Covid-19 to Have Significant Deflationary Impact Due to Demand Evaporation, Says Chief Economic Advisor

Ruling out any impact of stimulus on the price situation, Chief Economic Advisor K V Subramanian on Thursday said the COVID-19 pandemic has severely dented the demand for non-essential or discretionary goods, creating deflationary conditions.

He also said that a good part of the Rs 20 lakh crore stimulus package is designed in a manner that the fiscal deficit remains under control.

"COVID has a significant deflationary impact because demand especially for non-essential or discretionary goods and services will go down significantly. Therefore, it is unlikely that there would be too much inflationary impact through fiscal deficit or stimulus package," Subramanian told PTI in an interview.

The proposed stimulus package will generate demand by infusing liquidity into the system and thus perk up the economy, the CEA said.

"A good part of stimulus is utilising leverage to deliver...while at the same time ensuring that the fiscs remain actually under control," he said.

Last week, the government raised its market borrowing programme by a whopping 54 per cent of the Budget estimate to Rs 12 lakh crore for the current fiscal to fund a comprehensive stimulus package of Rs 20 lakh crore to fight the COVID-19 crisis.

According to some estimates, Rs 4.2 lakh crore additional borrowing by the government will push the fiscal deficit to 5.8 per cent of the GDP in FY21 as against the budget target of 3.5 per cent.

With regards to proposed structural reforms, Subramanian said Prime Minister Narendra Modi in his recent address touched some important aspects like land, labour, laws and liquidity.

"Land and labour are really factor market reforms because these are factor inputs that really affect the cost of doing business and you have seen a lot of changes on these recently at state level," he said.

Uttar Pradesh, Madhya Pradesh and Gujarat have announced fundamental labour reforms and other states are also in line to follow up, he said, adding, Karnataka had just gone ahead and changed the regulation on acquisition of land for business.

Land can now be directly bought from farmers in the state and other states will also imbibe the model, he said.

"Land and labour are state-level subjects. What the PM has outlined is what states are implementing. I think from the perspective of the cost of doing business, these are very important," he said.

On growth he said, India will witness a V shape rebound rather than U shape post COVID-crisis.

"It is possible that there may be a lot of pessimistic assessments, I would rather be aware of that bias while making judgement. When you look at researches around Spanish Flu of (1918), it was far more devastating. even then it was V shaped recovery," he said.

That is the best estimate that one can make at this point of time, he said.

Pointing out that the Spanish Flu was far more devastating than the current COVID crisis, he said, that flu had affected one-third of the global population in contrast to one per cent now by coronavirus and despite all that it was a V shaped recovery then.