All the World’s a Stage

By Satyam Kumar, Amritanshu Patnaik, Ujjavala Bhotra, Aarushi Kalra

The name Gita Gopinath holds special reverence in the hearts of most students at the Delhi School. Listed as one of the most influential Economists by the IMF, she was recently appointed as the as the Financial Adviser to the Chief Minister of Kerala in a homecoming of sorts. Her work on Sovereign Debt won her recognition from various quarters including those of former French President, Nicolas Sarkozy. The Editorial Team engages with Prof Gopinath about the forces of Macroeconomics on the World Stage.

Team Eostre (TE): The first question we’d like to begin with is in the context of India, where sovereign debt seems to be in the green zone but there is the issue of corporate debts skyrocketing and non-performing assets (in banks). In particular, the numbers suggest a lot of companies aren’t exactly in a position to pay those debts. So, how would the consequences of a corporate debt induced crisis be different from the one which we would see in the sovereign case, and what could be its impact on the long run growth rate.

Gita Gopinath (GG): So…usually when you have a sovereign default, there is also a default by the private sector, and then usually also what happens is that the government will start nationalizing corporations . You don’t have that if it starts with the corporate sector. Now what could happen is that they might have a bailout….the sovereign government might come in…that creates problems of sovereign debt and we might see the opposite kind of problems, which is what a lot of Europe is suffering from, which is basically the banks. My sense is that a bigger concern than corporations going under is the case where the banks fail. If it turns out that the level of corporate debt is so high that the banks are going to be affected that may lead to a banking crisis, then that has a much bigger effect on the economy than the case where just the corporations fail.

TE: The Indian Express, for instance, did a story on the NPAs and they put the numbers at somewhere close to one lakh forty thousand crore rupees. Where would you classify this: on a yellow-red zone setup?

GG: I think it still remains yellow. The growth prospects for India are quite good. It bothers me that investment still hasn’t become healthier. But it’s one of the few countries in the world showing 7% growth, and that’s good.

TE: The next question is a little bit of a cliché but it’s worth asking especially post your article on Project Syndicate. You have had some positive things to say about demonetization and also suggested a gradualist approach. It’s been over a month since the implementation, so what has been your overall assessment of it and how does demonetization impact the credibility of the rupee in the long term.

GG: When I wrote that piece, I said the one plus of doing it dramatically overnight is that maybe you can catch some people who are hoarding cash. But it looks like that’s not happening, (laughs) so in which case the gradualist approach looks even better. I think what they are doing since then about incentivizing digital payments and all of that (I think all of that is great), but that they could’ve done without demonetization. You don’t want to treat a cough with chemotherapy.

TE: From an international perspective, some people believe that the credibility of the rupee will go down.

GG: Certainly. While I don’t think there’s been a dramatic hit on the credibility. There certainly has been a negative reaction. You know, initially when it was announced, a lot of people in the U.S. were of the opinion that this was very interesting and India is trying to do something very brave. It’s a bit over-the-top but everybody somehow thought that the cash had already been printed, and there wouldn’t be a cash scarcity or rationing. I think overtime people realized that this was not what it was and there was all this rationing of cash and people literally not being able to withdraw cash or exchange their notes, and then it felt that this was not really the best conceived plan.

TE: Relating to the sovereign debt model that you presented in the second session, the ramifications of being in a high debt low endowment or a low debt high endowment sort of seemed obvious. But what is not so obvious is the combination of say low debt low endowment and high debt high endowment. What are the other factors that could possibly play a role and specifically, where you would place Greece in these combinations?

GG: Greece is high debt, low growth. In the model the only state variables are the level of debt and your endowment. So once you have that, you’ve described everything that you need to describe.

(Transcribed by Amritanshu Patnaik)



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