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October 4, 2017

In need of a psycho-economic boost

  • If everyone in the economy starts becoming extra-cautious, the decline in confidence and economic activity becomes self-fulfilling. This decline can happen even if the economy is fundamentally sound. What causes investor or home buyer confidence to wane? It could be anecdotes, actual economic evidence, broken trust in government or socio-political developments. Not to overstate this, but there is an element of psychology that keeps the economy chugging. The government’s role is as much to provide the right policy environment, as to provide a psychological atmosphere that is conducive to risk taking about the future, and inspire confidence in the people.

The Keynesian solution

  • John Maynard Keynes called these the “animal spirits” which guide buyer and investor behaviour. When those spirits are in a downward spiral, the end result could be recession, if not outright depression. His remedy was to suggest countercyclical policy, which has become the hallmark of Keynesianism. This includes an injection of both fiscal and monetary stimulus. This involves increasing government spending or cutting taxes, or both, and decreasing interest rates. Despite many attempts at discrediting the efficacy of Keynesian remedies, to this day policy-makers continue to repose faith in them. Sure, the effects could last only for a short term, but if that helps the economy into a higher gear, or break out of the “pessimism spiral”, it would have served its purpose.
  • We are not quite in a recession, nor are we anywhere remotely near a depression. But the fact is that we are in danger of the self-fulfilling prophecy nature of investment and consumer behaviour. The data need to be restated to understand the seriousness of the situation. GDP growth declining continuously for six quarters in a row, down from 9.2% to 5.7%. Investment share of GDP, which creates new factories and businesses for tomorrow, falling for almost five years. The latest data from the Centre for Monitoring Indian Economy show that even the project pipeline is drying up. Newly announced projects at ₹84,500 crore are at a four-year low. Even the stalled projects which have been revived are only 6% during this fiscal year, as against 25% last year. The value of stalled projects is at a record high of ₹13.2 lakh crore. During the last years of the previous government, projects were stalled due to delays in approvals and clearances, legal disputes and charges of corruption. But these issues were tackled, and yet new projects are not picking up. In fact, in terms of the number of new private sector projects announced in the latest quarter, it is at a 13-year low.
  • The short point is that investor enthusiasm is lacking, especially from the private sector. Added to their lack of demand is the reluctance of supply of investible funds.

Cautious banks

  • Banks, despite being flush with deposits (partly thanks to demonetisation), are in no mood to extend new credit. This is because of the increasing burden of bad loans (called non-performing assets, or NPAs). The ratio of NPAs has been continuously going up for five years. Either you have to write-off the loans and book losses, or ask shareholders to bring more equity capital. The new bankruptcy code and procedure is promising, but is as yet untested for timeliness and effectiveness. There is also a suggestion to collect all the bad loans (that is, toxic waste) from the various banks and move them to a freshly capitalised bank, the so-called “bad bank”. The bad bank would focus solely on liquidating the collateral, bringing in fresh owners and managers to run distressed companies. Once freed from NPAs, the existing banks can resume lending to the healthy sectors. This is a promising idea as well and worth pursuing. The government cannot shy away from funding the rescue of India’s banking. It has to provide capital to the new “bad bank” or to recapitalise the beleaguered public sector banks, where most of the NPAs reside.
  • This is where the Keynesian wisdom of stimulus is worth recalling. All four drivers of economic growth are sputtering. While reviving exports may need boosts like a weaker rupee or more export-linked incentives, consumption and investment sentiment can certainly be boosted by conventional Keynesian tools. Corporate income tax can be reduced to 25% as promised two years ago. Excise taxes on petrol and diesel need to be reduced. These are indirect taxes, hurt the poor more, are regressive and feed into general inflation through logistics and energy costs.

Four steps

  • On the spending side, the government can focus on the following four areas.
  • First, provide fresh capital either to existing banks or the new “bad bank”.
  • Second, provide some version of a wage subsidy as an incentive to labour intensive sectors. A version of this was offered to the textile and garment sectors last year, but can be improvised and extended. The successful model of Odisha in the garment sector can be replicated.
  • Third, give a big boost to affordable housing, by funding land acquisition for the builder, and interest rate subvention for the home owner. The States of Kerala and Maharashtra have interesting and replicable models.
  • Fourth, keep a big focus on exporters, especially in labour intensive sectors, including agriculture. This includes a weaker exchange rate, quicker refund of GST credit and expanding the scope of the Merchandise Export from India Scheme and Service Exports from India Scheme.
  • All of these are short-term economic stimuli, but can also provide a psychological boost to the animal spirits. Of course, consumer and investor confidence can return and sustain only when the Keynesian boost is buttressed by credibility of implementing longer-term reforms.

The cold facts: on tracking influenza outbreak

  • Ever since the influenza virus known as H1N1 landed on Indian shores during the 2009 pandemic, outbreaks have been an annual occurrence. The worst was in 2015, when 2,990 people succumbed to it. This year the virus has been particularly active; mortality, at 1,873 by the last week of September, is quickly catching up with the 2015 toll. In comparison, official figures show 2016 to be a relatively benign year, with an H1N1 death toll of 265. The problem with these official figures, however, is that they only capture H1N1 numbers, a practice that has been adopted in response to the severity of the 2009 pandemic.
  • But influenza was present in India even before 2009 in the form of H3N2 and Influenza B virus types. Out of these, H3N2 is capable of causing outbreaks as big as H1N1, and yet India does not track H3N2 cases as extensively as it does H1N1. This means that seemingly benign years such as 2016 may probably not be benign at all. Data from outside government surveillance systems are making this fact apparent. For example, a surveillance project for acute febrile illnesses, anchored at the Manipal Centre for Virus Research in Karnataka, has found that influenza accounts for nearly 20% of fevers across rural areas in 10 Indian States — fevers that are often undiagnosed and classified as “mystery fevers”. During the years when the H1N1 burden is low in these regions, H3N2 and Influenza B circulation tends to spike.
  • All this indicates that India’s surveillance systems are still poor and underestimate the influenza burden substantially. If numbers are unsatisfactorily tracked, so are changes in the viral genome. As a 2015 commentary by a pair of researchers from the Massachusetts Institute of
  • Technology pointed out, India submits a woefully small number of H1N1 genetic sequences to global open-access databases for a country of its size and population. Sequencing is important because it can detect mutations in genetic material that help the virus evade human immune systems, making it more deadly. Because India does not sequence a large enough sample of viral genomes, it would be missing mutations that could explain changes in the lethality of the virus. Put together, the numbers data and sequence data will enable sensible vaccination decisions.
  • Vaccination is the best weapon that India has against this menace, because Oseltamivir, the antiviral commonly deployed against flu, is of doubtful efficacy unless administered early enough. Yet, India has thus far stayed away from vaccinating even high-risk groups such as pregnant women and diabetics, because influenza is thought to be a more manageable public health challenge compared to mammoths such as tuberculosis. Better surveillance of influenza will possibly change this perception by revealing the true scale of this public health issue.