(English captions & Hindi subtitles available)
About the Speaker:
Dr. Krishnamurthy Subramanian, currently the Chief Economic Adviser to the Government of India, is a leading expert on economic policy, banking and corporate governance. In his role as Chief Economic Adviser, he has authored India’s 2019 Economic Survey and 2020 Economic Survey, the flagship annual document of the Ministry of Finance. His academic articles span various topics, including corporate governance, bankruptcy, and banking deregulation, and have appeared in a range of peer-reviewed journals including Journal of Financial Economics, Review of Financial Studies, and Journal of Law and Economics. He has previously served on several expert committees including the P.J. Nayak Committee on governance of banks for the Reserve Bank of India and the Uday Kotak Corporate Governance Committee of Securities and Exchange Board of India. He was also the Founding Board Member at Bandhan Bank (2015-18).
Dr. Subramanian earned a Ph.D. from Chicago-Booth, a B.Tech in Electrical Engineering from IIT Kanpur, and a PGDM from IIM Calcutta, where he was placed in the Honor Roll for his top-ranking performance. At the University of Chicago, he was awarded the Ewing Marion Kauffman Foundation Dissertation Fellowship—an award given to top 20 Ph.D. dissertations across all disciplines. He is on leave from the Indian School of Business, where he is a Professor of Finance. Dr. Subramanian has previously been an Assistant Professor of Finance at Emory University and has worked with leading financial firms such as ICICI and J. P. Morgan Chase.
Hello, everyone and thank you for joining us here at CASI, the Center for the Advanced Study of India at the University of Pennsylvania, for our first event of 2021. I am Tariq Thachil and I'm the director of CASI and faculty in the Department of Political Science here at Penn. And I'm delighted to welcome you to our second annual Nand and Jeet Khemka Distinguished Lecture this academic year. Before introducing our distinguished speaker, I just want to thank the Nand and Jeet Khemka Foundation, whose generous support make these series of public lectures possible. I would also like to thank the CASI team responsible for organizing this event, Juliana, Georgette, Alan, Makheda, Laura, and Levine.
The issue animating today's Khemka Lecture could not be more timely, How Do We Assess The Present State Of The Indian Economy And Its Future Outlook. As many of you know, the economy has faced headwinds even before the onset of the Coronavirus pandemic, with slowing GDP growth for three consecutive years. Following the pandemic and stringent lockdown measures, India witnessed a historic contraction of nearly 24% of the April to June quarter of last year. However, this decline contracted to a 7.5% fall in the following quarter. And the national statistical office said in its first advanced estimates recently, that India's GDP is now expected to contract by 7.7% in the 2020/21 financial year.
Now this is actually a positive revision from the 9.5% contraction projected just two months ago, pointing to signs of a recovery as the economy 'unlocks'. But again, this remains the first time in over four decades that the annual growth rate will be negative. As the situation has unfolded, the central government in New Delhi has looked to enact a series of sweeping reforms to three key sectors, agricultural markets, industrial labor, and the banking sector. The first of which have catalyzed sustained protests led by a coalition of several national and regional farm unions, demanding that the three new farm laws be repealed. And in fact, today itself the Supreme Court of India heard a clutch of pleas challenging these new measures.
To help us understand how government policy makers are understanding this challenging and complex reality, we are fortunate to be able to host our speaker, Dr. Krishnamurthy Subramanian, the chief economic adviser to the Government of India. In his capacity as CEA, among other responsibilities, he has authored the 2019 and 2020 economic survey of India, the flagship annual document of the ministry of finance. Dr. Subramanian is also a professor of finance at the Indian School of Business, where he was named the school's inaugural alumni endowment research fellow in 2014. He earned his MBA and a PhD in financial economics from The Booth School of Business at The University of Chicago in 2005. Where his dissertation committee included Dr. Raghuram Rajan, a former governor of the Reserve Bank of India, and also a former Khemka lecturer here at CASI. Previously, he was assistant professor of finance at Emory University and his peer reviewed research has appeared in a range of leading academic journals.
There are too many for me to summarize here, but many of his papers examine the impact of various regulations and policies on innovation. In a well cited on bankruptcy codes and innovation that he coauthored with former deputy Reserve Bank governor, Viral Acharya, he finds that a creditor friendly bankruptcy code can lead to lower absolute levels of innovation by firms. In another highly cited paper Dr. Subramanian and his coauthors find stronger dismissal laws, laws that make it difficult for firms to discharge employees, can actually encourage a firm and its employees to engage in more successful and more significant innovative pursuits. Outside of his research, he has also served on several expert committees, including the Nair Committee on Governance for banks, for the Reserve Bank of India, and the Kotak Corporate Governance Committee of SEBI, the Securities and Exchange Board of India.
He was also the founding member at Bandhan Bank in 2015 to 2018. We're very sorry to not be able to host Dr. Subramanian in person, but very much appreciate his making time in his busy schedule to join us virtually. To all of you listening, as with our past events, if you have questions, please write them into the Q and Amazon box and I will try and field as many as we can. We've already received a number of advanced questions from registrants and I will try to group questions together to ask Dr. Subramanian, so that we can cover as many of the diverse topics that his presentation will touch on as is possible. With that, please join me in welcoming Dr. Subramanian, our spring 2021 Khemka Distinguished speaker. Dr. Subramanian, the floor is yours.
