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Raghuram Rajan On India's GDP And 5 Steps To Revive The Economy

The numbers will likely get worse once there are estimates of the damage in the informal sector, Rajan said.
India’s former Reserve Bank of India (RBI) Governor Raghuram Rajan
Adnan Abidi / reuters
India’s former Reserve Bank of India (RBI) Governor Raghuram Rajan

Former Reserve Bank Governor Raghuram Rajan called the 23.9% fall in India’s economic growth in the first quarter of FY20-21 “alarming” and said that the current crisis required a more thoughtful and active government.

“The sharp decline in economic growth should alarm us all. The 23.9% contraction in India (and the numbers will probably be worse when we get estimates of the damage in the informal sector) compares with a drop of 12.4% in Italy and 9.5% in the United States, two of the most COVID-19-affected advanced countries,“ Rajan wrote in a post on his LinkedIn page.

Rajan suggested that only silver lining to India’s GDP numbers was that it could frighten the government and its bureaucrats “out of their complacency and into meaningful activity”.

The former RBI governor stressed that the recent pick-up in sectors like auto was not an evidence of the much awaited V-shaped recovery.

“It reflects pent-up demand, which will fade as we go down to the true level of demand in the damaged, partially-functioning, economy,” he noted.

Here are the steps Rajan said the Indian government should take to help the economy recover:

1. Government-provided relief

The economist pointed out that the government’s reluctance to do more today seems partly because it wants to conserve resources for a possible future stimulus. “This strategy is self-defeating,” he opined.

Citing an example, Rajan said if one thinks of the economy as a patient, relief is the sustenance the patient needs while on the sickbed and fighting the disease.

“Without relief, households skip meals, pull their children out of school and send them to work or beg, pledge their gold to borrow, let EMIs and rent arrears pile up. Essentially, the patient atrophies, so by the time the disease is contained, the patient has become a shell of herself,” he said.

Rajan said economic stimulus would work as a tonic and called MNREGA a tried and tested means of providing rural relief which needed to be be replenished as needed.

“Given the length of the pandemic, more direct cash transfers to the poorest households, especially in urban areas that do not have access to MNREGA, is warranted,” he wrote.

2. Expand resources

“India could borrow more without scaring the bond markets if it committed to return to fiscal viability over the medium term – for example, by setting future debt reduction targets through legislation and committing to honest and transparent fiscal numbers with a watchdog independent fiscal council. In addition to borrowing, it should prepare public sector firm shares for on-tap sale, to take advantage of every period of market buoyancy. The current period of buoyancy already looks like a missed opportunity. Many government and public sector entities have surplus land in prime urban areas, and those too should be readied for sale. Even if sales do not take place immediately, preparations for sale, as well as an announced time table, will give bond markets greater conviction the government is serious about restoring fiscal stability,” Rajan said.

Rajan also said the government would have to set aside resources to recapitalise public sector banks as the extent of losses are recognised.

3. Clear payables quickly, provide rebates to corporations, small firms

Rajan said the government and public sector firms must clear their payables quickly so that liquidity moves to corporations.

Rebates on the corporate income and GST tax depending on firm size would help small viable firms, he said.

“The private sector should also be urged to give a helping hand. Cash-rich platforms like Amazon, Reliance, and Walmart could help smaller suppliers get back on their feet, even funding some of them. All large firms should be incentivised to clear their receivables quickly,” he wrote.

4. Plan to deal with financial distress

Rajan said the government need to plan for financial distress when various entities would be unable to pay as payment moratoria come to an end.

His suggestions to combat this included: a variety of structures to help debtors and claimants reach agreements to restructure obligations, arbitration forums set up to renegotiate claims of various sizes and beefed up civil courts, debt recovery tribunals and the NCLTs to provide rapid back-up judgments.

5. Reforms as stimulus

Rajan said that reforms, even if they are not undertaken immediately, could boost current investor sentiment.

“The world will recover earlier than India, so exports can be a way for India to grow,” he wrote.

His suggestions for this included reversal of recent tariffs increases so inputs could be imported at a low cost and implementation of “long-debated reforms to land acquisition, labor, power” and in agriculture.

“Temporary half-baked ‘reforms’, such as the recent suspension of labor protections in a number of states, will do little to enthuse industry or workers, and give reforms a bad name,” he said.

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This article exists as part of the online archive for HuffPost India, which closed in 2020. Some features are no longer enabled. If you have questions or concerns about this article, please contact