. I don’t think the economic crisis can be brought under control. I want to kind of disabuse the notion that the economy is something else, and everything else is something else. Economy is health, economy is education. That’s how you actually build economies. So, unless you get the health crisis under control, I don’t think the economic crisis can be brought under control. There has to be a lot more focus on the health emergency.

Numbers are still growing. I was just listening to Ashish Jha who was at Harvard and who’s an expert on epidemiology, and his sense was that these numbers are going to be much higher in the coming months. And that the actual numbers maybe are about 8 to 10 times more than the reported numbers. How can you actually deal with the economy fully, if you’re not dealing with the health part, the crisis part: the actual disease? You can treat the symptoms, but you have to treat the disease. And you can treat the disease by really… you need to test more, you need to know a lot more about this disease!

And by the way, you have other things to do. There’s so much to be done. Say, tomorrow, there’s a vaccine. How are you going to deliver it, administer it? What’s the prioritisation scheme? How will you make sure that all the people get this, so that we can get out of this crisis? How can we start reducing these numbers? And how can we keep people safe in these coming months when the disease is expected to grow?

If we don’t pay attention, obviously, then you are talking about the young people: I think there could be a lot of social discord in India. Unemployed young people is never a good thing for a society. Never a good thing. And I think if anybody is paying attention, the fact that the government’s spending declined by about 10 percent, I would say it is shameful, it is unforgivable. But even now, do something so that you reduce, you mitigate future losses! Because this is going to cause a lot of grief, a lot of harm, for a lot of people, and to the country. I am sorry to end on a sombre note but if you don’t warn people of what is coming then I would not be doing… and I am not speaking, by the way, just as a member of the Congress Party. No. I am just speaking as someone who has been studying these issues. And this looks very grim. And I think this looks very, very grim for India’s poor and marginalised and vulnerable.

And I think if anybody is paying attention, the fact that the government’s spending declined by about 10 percent, I would say it is shameful, it is unforgivable. But even now, do something so that you reduce, you mitigate future losses!

Mitali Mukherji: Some of it is unravelling already as we speak, Salman. It is always a pleasure speaking with you, even though it was such a sombre conversation. Thank you very much for joining in with your thoughts today.

Salman Soz: Thank you, Mitali. Thank you for having me.

(This interview was originally conducted and published on 1 September, 2020 by thewire.in in its video format, accompanied by an abridged written summary. This transcript of the interview, edited to fit the format of the newsletter, is being published here with the permission of thewire.in.)