Raghuram Rajan in his post wrote that the growth numbers should alarm everyone. (Proceedings)
New Delhi:
The government and its bureaucrats must be frightened by their complacency and stimulus is critical to avoid a “stunted” economy, former RBI chief Raghuram Rajan said in a post in response to what he calls the alarming -23.9% of quarterly GDP. from India. Without relief measures, the economy’s growth potential would be “seriously damaged,” he said, noting that the government appeared to have retreated into a shell.
The growth figures should alarm everyone, Raghuram Rajan wrote in a LinkedIn post on Monday, suggesting that India is even worse compared to two of the advanced countries hardest hit by Covid that have also suffered a contraction: the United States and Italy. “The pandemic continues to ravage India, so discretionary spending, especially on high-touch services like restaurants, and associated employment, will remain low until the virus is contained. The relief provided by the government becomes even more important.” said.
“India needs strong growth, not just to meet the aspirations of our youth, but to keep our hostile neighbors at bay,” advised Rajan, now a professor at the University of Chicago.
“To be sure, the government and its bureaucrats are working hard as ever, but they need to scare themselves out of their complacency and into meaningful activity. If there is a silver lining to the dire GDP figures, hopefully that is it.”
The government’s reluctance to do more today appeared in part because it wants to conserve resources for a possible future stimulus, said the renowned economist, calling the strategy counterproductive.
“If you think about the economy like a patient, relief is the sustenance the patient needs while on the sickbed and battling the disease. Without relief, households skip meals, take their children out of school, and they 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 a small restaurant) stop pay workers, let debts pile up or close permanently. Essentially, the patient atrophies, so when the disease is contained, the patient has become a shell of herself, “said Mr. Rajan.
The financial stimulus, he said, was like a tonic, but “if the patient has atrophied, the stimulus will have little effect.”
The recent rally in sectors such as auto was not evidence of a V-shaped recovery, but reflects stifled demand that will fade “as we move down to the real level of demand in the damaged and partially functioning economy.”
“… government officials holding out the possibility of a stimulus when India finally does contain the virus are underestimating the damage from a smaller and scarred economy at the time,” said Rajan, who appears to be referring to the economic adviser’s comments. Principal Krishnamurthy Subramanian. . “Rather than claim that a V-shaped recovery is around the corner, they should ask themselves why the United States, despite spending more than 20 percent of GDP on fiscal and credit relief measures, remains concerned that the economy does not return to pre-pandemic GDP. ” levels by the end of 2021, “he said.
Rajan said the government needed to expand the resource endowment in every way possible, spend as wisely as possible, and take all measures without additional spending. “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.
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