Former Reserve Bank of India governor Raghuram Rajan has raised an alarm over the state of the Indian economy, seeing the impact of the coronavirus pandemic and the resultant lockdown across countries as the “greatest emergency” this country has faced since it became independent. Rajan posted a note on his LinkedIn page on 5 April, suggesting some measures that he believed would help the country check the slide.
While India is in the midst of a 21-day nationwide lockdown, the halt in domestic businesses as well as in global economies may pull the GDP growth down sharply. According to Fitch Ratings, the growth could fall to a 30-year low of 2% in 2020-21.
The former RBI governor acknowledged that the lockdown was necessary. “The 21-day lockdown is a first step, which buys India time to improve its preparedness. The government is drawing on our courageous medical personnel and looking to all possible resources — public, private, defence, retired — for the fight, but it has to ramp up the pace manifold,” he said, adding that the country will have to significantly increase the number of COVID-19 tests to reduce the fog of uncertainty as regards where the hot spots are.
Rajan wrote: “Economically speaking, India is faced today with perhaps it’s (the) greatest emergency since independence… While the immediate priority is, of course, to suppress the pandemic’s spread and improve preparedness, we should now plan for what happens after the lockdown.”
Rajan said it would be tough to keep the economy locked down any longer. Administrations, he advised, needed to start thinking about restarting certain activities in regions away from contagious areas with proper precautions. “While only a handful of employers would be able to take the measures required when restarting work, they may be the largest employers,” he said, adding that the government must make a roadmap to enable manufacturers to re-activate their supply chains.
The former RBI governor used to enjoy a massive fan following among the right-of-centre economic thinkers while he was on the job whereas the opposition used to take advantage of his proclivity to give statements, which often worked to the disadvantage of the Narendra Modi government. This was believed to be a reason why he did not get another term as the RBI head, much as a second term for an individual in that position has been rare.
Rajan proposes package govt has already unveiled
The lockdown has affected the poor and the non-salaried lower middle class the most and, therefore, Rajan suggests a combination of state intervention, private participation and direct transfers — which the government is doing already. When the former RBI governor says the state and the centre must come together to promptly figure out a combination of public and NGO provisions for food, healthcare and in some cases, shelter, even that has been done.
The Indian government has also announced voluntary moratoria on debt payments, which the economist proposes.
What is novel in Rajan’s recipe is a community-enforced ban on evictions in the next few months by the private sector.
Rajan says that direct benefit transfers may not reach all who are needy. Influenced by the hoopla in the media over migrant labourers’ migration, where they did not report the mischief of certain politicians who had misled them, he said. “We have already seen one such consequence — the movement of migrant labour. Another would be people defying the lockdown to get back to work if they cannot survive otherwise.”
Rajan did acknowledge the government’s fiscal support package of Rs 1.7 lakh crore, equivalent to 0.8% of the GDP, but he pointed out that other countries had announced large support packages. “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,” he wrote but added that budgetary constraints couldn’t be ignored.
Revenues will be severely impacted this year, the former RBI governor said.
Rajan wants expenditure to be prioritised. He urged the government to push less critical spending back. To keep investors motivated, the government may say it is returning to fiscal rectitude and back its intent by setting up an independent fiscal council.
‘Support for small enterprises, innovation by corporates’
Many weakened small and medium businesses may not have the resources to survive, Rajan said. “Not all can, or should, be saved given our limited resources.”
However, larger enterprises must design innovative ways to survive, where the government could do a bit of handholding, Rajan believes. SIDBI, he believes, should make the terms of its credit guarantee of bank loans more customer-friendly. However, banks are not likely to take on more credit risk, Rajan acknowledged.
The economist recommended that the government accepts “first loss” in incremental bank loans up to the volume of the income tax SMEs paid the last year.
The former RBI governor said that one manner in which the money could be channelled was through larger corporations who they served. He advised the corporations to raise funds through bond markets. He wrote that he recognises that the appetite was low at this point.
How RBI must act
The economist believes the RBI Act needs to be changed to allow the above. The central bank, its former governor said, needed to apply suitable haircuts to account for the credit risk.
Rajan warned that the difficulties in the household and corporate sector will no doubt spill over to the financial sector.
The economist said the RBI flooding the system with liquidity was not enough. He suggested that the RBI lend against high-quality collateral to well-managed NBFCs.
Rajan urged the RBI to consider imposing a moratorium on financial institution dividend payments. This will build capital reserves, he holds. The RBI should plan for institutions that may still need capital.
Does Rajan want to return?
Perhaps hinting that he wanted to return and be in the thick of things, Rajan ended his LinkedIn note by saying the government ought to invite people with proven expertise and capabilities at a time like this. “If, however, the government insists on driving everything from the PMO (Prime Ministers’ Office), with the same overworked people, it will do too-little-too-late,” he said.
Rajan observed that the economy was going downhill even before the coronavirus pandemic. Few would be enthusiastic about returning simply to that situation, he noted. “It is said 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.”