New Delhi: Calling the 23.9% drop in economic growth in the June quarter alarming, former Reserve Bank Governor Raghuram Rajan has said the bureaucracy should grow out of complacency and take meaningful action.
The current crisis requires a more thoughtful and active government, he said, adding that “sadly, after an initial burst of activity, it appears to have retreated into a shell.”
“The sharp drop in economic growth should alarm us all. The 23.9% contraction in India (and the numbers will likely be worse when we get estimates of the damage in the informal sector) compares with a 12.4% drop in Italy and 9.5% in the United States, two out of the most COVID-19 advanced countries affected, ”Rajan wrote in a post on his LinkedIn page.
He further said that the bureaucracy must “be scared of their complacency and do meaningful activity. If there is a silver lining to the terrible GDP figures, hopefully that is it. “
Rajan, who is currently a professor at the University of Chicago, said that the COVID-19 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.
The eminent economist noted that the government’s reluctance to do more today appears partly because it wants to conserve resources for a possible future stimulus. “This strategy is counterproductive,” he said. Emphasizing the importance of government aid or support in the current scenario, Rajan said: “Without aid measures, the growth potential of the economy will be seriously damaged.”
He said Brazil, which has spent a lot on aid, is seeing a much smaller downgrade to medium-term growth than India.
“So government officials who hold 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,” Rajan noted.
Citing one example, Rajan said that if one thinks of the economy like a patient, relief is the sustenance that the patient needs while on the sickbed and fighting 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 IMEs and rent arrears accumulate. Essentially, the patient atrophies, so when the disease is contained, the patient has become a shell of himself, ”he noted.
The former RBI governor further said that if one thinks of the economic stimulus as a tonic, “when the disease wears off, (the stimulus) can help the patient get out of their sickbed faster. But if the patient has atrophied, the stimulus will have little effect. “
Rajan emphasized that the recent recovery in sectors such as automobiles is not evidence of the long-awaited V-shaped recovery. partially, “he said.
Rajan noted that due to the slowdown in pre-pandemic growth and the government’s strained fiscal situation, officials believe it cannot spend both on aid and stimulus. “This mentality is too pessimistic, but the government will have to expand the resource endowment in every way possible and spend in the smartest way possible,” he said, adding that it must also take all measures that can move the economy forward without additional costs. .
“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, ”added the former RBI governor.
Noting that India needs strong growth, not only to meet the aspirations of the country’s youth, but to keep its hostile neighbors at bay, Rajan said that temporary “reforms” half-done, such as the recent suspension of the country’s Labor protection in several of the states will do little to excite industry or workers and give reforms a bad name.
He also suggested that reforms can be a form of stimulus, and even if they are not carried out immediately, a timetable for undertaking them can boost current investor sentiment. “The world will recover before India, so exports can be a way for India to grow,” he said.
Rajan suggested that on the resources front, India could borrow more without scaring the bond markets if it commits to return to fiscal viability in the medium term. In addition to borrowing, he suggested that the government should prepare the shares of public sector companies for immediate sale, to take advantage of each period of market dynamism.
“Many government and public sector entities have surplus land in privileged urban areas, and that too should be ready for sale. Even if the sales are not made immediately, the preparations for the sale, as well as the announced timetable, will give the bond markets a greater conviction that the government is serious about restoring fiscal stability, ”Rajan said.
Noting that the MGNREGA is a tried and true means of providing rural aid and should be replenished as needed, he said that given the duration of the pandemic, a more direct cash transfer to the poorest households, especially in urban areas that do not They have access to the MGNREGA, It is justified.
The eminent economist emphasized that the government and public sector companies must settle their accounts payable quickly so that the liquidity is transferred to the corporations. In addition, he suggested that small businesses below a certain size could be reimbursed for the corporate income tax and GST they paid last year (or a portion of it), and that the reimbursement decreases 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.
“Ultimately, the government will probably have to set aside resources to recapitalize public sector banks as the extent of the losses is recognized,” Rajan said.
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