Dr. Krishnamurthy Subramanian:
Thank you very much, Tariq. And wish you all a very Happy New Year. I hope that the new year brings a lot of good health and cheer to all of you and wish you a very good morning as well. First let me start by thanking the organizers for inviting me to share my thoughts on the way in which India has responded to this once in a century situation, once in a century pandemic. The economic crisis as you all recognize has been an outcome of this pandemic. So I'm going to now share my screen and make a presentation, after which I'd be more than happy to answer questions. So I'm going to talk about the response to the pandemic and the emphasis that Indian policy makers have made on saving lives and also on using this opportunity to reboot the economy.
So let me first start out by highlighting how the Indian situation, and the characteristics of India as a country, how that created various vulnerabilities for the country faced with this pandemic. I think that is extremely important for us to understand, how we've done in responding to this pandemic. So first, if you look at the way a pandemic spreads, it spreads based on network effects, much like a digital network for instance. The pace of spread is much higher when the size of the network is larger. Similarly, the pace of spread in a larger population inherently enables a higher pace of spread and India is a country with a population of 1.4 billion people with a population of many countries put together. So, that's the first aspect that policy makers had to keep in mind.
Secondly, because the pandemic spreads via human contact, high population density, especially at the bottom of the pyramid, really affects the ability to do social distancing, implement social distancing and therefore, also aids the spread of the pandemic, especially at its onset. Something I'll talk about using some of the research that the policy makers referred to as well. So these two key characteristics and were among two key vulnerabilities that India face as a population, as a country in terms of the pandemic and its impact. Let me just show you some data to actually support what I've just said. So if you look at the chart that I'm showing here, on the left side you see the total cases and total cases on the Y axis, population on the X axis. This is across all countries.
And what you notice here is that there is a very strong relationship and because this is in log and without getting into some of technical details what it implies therefore, is that population has a non linear impact on the total case. In other words, in higher populations the cases have been much more likely, in a convex manner, in a non linear manner. And similarly population density also affects total cases, which is what you see on the right panel. Now, as many of you would acknowledge, India has a population where many states have a population greater than countries. Just to give you some examples, just to solidify ideas. The state of Uttar Pradesh, which is the most popular state in India, has a population of 221 million, which is greater than that of entire Brazil of 215 million.
Similarly, the next two most popular states Bihar and Maharashtra, which have population of about 125 to 130 million, have populations that can actually take both France and the United Kingdom together in each one of these states. So given the fact that the total number of cases, actually the pace of spread increases non linear in a populated population, this is the first aspect that India had to take into account. You see the same thing actually with deaths as well. If you see, and this is using data from March till December across all countries, you see that the number of deaths have actually been non linearly higher with population and with population density as well, given these non linear effects. So these are the first two key vulnerabilities that India had to take into account.
Apart from that, everybody recognizes that India has a young population and in terms of its percentage, yes, India of course has a young population. But just the sheer numbers, if you count the elderly population, which is the people who are above 60 years of age, that elderly population, which is far more vulnerable to the pandemic, is much higher than in other countries. And this chart essentially illustrates that very clearly. The size of the rectangle actually corresponds to the size of the elderly populations. India has a much higher elderly population. And so even though we are a young population, that's just sheer numbers of the elderly is also something that created a vulnerability that policy makers had to be cognizant of.
And finally of course, the infrastructure, the health infrastructure was weak and that exposed the country to a humongous supply demand mismatch that could have potentially overwhelmed the health system, and severely exacerbated fatalities. This is because when the system gets overwhelmed, people don't get care in which case, the mortality rate increases significantly. So just to summarize the key vulnerabilities that India faced actually was the fourfold, high population, high population density, especially at the bottom of the pyramid, a large population just numerically, of the elderly, who are more vulnerable, and a poor health infrastructure. And against this is when we actually had to take into account the decisions to take. Now, reflecting these vulnerabilities, it was surprising that several international organizations, and universities, and institutes really expected the worst in terms of the impact of the pandemic on India.
This is research that was put out on the 24th of March by CDDEP, Johns Hopkins and Princeton University just before the lockdown began in India. And they estimated the cases, the total number of cases that would come in India, in three scenarios actually. A best case scenarios which is captured in the orange line, the blue line was the worst case scenario with a very high peak. So if you notice here, I think there are a couple of important points that come about. The best case scenario, which is actually a much lower peak. The peak was expected in the month of June, just do make a note of that, that the peak was expected in June in terms of a best case scenario. And the number of cases that were expected were 125 million. The worst case scenario was a peak in the month of April itself, but double the number of cases, 250 million.
Given the vulnerability, especially the health infrastructures I spoke about, the estimate was a ventilator demand of one million at the peak, and the study mentioned that the availability at that point in time was actually a fraction of what would have been required just 30 to 50,000 ventilators. And the study mentioned that the United States had 160,000 ventilators and was running short of the ventilators in most places. So this is basically just going back in time, as of 24th March and highlighting the vulnerabilities and what was expected by an international reputed institution in terms of what could have happened in the Indian context given its vulnerabilities. Now, let me actually show what indeed has transpired. So on the left panel, what you see are the daily COVID cases in blue. And you see the red, red is basically the mobility.
In contrast to the best case scenario of a peak in the month of June, India had its peak in the month of September, which has been highlighted here. So several months after what was expected. The number of cases have been of course much, much lower, as I'll show as well. And the mobility has been increasing. In fact now India is in a phase where cases are declining and mobility is increasing. On the right side, if you look at the recovery rate as the last fatality rate, which as I'm going to show you is among the lowest among many countries. The recovery rate was very high, and has increased monotonically as time has progressed, while the fatality rate has declined significantly and is close to 1% now. So India has actually managed COVID quite well compared to what was anticipated and given the vulnerabilities that I had spoken about.
