Former RBI Governor, Raghuram Rajan warns about India's GDP data

As per news source, former Reserve Bank of India Governor, Raghuram Rajan said that GDP of India should “alarm” all of us. In a LinkedIn post he wrote that the 23.9% contraction in the economy may even worsen when informal sector data is accounted for.

The damage to Indian economy is much more than compared to the two worst affected economies - U.S and Italy by the pandemic. He also added that the discretionary spending in India will remain weak until the virus is contained.

“The pandemic is still raging in India, so discretionary spending, specially on high contact services like restaurants, and associated employment, will stay low until the virus is contained. Government provided relief becomes all the more important,” said Raghuram Rajan, Former RBI Governor.

He highlighted that this relief from the government has been meagre.

The former RBI governor said the government’s strategy to conserve resources today for a possible future stimulus is “self-defeating”. “Government officials who hold out the possibility of a stimulus when India finally contains the virus, are underestimating the damage from a more shrunken and scarred economy at that point,” Rajan said.

“Without relief, households skip meals, pull their children out of school and send them to work or to beg, pledge their gold to borrow, let EMIs and rent arrears pile up. Similarly, without relief, small and medium firms-think of a restaurant-stop paying workers, let debt pile up or close permanently. Essentially, the patient atrophies, so by the time the disease is contained, the patient has become a shell of herself,” he said.

The belief that the government cannot spend on both relief and stimulus, is too pessimistic, Rajan said, highlighting the need to expand resources and spend cleverly.

“By setting future debt reduction targets through legislation and committing to honest and transparent fiscal numbers under an independent watchdog fiscal council, India could borrow more, Rajan highlighted. He added, “The current period of market buoyancy already looks like a missed opportunity.”

Rajan suggested the following:

· Replenish MGNREGA

· Given the length of the pandemic, provide more direct cash transfers to the poorest households, especially in urban areas.

· Government and public sector firms must quickly clear payables.

· Rebates could be provided on corporate income tax and GST paid by small firms last year.

· Resources should be set aside to recapitalise public sector banks.

· Cash rich platforms like Amazon, Reliance and Walmart should be urged to reduce receivables and pay small suppliers in a timely manner.

With the RBI provided loan moratorium now over, Rajan said the government should have a well thought-out plan to deal with the coming financial distress.

* A variety of structures should be in place to help debtors and claimants reach agreements to restructure obligations.

* A number of arbitration forums should be set up to renegotiate claims of various sizes.

* Civil courts, debt recovery tribunals and the NCLTs should be beefed up to provide rapid back-up judgments.

While reforms can be a form of stimulus, temporary half-baked reforms such as the suspension of labour protection in a number of states, will do little to enthuse industry or workers, he said.

The above mentioned steps are required to ensure that India returns to strong growth, which is needed to satisfy the aspirations of the youth and keep unfriendly neighbors at bay, said Rajan.

“The recent pick-up in sectors like auto is not evidence of the much awaited V-shaped recovery. It reflects pent-up demand and will fade as we go down to the true level of demand in the damaged, partially-functioning economy. No doubt, the government and its bureaucrats are working hard as always but they need to be frightened out of their complacency and into meaningful activity,” he said.