Reserve Bank of India’s former Governor and renowned economist Raghuram Rajan has stated that the country is facing the greatest Economic Emergency since Independence. In a new blog titled ‘Perhaps India’s Greatest Challenge in Recent Times’, Rajan urged the Union Government to start planning the measures that shall be taken after the novel Corona Virus is controlled. He also cautioned the government that people will break the lock down if they cannot survive.
Raghuram Rajan wrote, “Economically speaking, India is faced today with perhaps its greatest emergency since Independence.” Explaining how this is different from the previous crisis and why this is the greatest crisis since Independence, he said, “The global financial crisis in 2008-09 was a massive demand shock, but our workers could still go to work, our firms were coming off years of strong growth, our financial system was largely sound, and our government finances were healthy. None of this is true today as we fight the coronavirus pandemic.”
GDP
India is currently facing its 21-day nationwide lockdown. The sudden stop across local businesses and major global economies could pull down GDP growth sharply. Fitch Ratings estimates that growth could fall to a 30-year low of 2 percent in 2020-21.
Measures To Be Taken
In his blog, Rajan urged the government to start taking necessary steps after controlling the Corona Virus. “We should now plan for what happens after the lockdown, if the virus is not defeated. It will be hard to lock down the country entirely for much longer periods, so we should also be thinking of how we can restart certain activities in certain low-infection regions with adequate precautions.” In order to restart the economy, the former Governor of Reserve Bank of India suggested that healthy youth may be lodged with appropriate distancing in hostels near the work place. He said administrations need to start thinking about restarting certain activities in low infection regions with adequate precautions.
Poor & Non-Salaried
Rajan stressed the need to pay immediate attention to the poor and non-salaried. He wrote, “Direct transfers to households may reach most but not all, as a number of commentators have pointed out. Furthermore, the quantum of transfers seems inadequate to see a household through a month… We have already seen one consequence of not doing so – the movement of migrant labour. Another will be people defying the lockdown to get back to work if they cannot survive otherwise.”
Fiscal Deficit
Rajan has also expressed concerns about India’s fiscal deficit. He wrote, “Our limited fiscal resources are certainly a worry. However, spending on the needy at this time is a high priority use of resources, the right thing to do as a humane nation, as well as a contributor to the fight against the virus.”
Budgetary Constraints : Cutting Down Less Important Expenditures
Explaining India’s budgetary constraints, the former governor of RBI said, “Unlike the United States or Europe, which can spend 10 per cent more of GDP without fear of a ratings downgrade, we already entered this crisis with a huge fiscal deficit, and will have to spend yet more. So we have to prioritise, cutting back or delaying less important expenditures, while refocusing on immediate needs. At the same time, to reassure investors, the government could express its commitment to return to fiscal rectitude, backing up its intent by accepting the setting up of an independent fiscal council and setting a medium term debt target, as suggested by the NK Singh committee.”
SMEs
In order to save the small and medium enterprises (SME), Rajan suggested, “Many SMEs, already weakened over the last few years, may not have the resources to survive. Not all can, or should, be saved given our limited fiscal resources. Some are tiny household operations, which will be supported by the direct benefit transfers to households. We need to think of innovative ways in which bigger viable ones, especially those that have considerable human and physical capital embedded in them, can be helped.”
NBFCs and NPAs
“The RBI has flooded the banking system with liquidity, but perhaps it needs to go beyond, for instance, lending against high quality collateral to well-managed NBFCs. However, more liquidity will not help absorb loan losses. NPAs will mount, including in retail loans, as unemployment rises. The RBI should consider imposing a moratorium on financial institution dividend payments so that they build capital reserves.”
Reforms
Raghuram Rajan concluded his write-up by stating, “It is said that India reforms only in crisis. Hopefully, this otherwise unmitigated tragedy will help us see how weakened we have become as a society, and will focus our politics on the critical economic and healthcare reforms we sorely need.”
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