If you look at some more data, which you look at the mortality on a per capita basis and that is important to ensure an apples to apples comparison, the mortality rates are a fraction in India of many of the other countries. That's what you see in the left chart. The deaths as per 100,000 a population, if you look at the fatality rates as well, those fatality rates for as well India, is actually among the lowest at 1.4% compared to many other countries, which have more than double the fatality rates. Currently this is as of December 31st, this shows the countries with the maximum number of cases, India stands out as an outlier with lower cases, cases going down monotonically and at the same time, mobility increasing at a time when other countries have been facing the second wave, which has been far more deadly than the first wave, which was indeed the case even in the Spanish Flu pandemic, which I will talk about.
So India has been a [inaudible 00:17:00] endless case in having lower cases with rising mobility. And of course the arrival of the vaccine provides encouragement in this front as well. So if you look at the economic recovery and Tariq has mentioned about this, after the 24% decline in GDP, in the April to June quarter, the July to September quarter had a 7.5% decline. The next, the October to December quarter that has just gone by and this quarter that is happening, the projection is for this momentum to be carried forward. And quite likely October to December quarter should be marginally positive and should see marginally positive growth, and the Jan to March quarter seeing greater growth, which is also reflected in the upward trusion for the annual growth rate.
One of the key indicators, which is across all economies that economists typically really pay attention to is indirect tax revenues because they quite well reflect the state of the economy. They reached a record level of 1.15 trillion in the month of December. This number has never been achieved so far. Similarly, if you see on the left, the charts that are being displayed here, this is using either the cases or the deaths on the X axis, and on the Y axis you have the index of industrial production in the top panel, the manufacturing purchasing managers index, and the service sector purchasing managers index, just a sampling of some high frequency indicators, you see a V shaped recovery, which has manifested. And this actually has transpired across a lot of high frequency in other high frequency indicators as well. So the economy has actually displayed a V shaped recovery from this pandemic.
The question that arises is what were the critical aspects of India's policy response, which has led to the saving of lives on the one hand and at the same time also a V shaped economic recovery? Two key aspects that I would like to highlight, one was the emphasis on saving lives. India recognized very well and this actually was seen in its policy as well, that while GDP will recover from the temporary shock, we had actually no doubt that there will be a shock because of the lockdown. But human lives that are lost, they cannot be brought back. So this humane principle, that while GDP will recover, human lives that are lost cannot be brought back, was one bedrock of the policy response that India had. I know think this is best expressed as Abraham Lincoln eloquently said, "Next to creating a life, the finest thing a man can do, or a woman can do, is to save one." And that was principle that India adopted.
Second, as I'm going to show you in detail, was that the policy response was driven by a lot of research, learnings from both epidemiological and economic research, especially those that related to the Spanish Flu. In the next few minutes I'm going to talk about what were those learnings and how those were implemented in India's policy response. The first thing that was very important was to recognize that as Hansen and Sargent in the American Economic Review paper in 2001 showed, that when a policy maker is faced with enormous uncertainty, the policies must be designed with the objective of minimizing large losses. And that's done by selecting the policy that would be optimal in the worst case scenario. That's the right approach.
And in this case, those large losses as I have just mentioned from India's perspective, where basically debts and that is what, in the short run, we had to actually ensure. This was important because in the month of March, if you look at the data, there was enormous uncertainty about the pandemic itself. So for instance, if you look at the left panel, this is that they see a [inaudible 00:21:40] that will estimate as of 31st March 2020 across countries and you see so much variation, between 0.4% for South Africa for instance, close to 12% for Italy. And which of these actually would manifest in India, at that time was not very clear. Similarly, if you look at the Arnot Parameter, which is a very important indicator of the pace of spread of the pandemic and how contagious it is, even this parameter that was significant variability as estimated in March, in late March.
So it would be just a COVID-19 epidemic and Wuhan actually had between 1.4 to 5.7 and by the way, while these numbers, the range looks enormous, from the perspective of the pandemic, 5.7 means extremely high levels of contagion in the pandemic. And if you looked at other similar pandemics as well, the range was very large. So this was what the policy makers were encountering as of 31st March, enormous uncertainty and therefore, the right objective that was chosen was to minimize large losses by choosing the strategy that was optimal under the worst case scenario. And that was one key aspect of India's policy response.
Now this is a very important slide that actually I want to emphasize, what the slide show, this is from research by the Center for Economic Policy Research, what this shows is across time, starting from March onwards till about, till end of June the impact of a one percentage point increase in population density on the transmission. And what is really critical and that's been highlighted here, is that at the start of the pandemic, at the onset of the pandemic, the impact of higher population density on transmission was extremely large. And so this of course tapers out the impact of population density tapers out once the pandemic has matured.
But at this onset of the pandemic the impact of higher population density was very sharp in terms of the transmission and this was therefore, a very important learning in terms of the initial lockdown, what it should be and that's something that guided policy makers as well. And of course this was something that was talked about, the importance of flattening the curve because without the flattening of the curve, the pandemic would have hit a peak much earlier as was estimated in that study that I showed you from Princeton and John Hopkins. And at the same time the healthcare capacity would actually be very inadequate in responding to these cases. So flattening the curve was important, together with the initial lockdown as I just showed you in the earlier piece of evidence.
