Monday, 7 September 2020
No gain for India in holding back stimulus measures for future: Raghuram Rajan
Raghuram Rajan. (Photo: Reuters)
Noted economist and former Reserve Bank of India governor Raghuram Rajan has expressed serious concern over India’s historic GDP fall in the first quarter of 2020-21.
Rajan said the -23.9 per cent GDP recorded in the first quarter of the year is alarming for the country and added that economic growth may further worsen after revised GDP data accounts for losses in the informal sector.
The 57-year-old economist opined in an article that India’s GDP fall is far worse in comparison to other economies that have been severely affected by the coronavirus pandemic.
GOVT-PROVIDED RELIEF ESSENTIAL
Raghuram Rajan said the ongoing pandemic-induced economic crisis is likely to worsen in India as it has taken a toll on discretionary spending. He explained that spending by Indians is likely to remain low till the pandemic is contained.
Rajan said that “government-provided” relief measures are essential for helping the Indian economy stabilise.
He went on to say that government-provided relief, which included free food grains to poor households and credit-guarantees to banks for loans to MSMEs, has been meagre.
The former RBI governor said the government needs to change its approach and added that it should not be reluctant to announce more fiscal measures. He said the strategy of conserving resources for a possible fiscal stimulus in future is “self-defeating”.
Rajan highlighted scenarios of how India’s middle class may further cut down spending to tackle the crisis if help is not provided. He went on to add that SMEs such as small restaurants will stop paying workers, let debt pile up and may even shut shop if stimulus is not provided directly.
“Without relief measures, the growth potential of the economy will be seriously damaged,” wrote Rajan. He gave the example of Brazil which has spent significantly on relief measures.
He also advised government officials — who claimed that India is heading for a V-shaped recovery — to take a hard look into the situation.
Giving an example of the US economy, he asked India’s government officials to wonder why the biggest economy in the world continues to worry about growth despite spending 20 per cent of GDP in fiscal and credit relief measures.
Raghuram Rajan said government officials in India are holding back on additional stimulus measures as they are worried about the government’s strained financial condition. However, he feels the mindset is “too pessimistic”.
Rajan wrote that the government will need to spend “as cleverly as possible” to have a positive impact on the economy. He added that the government has to take “every action that can move the economy forward” without additional spending.
“All this requires a more thoughtful and active government. Unfortunately, after an initial burst of activity, it seems to have retreated into a shell,” Rajan opined.
Rajan said India could boost confidence in the bond markets by announcing measures to show that it serious about restoring fiscal stability.
But the economist said government spending holds the key to India’s economic stability. He said the government needs to put more cash in the hands of poorest households in the country, especially those in urban areas, where there is no access to MNREGA.
He also advised the government and public sector firms to clear their payables quickly so there is no disruption in liquidity to corporations.
Small firms should also be helped through increased tax rebates, according to Rajan. He added that the government will also have to set aside resources to recapitalise public sector banks.
In fact, Rajan suggested that major private sector companies in India, including major cash-rich platforms like Reliance, Amazon and Walmart could help small suppliers find their footing.
He went on to say that the government also needs to increase investments in specific job-creating sectors like infrastructure. This will not only create jobs but also increase demand for all manner of inputs like cement and steel.
Rajan also added that the Centre should “replenish” the coffers of state governments, which generally spend more on infrastructure. He said there is a need to boost current investor sentiment and announcing some future reforms could help in the process.
Exports, too, could help India regain lost growth momentum, added Rajan. However, for that to happen, the government has to lower tariffs so inputs can be imported at a lower cost.
In conclusion, Rajan said India needs strong growth just to satisfy the aspirations of its vast population of youngsters.
He again warned that India’s recovery in certain sectors in not a sign of a V-shaped recovery and only reflects pent-up demand, which is likely to fade away if the economy remains battered.
Rajan now hopes that the dismal GDP figures will be a wake up call for the government, which has to act quickly to prevent the economic crisis from deteriorating further.