In a blog titled 'Perhaps India’s Greatest Challenge in Recent Times', former Reserve Bank of India (RBI) governor and economist Raghuram Rajan has laid out the possible ways to face the huge economic crisis that India may be facing due to the measures taken to curb the spread of the novel coronavirus.
"Economically speaking, India is faced today with perhaps its greatest emergency since Independence," he wrote. According to a report published last week, India is possibly going to risk as many as 13.6 crore jobs due to Covid-19.
"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," Rajan said.
Urging the government to start planning the measures that shall be taken post the virus is controlled, the economist wrote, "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, Rajan suggested that healthy youth may be lodged with appropriate distancing in hostels near the work place.
"Since manufacturers need to activate their entire supply chain to produce, they should be encouraged to plan on how the entire chain will reopen. The administrative structure to approve these plans and facilitate movement for those approved should be effective and quick – it needs to be thought through now," he wrote.
Talking about the need to pay immediate attention to the poor and non-salaried, he said, "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."
He also expressed concerns about India's fiscal deficit.
"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.
India had come under criticism for spending too little for economic relief of the needy.
While explaining India's budgetary constraints, Rajan 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."
A ratings downgrade coupled with a loss of investor confidence can possibly lead to a plummeting exchange rate and a dramatic increase in long term interest rates in this environment, and substantial losses for our financial institutions.
"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," he wrote.
Regarding the need to save small and medium enterprises (SME) he wrote, "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."
"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."
India's former RBI governor 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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