The other key learning and this was very critical to India's policy response, was what happened in the Spanish Flu. This chart actually shows on the X axis the mortality rates and on the Y axis, the change in employment from 1914 to 1919. Remember the Spanish Flu happened in 1918. Now there are red colored dots here, which actually correspond to counties in the United States where the interventions, what are called non pharmaceutical interventions or a lockdown. The red ones are those counties that had the lockdown that was below the medium. In other words, the lockdown was not very intense. So the red corresponds to those counties where the lockdown was not intense. While the blue dots correspond to those where the lock downs were indeed intense.
And one key learning that you actually get from here, is that first, if you compare the blue dots versus the red dots, the blue dots are more to the left, and therefore, mortality was lower, so a more intense lockdown actually meant that the mortality was lower. But the more important point from the economic perspective, from the medium to longterm perspective, was that not only was the mortality lower when the lockdown was more intense, but the economic recovery as captured by the change in employment was also much higher when mortality was lower. In other words, the non pharmaceutical interventions, the lock downs, not only did they reduce mortality, but they also enabled a much better economic recovery. And this was therefore, a very critical part of the design of India's policy response.
So the strategy therefore, in the last slide that I showed you, in particular, it provided guidance for the strategy to transform the short term trade off between flattening the pandemic curve, but exacerbating the economic curve, which was a short term trade off to the win-win in the longterm, which is the fact that lock downs, when they were more intense, not only did they reduce mortality, but also enabled economic recovery. And so the key learnings from this research were threefold, as I just said, enormous uncertainty means that the policy has to be minimize large losses, which is basically lives in the COVID scenario. Early intense lockdown, research showed that it delayed the peak, reduced the magnitude of the peak, and decreased the mortality burden by obtaining time to ramp up the health and testing infrastructure.
An early stringent lockdown, while it was costly in the short run, led to a much sharper economic recovery and reduced mortality. In other words, in the longterm the trade off essentially was between short term pain and longterm gain. And what India actually did was to choose the strategy of longterm gain for some short term pain, by implementing a very intense lockdown, which is what you see in this particular chart here. What you see in the page color is India's lockdown was by far the most intense across all countries. So the initial lockdown was the most intense and I've just provided you the rationale for why that was chosen. What are research, epidemiological and economic research, especially from the Spanish Flu had highlighted the optimality of this strategy. And that's why India went for a very stringent lockdown initially.
This has been actually reflected now in the lives that have been saved. So these are estimates using India's actual cases, but applying the fatality rates of other economies, what you see in the left panel are countries which have similar demographics, but with fatality rates that are much higher than that of India. And those numbers that you see are the number of times that mortality would have been. So if for instance, India's fatality rate had been similar to Mexico, we would have had six times as much deaths as we actually had. And similarly on the right, what you see is using the fatality rates for the worst affected countries. And there you see if we had the mortality rate, or the fatality rate, CFR, of Italy, we would have had about two and a half times as many deaths.
And so this actually gives you an idea of the number of lives that India has been able to save by implementing this strategy, focus on a very stringent initial lockdown and emphasizing longterm gains, even though there was short term pain in the process. Now, as I said this of course did create short term pain, and this chart shows the April to June quarter GDP, how that relates to the intensity of the lockdown using the major economies. What you can see here clearly is that India lies on that line of it. Therefore, the impact in the April to June quarter on the economy, was primarily because of the intense lockdown. And as I already said, this was something that was a price in terms of the short term pain that we actually were willing to pay in order to emphasize human lives and save human lives.
Of course, after that, now the economy has recovered. So if you look at the policy response, and now I'm going to actually come into the economic policy response. India recognized that the COVID pandemic is both the demand and the supply side impact. But what India also was very, very careful to recognize, was that during the time when the economy was in a lockdown and economic activities were restricted, it did not make much sense to actually try and give a significant demand side push. What this chart shows you here, that brown dotted line is the revenue expenditure, typically economists think about that basically your, not necessarily capital expenditure. So these are expenditures on salaries, subsidies, et cetera. The revenue expenditure went down during the lockdown months and has since come back. But what is more important and that is what is being shown in the green bars here, is the growth in the capital expenditure.
During the lockdown months, because there was a lockdown, capital expenditure activities could not be done as much. But since the unlock phase has begun, the capital expenditures have grown significantly and that is something that India has emphasized. And that's what I've tried to capture, that India recognize that it not make that much sense to be pushing on the accelerator on demand while the breaks were clamped. It would have only led to the loss of fuel or in some sense the fiscal spending not necessarily generating as much bang for the buck. This was also important to recognize because of the precautionary motive to save. And this is something that economists recognize, that when there is a period of high uncertainty, households typically go into the tendency, that tendency is to save rather than to spend.
This chart actually illustrates that. This is the average balances of people who hold the, what I call the Pradhan Mantri Jan Dhan Yojana. These are accounts or these 400 million accounts at the bottom of the pyramid. What I want you to look and take away here, is the significant increase in the balances during the lockdown months. And it stayed at that level till the end of June because of the precautionary motive to save. Now remember, these are households at the bottom of the pyramid where the marginal propensity to consume, which is basically economist jargon for saying if one additional rupee is given to these households, how much do they spend out of that? Typically such households end up spending almost the entire rupee. In other words, they don't save very much.
