BT MindRush: India to return to pre-COVID growth at higher rate, will grow at 8%, says Arvind Panagariya

Indian economy can look at better post-COVID decade with a growth rate of 8% as the prospects look better with recovery on track, said Arvind Panagariya, Professor of Economic, Columbia University and Former VC, NITI Aayog. He added that the country will return to pre-COVID GDP growth, which will be significantly higher compared to pre-Covid days. Speaking at the Business Today MindRush event on Friday, January 22, Panagariya, however noted that the economic recovery hinges upon the recovery from COVID-19.

"The faster we bring the spread of the virus under control, the faster the economy will return to its pre-COVID level," he noted.

Talking about the options for catalysing growth, Panagariya listed four ways the government can speed up the recovery process.

1. Coronavirus vaccine: He stated that the government needs to be aggressive on bringing the virus under control even if it has to spend around "8-10 billion dollars of public money". He said the money will be well spent for the simple reason that "for every week that we advance the recovery of the economy, we will be recovering several billion dollars."

The government, Panagariya said, could also be a bit more aggressive on the COVID-19 vaccine approval process as long as it is completely safe. "Even it is just about 50% or more effective, and not as high as 90%, the government should go ahead with it."

2. The fiscal scale: Panagariya backed the government on not announcing fiscal stimulus at the scale of United States and European economies which spent upto 10-12% of the GDP. He said this was "bandied around in India as well, but the government was wise not to do that as supply had been shocked as much as the demand at the time."

"With supply in complete shock, workers not able to return to work, with input markets disrupted because of the inability to transact, there was no way demand stimulus would have generated a supply response. But now we are in a situation where supply responses are entirely possible, and therefore the demand stimulus could be of some help," he noted.

3. Bank recapitalisation-  Favouring privatisation of public sector banks, Panagariya said, "it is clear that despite the good bit of support that the government gave on the credit side, in terms of delayed repayments of loans and one-time restructuring without any cost, still with all that there will be businesses that may not be viable and profitable in the long run. There will be bankruptcies, more NPAs will accumulate in the banks and this vulnerability will be more in public sector banks."

"So as a third step the government should go in a substantial way to recapitalise the banks in advance. Because nothing will hurt the economy more on the way to its recovery than at all in the credit growth. The credit crunch should not happen,: Panagariya stated.

4. Privatisation- Panagariya added that privatisation is good for the economy. "It is time for the privaisation to move on a substantial scale, even with this very limited fiscal response, fiscal deficit during the FY21 is going to be 12-15% and this to GDP ratio will rise from 72%- 85%, which is a very high debt-GDP ratio. The government needs to address it, and the privatisation is clearly a major step that can be taken," he said.

"All evidence shows that public sector enterprises performed extremely poorly relative to their private sector counterparts."

Privatisation is a major step, it is good for the economy," Panagariya stated.

Talking about the future prospects of the economy, Panagariya added that they look good. "I would say post-COVID decade, India would certainly grow at 8 per cent plus, I say that with conviction, because post-COVID decade will be different for the reasons of the number of reforms that the government has already put in place such as low corporate tax, IBC, GST, labour reforms, farm law reforms, digitisation, etc, as these were not in place two or three years ago," he noted.

Listing 3-4 structural reforms the government needs to go ahead with before the end of its current term, Panariya mentioned the following:

1. Import substitution - Centre needs to reverse it.

2. Land laws

3. The financial sector needs to be strengthened further apart from recapitalisation

4. Liberalisation and rationalisation of labour laws- States, under the revised labour laws, can raise the limit on the number on the number of workers, he said. "Law permits the states, through notification, to raise the limit," panagariya said.