The government and its bureaucrats must be frightened by their complacency, says the former RBI governor
The 23.9% contraction in the GDP growth figures for the first quarter of the fiscal year 2020-21 “should alarm us all” and the government and its bureaucrats must “be scared of their complacency” and engage in significant activity, Former Reserve Bank of India Governor Raghuram Rajan said in a LinkedIn post.
With discretionary spending expected to remain low until the virus is contained, the relief provided by the government becomes even more important, Rajan said, adding that the government’s reluctance to do more today to conserve resources for a possible Future stimulus is a “defeat” strategy.
“Without aid measures, the growth potential of the economy will be seriously damaged,” he said.
Rajan said the 23.9% contraction in India, which is likely to be worse when estimates of damage in the informal sector come out, compares with a 12.4% drop in Italy and 9.5% in the United States, two of the most advanced countries affected by COVID-19.
“However, India is even worse off than these comparisons suggest. The pandemic is still ravaging India, so discretionary spending, especially on high-touch services like restaurants and associated employment, will remain low until the virus is contained, “he said.
“The aid provided by the government becomes even more important. This has been rare; mainly free food grains for poor households; and credit guarantees to banks to grant loans to small and medium-sized companies (SMEs), where the elimination has been irregular ”, added Rajan.
Explaining in more detail, the former RBI governor said that if you think of the economy like a patient, relief is the sustenance the patient needs while on the sickbed and fighting the disease. Without help, households skip meals, take their children out of school and send them to work or beg, pledge their gold to borrow, let EMIs and rent arrears pile up. Similarly, without help, small and medium-sized businesses, think of a small restaurant, stop paying workers, let debts pile up, or go out of business permanently.
“Essentially, the patient atrophies, so when the disease is contained, the patient has become a shell of himself. Now think of the economic stimulus as a tonic. When the disease is overcome, it can help the patient to get out of his sickbed faster. But if the patient has atrophied, the stimulus will have little effect, “he said.
Even if people start earning, indebted households will not consume freely, especially if they believe they have to handle more periods without livelihoods or government help. Likewise, even small and medium-sized businesses that have remained open but have huge unpaid bills and interest will not be able to do well.
He noted that Brazil, which has spent a lot on aid, is seeing a much smaller downgrade to medium-term growth than India. “So government officials offering the possibility of a stimulus when India finally does contain the virus are underestimating the damage of a smaller and scarred economy at the time.”
Rather than claiming that a V-shaped recovery is around the corner, Rajan said, they should ask why the United States, despite spending more than 20% of GDP on fiscal and credit relief measures, remains concerned about that the economy does not work again. GDP levels before the pandemic by the end of 2021.
‘Pessimistic mentality’
Stating that due to the pre-pandemic growth slowdown and the government’s strained fiscal situation, officials believe it cannot spend as much on relief as on stimulus, it said that this mindset is too pessimistic, but that the government will have to expand the endowment of resources in every possible way. and spend in the smartest way possible.
“You also have to take all the steps that can move the economy forward without additional expense. All of this requires a more thoughtful and active government. Unfortunately, after an initial burst of activity, it appears to have retreated into a shell, ”he said.
On the resources front, Rajan said, India could borrow more without scaring bond markets if it committed itself to returning to fiscal viability in the medium term, for example, by setting future debt reduction targets through debt relief. legislation and committing to being honest and transparent. fiscal numbers with an independent fiscal supervisory council.
In addition to borrowing, the government must prepare shares of public sector companies for immediate sale, to take advantage of each period of market dynamism. “The current buoyancy period already seems like a missed opportunity,” he said. Many government and public sector entities have surplus land in privileged urban areas, and that too must be ready for sale. Even if the sales are not made immediately, preparations for the sale, as well as an announced timetable, will give the bond markets greater conviction that the government is serious about restoring fiscal stability.
“Regarding public spending, the key will be to prioritize. MNREGA is a proven means of providing rural aid and must be replenished as needed. Given the duration of the pandemic, more direct cash transfers to the poorest households are justified, especially in urban areas that do not have access to the MNREGA, ”he said, adding that the government and public sector companies must settle their accounts by pay quickly so that the liquidity is transferred to corporations.
Additionally, small businesses below a certain size could be reimbursed for the corporate income tax and GST they paid last year, and the rebate will be reduced with the size of the business. “This would be an objective way to help viable small businesses based on a metric that is difficult to manipulate, even rewarding their honesty. Finally, the government will likely have to set aside resources to recapitalize public sector banks as the extent of the losses is recognized. “
He suggested that the private sector should also be encouraged to help. Cash-rich platforms such as Amazon, Reliance and Walmart, he said, could help smaller providers recover, even by financing some of them.
“All large companies should be encouraged to quickly settle their accounts receivable. As the various payment moratoriums come to an end, various entities will not be able to refund. Rather than react in a piecemeal manner, the government should have a well thought out plan to deal with the financial difficulties that lie ahead, ”he said, adding that a variety of structures should be put in place to assist debtors and claimants such as homeowners. and the banks reach agreements to restructure the obligations, including the cancellation of unpayable amounts.
Several arbitration forums should be created to renegotiate claims of different sizes. Civil courts, debt recovery courts and the NCLT should be strengthened to provide speedy support rulings, he recommended.
“Given the depth of the contraction, stimulus will also be needed, especially investment in the construction of infrastructure that creates jobs and increases demand for all kinds of inputs such as cement and steel. The center should replenish the coffers of state governments, which typically spend more on infrastructure. This can be counted as part of the GST fees that the center owes to the states, ”said Mr. Rajan.
He added that the Center must notify the projects ready for sale that are in the National Infrastructure Pipeline for their implementation. “Given the waiting time for such spending, all of this should happen now,” he said.
“Reforms can be a form of stimulus, and even if they are not carried out immediately, a timeline for undertaking them can boost current investor sentiment. The world will recover before India, so exports can be a form of growth for India. For that to happen, the government has to reverse its recent tariff hike so that inputs can be imported cheaply, ”he said.
Once the tariffs are restored, the government should make it difficult to modify them at will, otherwise companies will not have the confidence to invest in export production, given how competitive the world is, he said, adding that to improve our competitiveness, long-debated reforms. to the acquisition of land, labor, energy and the financial sector must be implemented, as well as the recently announced reforms in agriculture.
“Temporary” reforms “half-way, like the recent suspension of labor protections in several states, will do little to excite industry or workers, and will give reforms a bad name,” he said.
“India needs strong growth, not just to meet the aspirations of our youth, but to keep our hostile neighbors at bay. The recent rebound in sectors like auto is not evidence of the long-awaited V-shaped recovery. It reflects stifled demand, which will fade as we move down to the real level of demand in the damaged and partially functioning economy. To be sure, the government and its bureaucrats are working hard as ever, but they must be frightened of their complacency and do meaningful activity. If there is a positive side to the terrible GDP figures, it is to be expected that it is ”, he concluded.
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