Now what this chart illustrates is that even this demographic, which does not save as much was saving significantly. And therefore, a demand push during the lockdown months when the uncertainty was very large, would not have had enough bang for the buck. And that is what India chose to do, to not basically give as much of a demand side push. But now of course, as I showed you in the previous chart, during the unlock phase, the demand side measures have been accelerated. Apart from that, as I said, the COVID pandemic is both a demand and supply side shock. The shock to consumption comes actually from labor market disruptions and the impact on disposable incomes, the short term shock as I just showed you, was because of the impact of uncertainty and therefore, the impact on the motive to save. And the supply shocks also come from potential disruption of supply chains and potential corporate distress.
So these were the supply shocks, apart from the demand shocks, that COVID induced because of the impact on incomes. And in this context the COVID crisis is quite different from other crisis in emerging economies, which are typically caused by overheating of the economy. For those who follow the Indian economy, the [inaudible 00:35:21] episode of 2013 for instance, is a good example of a crisis that's caused by overheating of the economy. Typically, it is reflected in the current account deficit increasing a lot. Inflation also going up simultaneously. In contrast, during this crisis, India has actually gone from a current account deficit to a significant current account surplus, which is actually illustrative of the under heating of the economy that the negative shock demand.
But what this can do, and economists use this term called hysteresis, is that this can have impact on growth prospects in the medium to longterm. And something that we recognized very, very clearly and therefore, initiated a slew of multi sectoral supply side reforms and India is the only country to do so during the pandemic, which I anticipate will generate productivity gains in the medium to longterm. So I just want to spend a couple of minutes talking about these reforms and mentioning what is the impact that they should have. So the reforms that I said have been multi sectoral and have been focused on the supply side.
So agriculture is something that Tariq mentioned, but what is quite important is that there were other very important seminal reforms, that have been done in the areas of labor, the MSMEs, enabling them to, the MSME definitions were changed, so that they can grow and create jobs, a phenomenon of dwarfing the economic survey of July 2019 and highlighted that Indian firms, small firms especially remain dwarfs, they don't grow enough. And therefore, do not create enough jobs. So this was something that was addressed. The labor reforms, India has talked about the need for labor reforms over three decades, since the balance of payments crisis in 1991, when the loan that was given by the International Monetary Fund, labor reforms were recognitionality in that. And yet, despite economists recommending these labor reforms for three decades, these had not been done.
But now they've been done, and these are very important because 44 laws that govern the employer, employee relationship have now been condensed into four. The number of sections has been reduced almost to thirds. More than 2,200 minimum pages have been condensed into 40. An important change has been the enabling of contractual employment, what is called the full-time equivalent contracts. And compliance has been enabled through the one labor return, one license, and one registration. The agriculture reform, something that Tariq mentioned, are quite important because unlike any other producer in India, the farmer, especially the small and marginal farmer, does not have the access to markets and has to remain beholden to selling to the intermediaries. And that's something that has also been recommended by various economists over several decades, which has been done.
Now of course, it remains to be seen how this pans out given the Supreme Court, the opinion that has come in today. But the other part, which is enabling storage and warehousing through the essential commodities act, these are also quite important. Another important change that's been done is on the business process [inaudible 00:39:10], saying enable work from home and work from anywhere, which will have benefits for the service side of the economy moving forward. Similarly, reforms on power, on privatization of the public sector undertaking, which is an important reform because India historically, had been a socialist economy. So in the 1950s when the industrial policy was announced, the commanding height for the economy was given to the state owned enterprises. So this is now a 180 degree shift from that situation. Where now the commanding height of the economy is given to the private sector.
Reforms also in the mineral sector, industry, the production linked incentive scheme space defends, et cetera, there are a bunch of reforms across sectors, which should have salutary impact on the productivity. And the productive capacity of being an economy. So overall, I expect these reforms to help in increasing value added and job creation in two key sectors, which is the primary and secondary sector of the economy. Primary, I'm referring to agriculture and secondary, which is manufacturing. Now, they are very important because these account for a large proportion of jobs in the Indian economy. And through the job creation can help to create a large, middle class over the coming decade and are important to realize the demographic dividend. India has a young population and therefore, the focus on enabling sectors that can create jobs is quite important.
And in the medium to long run by increasing disposable income, these have the potential to create regime change and the aggregate demand in the economy thereby have the potential to create sustained economic growth. In terms of the outlook for the coming year, India is likely to grow at 10% plus in 2021, '22. Of course, part of that will be from a low base, but still India will grow at 10% plus. And given these reforms and the policy measures that are being taken, I do anticipate India to be among the only large economy possibly, to be growing on close to 7% over this decade. And I think this is being reflected also in the foreign in flows post COVID, which reflect these fundamentals. Of course, some part of these in flows are also because of the easy monetary policies. But even taking that into account, this is also reflecting the fundamentals and the expectation of growth, given the reforms that have been launched.
So I think it's time for me now to summarize. India has responded to COVID by making difficult, but economically optimal choices. It would have been very easy to have succumbed to myopic populace strengths and not make those difficult choices, especially emphasizing lights and choosing what is good in the medium to long run. And through these difficult choices, India has saved lives as I just showed you, I gave you the evidence and has also helped reboot the economy. This momentum is likely to be sustained now with the arrival of the vaccine, which has particular helped the service sectors, especially travel and tourism to come back to pre-COVID levels. And overall, my assessment is that India is likely to be more stronger than other economies post COVID because of these choices that we made. Thank you very much for your patience. I'd be more than happy to take questions now.
