‘In Desperate Need of Capital:’ Prof Ajay Shah on Economic Crisis

Video Editor: Mohd. Ibrahim

“All over India, there is a desperate need for capital and we need to work with a pragmatic approach,” said Ajay Shah, Professor at National Institute of Public Finance and Policy on the present economic crisis in the country due to the coronavirus pandemic.

In a chat with The Quint’s Sanjay Pugalia, he explained how capital needs to be pumped into the Indian economy to fuel growth and how the country needs to take down restrictions to welcome foreign investment.

When questioned if India’s relief packages are good enough, in comparison to countries that have been providing aggressive packages – some even 5-10% of the country’s GDP – he said, “Our country’s response is modest. We don’t have the fiscal space.”

The country needs a lot of capital to rescue ourselves from this economic crisis. But can the government bring such a stimulus?

I do not think that there is a lot of possibility for government expenditure to help in this situation. And there are two things that are going on. Before the crisis spawned, the Indian fiscal deficit was very large. There was off balance sheet borrowing of the union government and then borrowing by the state governments.

When the economy goes down due to COVID-19, the government’s tax income also goes down. So there is a big decline of the tax revenue and enlargement of the government’s deficit. So there is not really much head room for the government to take any action which will make a significant difference to this.

You have suggested that we need to work towards getting capital from foreign countries but now with the present situation amid the pandemic, why would other countries help out India?

No matter what, there is a basic accounting fact that there is savings and investment in India. Suppose we have Rs 25 savings and if we invest Rs 30, then there is a gap of 5 rupees and this gap will always be covered by an outside source. This is a guarantee that it will come. The question is only at what cost will it come. How much will the rupee depreciate? How much will the share prices go down? At what interest rate will that money come in. That is the subject of negotiation.

All countries are facing the same problem. All countries have companies that are capital thirsty. But India is in a better position for three reasons.

First, we have young demographics. Compared to many other countries, the problem of COVID-19 in India is lower as much of the Indian population is young.

Second, Indian firms are starting out with less borrowing. In pre-COVID19 time, there was not much borrowing on the balance sheet. So these companies become more able to obtain debt and equity. The third thing is, ultimately what global investors want is a fundamentally sound company. Are you competitive? Are you able to generate capital?

The Indian government has told Chinese investment cannot come in without the Centre’s approval. So does this mean we are not welcoming foreign capital?

About China, there is reason to be concerned about investment in certain areas which has national security related implications. For example, if there is Chinese presence is in the core telecom companies, who are running India’s communication infrastructure, then there is merit to be concerned. Or if Chinese ownership was to come for the Jawaharlal Nehru Port in Nhava Sheva, then there is room to be concerned. But in a normal business, there is no need to be so uncomfortable. We should also be more measured in our response. In terms of speed, the need for this is right now. We need to get vast amounts of capital, so we need to remove a lot of restrictions which we have imposed in the last 10 years.

When it comes to cross-border business, India has become a difficult place to do business. There is a problem of taxation, there are many problems like capital control, financial regulation, investigation. We have to remove all these barriers so as to get this going fast.