Thank you so much, Dr. Subramanian for mind ranging talk. So we have a number of questions that have come in already. I'm going to try and group them as much as I can in the interests of getting to as many of them as we can. So we've had a number of questions regarding the kind of successful balancing of lives and livelihoods in India that you mention, specifically regarding this trade off with reference to the lockdown. So with regard to livelihoods, you noted that the economic [inaudible 00:43:45] we saw following the lockdown was directly due to its stringent nature. With regard to lives, I think there's broad consensus now that fatality rates for India are lower than almost anywhere in the world. However, there appears and this was reflected in our question, there appears less consensus that we can attribute this low rate to specific mitigation strategies.
So if we think of the lockdown as premised on a disease containment strategy, case figures regarding kind of the timing of India's curve, seroprevalent surveys are showing quite high disease prevalence for various samples, have led at least some public health experts to conclude that maybe the real puzzle is why we have a high prevalence rate that doesn't translate into a high mortality rate. And this may be driven by, as you mentioned, a youthful population, underlying immunities. So in your view, is there compelling evidence suggesting the economic pain of the lockdown actually had this causal impact on public health gain, that you seem to be suggesting? That was the kind of group of questions we had.
Dr. Krishnamurthy Subramanian:
Yeah, I think that's a good question because of the paucity of time I couldn't go into the details. But in the coming days, you will see some of the details that I've not covered coming out in the public. So what I can actually show is that we in fact have done an estimation of what would have been the actual number of cases in a cross country setting, naturally expected given the population, given population density, given the demographics of the population across the top 30 economies. And estimated the natural number of cases vis-à-vis the actual cases. And then have correlated with it for the stringencies of the lockdown as well.
Both across countries and across states in India. And what the evidence clearly shows is that the difference between the naturally expected number of cases and the cases that actually transpired, do correlate with the stringency of the lockdown. In other words, that in the initial lockdown, the stringency of that did have an impact on the actual cases compared to what would have been the case if the lockdown had not been stringent. The other point I think, as I mentioned, yes, people do recognize and we also recognize that India has a young population. But as I showed you, in terms of just sheer numbers, the number of people above 60, elderly population, is more than many countries. And these are the vulnerable people. So if you look at the fatality rates, which are typically likely to be higher among the elderly, they would have been much higher.
But the lockdown helped and I actually have personal anecdotes as well of many elderly people who really, they have mentioned that they've benefited from the lockdown because otherwise they would have been exposed to the younger people going out and coming and infecting them. So I think this is of course an area that there can be more debate on. But as I said, I've tried rather than going into some of the technical details, which will come out. I think the evidence does suggest that the lockdown had a clear impact on... Also, do take into account that the peak that India had happened in September, in contrast to the estimate of April or June, as I showed you in the studies that I'd referred to. And since then the cases have been singularly declining.
That really helped in terms of the fatality because if suppose India had hit the peak let's say in the month of May, or April or May, do remember for instance, the fatality rates in India in the month of April, they're close to 5% compared to 1.3, 1.4%. Now if the peak had been hit at around April or May, the mortality rates would have been about 5% or maybe even more because the 5% that actually transpired was with much lower cases because of the lockdown. But if you had a much higher supply demand mismatch the mortality rate should have been much higher. So it is important to keep this in mind when you interpret the fact that the lockdown indeed had an impact on reducing mortality.
Thank you. So one other question we had was regarding some of the effects of the lockdown that might actually have kind of long lasting impact for certain sections of the population. So obviously we had a number of questions about the impact on migrant workers and the kind of toll that was taken on migrant workers. That maybe that short term for many of them are coming from sections of the population where even a short term shock can be very hard to recover from.
And the second is that the idea that there might be long lasting damage, including psychological damage, psychologically induced behaviors resulting from a short term shock that can have lag effect. This could be for children who were not being able to go to school, this could be for adults dealing with a changing situation. So we've questions in those kinds of groups. But the basic premise of both questions is that these shocks can have disproportionate and long lasting effects for certain segments of the population, particularly in vulnerable populations, who will not be able to recover, even amidst a broader economic recovery. So what are your thoughts of that?
Dr. Krishnamurthy Subramanian:
I think that's a valid point. What is important again, to take into account here, is the account factual? Now what you have to recognize is that in India, typically the vulnerable households have usually five members and one bread earner. Now of course the impact of the lockdown is something that we all acknowledge and I said that, that created the short term pain. And I do concede some of that, there may be some long term impacts as well. But do consider the fact that if suppose the mortality rates had been much higher, for instance, I showed you if the CFR had been what other countries obtained, it would be particularly people at the bottom of the pyramid, vulnerable sections who would have had to actually face a lot of deaths because these are people who would have gone out to earn their livelihood, been exposed to the virus and therefore, that bread earner being really vulnerable actually to the unfortunate consequence of death.
Now do think about the psychological impact that when you have a household of five people with the bread earner actually having to suffer the unfortunate consequence of death, the psychological impact and the deprivation that happens on the four others who actually now lose their bread earner. And this is true not only for India, but across the world policy makers have had to make this choice between bad and worse. What I'm trying to actually convey here is that very high mortality rates and fatalities would actually have been far worse given the realities that India faces. The other point which is important is that yes, the migrant labor was indeed impacted, migrant labor is coming back now.
And the emphasis on demand side measures, on infrastructure for instance. Infrastructure is a sector that creates below us, especially in construction. And a lot of migrant workers work in the construction and other allied sectors. So the emphasis on such sectors, bringing back activity in those sectors will enable migrant labors to also get back their jobs. So overall, my view is that, this is given the evidence that I've seen and the evidence that I've talked about, the consequence for these migrant workers and especially people at the bottom of the pyramid would have been far worse if they had actually a situation of their bread earner having to actually suffer the unfortunate of death, which may have happened in very large numbers.
The next set of questions we had was to actually bring draws on this kind of demand side question. So you've noted that the economic crisis wrought by COVID is a crisis fundamentally to demand and one area flagged by some in our audience and remains a concern, has been that the trust of the government response, continuing response, has been disproportionately on the supply side. I'm sure you've got this before. But this has been seen as especially worrisome given that many demand side challenges facing the Indian economy perhaps predate the pandemic and are likely, as the RBI governor has noted, to persist even beyond supply side problems.
So there has been repeated calls for an expanded, direct fiscal stimulus and maybe especially at the time that households are being hit hard. So what are your thoughts on such calls, especially as we look ahead to the new budget and why the timing of it wasn't more appropriate, especially if a recovery was anticipated why a stronger demand side push was not? I know you briefly touched on this on your presentation, but why it would not have been at a more helpful, maybe even be more helpful to households to get that demand side push earlier on when they're hurting.
Dr. Krishnamurthy Subramanian:
Firstly, Tariq, I think I would like to correct that as I said very clearly that COVID is both a supply side and demand side. So I don't think I agree with this proposition that COVID is only a demand side phenomenon. As I mentioned in the presentation and I'm sure you would have noted as well, that the impact on supply side because of the disruptions, for instance, if you don't have labor that does affect your supply. If you have firms that go into financial distress, or have to go into bankruptcy, that affects the productive capacity and thereby, supply as well. So both demand and supply are indeed impacted. In fact, the impact on supply, especially if it is through labor market disruption and through like say bankruptcies and financial distress, could possibly be more longterm.
If you have firms that are basically going belly for instance, or in financial distress, a lot of research can finance for instance, highlights this that even before firms go into bankruptcy, when they're in financial distress, they suffer a lot of costs and that it impacts their productivity. For instance, they don't get credit, they can't basically give credit to their customers. They may have to go on a cash and carry model, things like these. And they have an impact on supply side. So I think I would reiterate that it is not quite right to only emphasize the demand side, the supply side is as important. On the demand side, as I said, that even though we did anticipate, the point I was making is that and it's a nuanced point that I hope that the viewers will get it, is when you have a lockdown and economic activities actually have been scaled down significantly.
At that time giving cash actually, it does not have as much bang for the buck because it goes and sits as money in the bank accounts of people. And that is precisely what I showed using the evidence from the Pradhan Mantri Jan Dhan Yojana, those bank accounts. And this has been seen, not only at the bottom of the pyramid, but even elsewhere as well. In fact, the deposits in bank accounts have gone up significantly. Research for instance, in the United States also has shown, there's NBR research which showed that the paychecks that were sent, those were used far more for essential items, food items, not as much for discretionary spending. And this is also something that is important to keep in mind. Given India's fiscal space, we had to make sure that the bang for the buck was maximized.
And therefore, while there was already restrictions and economic activities, to then go and give cash wouldn't have been optimal. The other point, which is important to remember, look, unlike the United States which does not a public distribution system for giving necessary essentials. India has a public distribution system and free cereal, free ration and pulses was given to actually large sections of population, apart from a cash transfer as well. So a lot essentials were taken care of through In Kind, something that advanced economies do not have the infrastructure for because they don't have these public distribution systems. So essentials were taken care of and the demand for essentials was taken care of. Now of course, as I showed you, during the unlock phase, when restrictions and economic activities are being taken out, that's where the emphasis on infrastructure is actually really being made.
I showed you how the increase in spending on capital expenditure actually has increased significantly. So to summarize, on the demand side I think the timing was very important, while there were restrictions and economic activities, and because of the uncertainty, the precautionary motive to save actually to give too much of a demand side push would not have shown up as discretionary spending. But once the lockdown has been removed and the unlock phase happens, that is the right time to do the demand side push. And one of the other things that I did not speak about as much is that there's been a wage subsidy, there is a program that has been launched in the [inaudible 00:58:08] package to enable more jobs to be created. And the demand side measures overall, we had close to 1% of GDP in the third phase, during the unlock phase.
So that's been India's strategy to sort of optimize thereby and get the timing right in terms of the demand side measures. And also ensure the bang for the buck is high. So research in India shows that if you look at the, what is called the fiscal multiply, in other words if you give one rupee and what is the multiply it creates? If you give just transfers, which is what these direct benefit transfers are, the multiplier is about 0.98. In other words, actually there's some wastage that happens. In contrast, if we look capital spending, the multiply for one rupee is 2.5 in the same year and about four and a half over the entire period. So the bang for the buck is much higher in capital spending than that in revenue spending. So these are also aspects that India kept in mind to ensure that the bang for the buck for this fiscal spending is maximized.
Thanks very much. We're almost at time, but maybe we'll just stay on for just a few extra minutes, we haven't at all been able to talk about the reforms that you mentioned. We did get several questions on that, perhaps I can just ask you a very brief question about two. Let's start with banking, which is a reformed sector that you have particular expertise. So as part of the kind of proposed changes to the banking sector, including from the RBI, one of them has been looking to address the problem of insufficient credit and a supply of credit, given India's relatively low credit to GDP ratio. And one of the recommendations is one that we got questions on, specifically the recommendation of industrial houses to be allowed as promoters of banks.
So former RBI governor, Raghuram Rajan, and deputy governor, Viral Acharya, both of whom you've worked with, wrote a note voicing concern that in looking to expand credit, this proposal will allow industrial houses to use their own in house banks for self lending and that would lead to conflict of interest, that might actually worsen a different problem facing India's bank, namely a high share of nonperforming assets. So there's been some concern about the kind of effects of this reform. And since it is an area of your expertise, I was wondering how you view this.
Dr. Krishnamurthy Subramanian:
So I two observations to make on have, Tariq. First, this was an internal recommendation made by a committee internal to Reserve Bank of India. So I would not call it a reform, reform is at least what I have talked about, legislation that has already been passed. This is a recommendation internally that has been made to the Reserve Bank of India. So I think to put it on the same footing as the other reforms, actually is not quite right, I think. So it should therefore, be a part of the importance that it deserves and nothing more, nothing less.
The second aspect that I want to mention here is that, and I've written about this in the last year's economic survey as well on that non performing assets, as well as the credit to GDP ratio. I think what is important to recognize is that there is a quantity problem and there is a quality problem. And the two problems don't necessarily intersect because a quality problem primarily surfaces in the big ticket loans or had surfaced in the big ticket loans. The quantity problem is more about actually people, entrepreneurs, small and medium enterprises, those that are actually at the bottom of the pyramid, not getting adequate credit, that is... So I think my view is that the two should not be mixed up when thinking about banking sectors, et cetera before.
Okay, and a final question on the farm laws and the impact of them, so let me focus on that's actually close to home here at CASI, perhaps the most contentious of the three laws is the so called APMC bypass bill which permits farmers to sell their produce outside state designated agricultural markets and directly to private players. And the proponents of this reform again argued that this would provide farmers an expanded choice of sellers, will reduce their reliance on intermediaries embedded within state run markets and increase private sector investments in infrastructure and supply chains.
And so a report that was actually authored by four scholars affiliated with CASI looked at agricultural markets in Punjab, Odisha, and Bihar. And two of the reports authors, Shoumitro Chatterjee, and Mekhala Krishnamurthy, they recently noted the importance of understanding these national laws in the context of a long and varied experience of regulatory reforms at the state level. And so they note that the evidence seems to be pretty clear that on their own regulatory reforms, do not do very much to facilitate new private sector investments.
And they cite the case of Bihar, one of the state based study where the monopoly of state designated markets as you know, was abolished in 2006. And yet, 15 years later, large private firms are absent because they don't want to deal with the hundreds and thousands of small farmers in Bihar. And so they conclude that there's need, the expectations for transformative impacts from these laws must be tempered without further support, particularly in providing small and marginal farmers with expanded support to mitigate risk and access credit. So how do you think about this broader point, about the potential limits of regulatory reform on increasing farmer incomes without these kinds of supplemental policies, helping especially small farmers?
Dr. Krishnamurthy Subramanian:
So two observations here, Tariq. First, among the states in India itself, the average landholdings in Bihar are far more fragmented than they are in the rest of India. And that does have its impact because in terms of the ability to invest in technology, the fixed costs that you have been, actually do not become as optimal when you have a much smaller landholding. So I think given these differences in boundary conditions, I would be careful in extrapolating what you find for Bihar to other states in the country, precisely because of these differences. So as economists think about actually, the out of sample validity is something that would have to be actually thought about very carefully in taking what you have in Bihar for other states.
The second observation is that we have to distinguish between necessary and sufficient conditions. The infrastructure that you create to enable markets and that includes warehouse for instance, that includes cold storage, those are sufficiency conditions. But the necessary condition has to be where the farmer has the opportunity to go and sell to a different person. And this is Nobel Prize winning work by John Nash. Many of us have actually watched his movie, The Beautiful Mind. The Nash Bargaining Solution, what it actually says, is a simple idea that if I have the option to go and sell to another person. Suppose I'm negotiating a particular trade with you, and I can actually threaten that I do have the option to go and sell it to another person, I will get far more of the value in that relationship.
But if I have no option, then you are quite likely to corner the entire benefits from that trade. This is a very simple idea called Nash Bargaining, which affects the split of the surplus in any trade. And this is true in the Indian context as well because a small and marginal farmer faces only the middleman and does not have the option to say, "I need not go to this particular APMC, I can go another APMC which is maybe a few kilometers down. And I do have the option to go and sell there." Just that credible threat enhances what the farmer, small and marginal farmer can get from the same middleman. And that option was nonexistent. This is a fundamental aspect of markets, that this is a necessary condition, not a sufficient condition. But what the laws therefore do, is to enable that necessary condition. And I'm sure all of us acknowledge that the necessary conditions have to be treated so. So enabling those necessary conditions is a very important piece of reform.
Thanks very much for taking all of these questions. There are many more that I couldn't get to, but obviously you touched on a broad range of subjects, so we got to as many as we can. Let me just conclude by thanking Dr. Subramanian for joining us today and thank you to everybody who helped organize this talk. Thank you also to all of our participants, who joined us from both near and far. And we look forward to seeing you at future CASI events, including our webinar series of academic talks that will be commencing in early Feb. So thank you again, and hope to see you soon. With that, we will take your leave.
Dr. Krishnamurthy Subramanian:
Thank you very much.