Former Reserve Bank of India Governor Raghuram Rajan on Monday said that India’s dismal gross domestic product figures – a 23.9% contraction for the April to June quarter – should alarm everyone. He added that the government must be “frightened out of its complacency” and take action to put the economy back on track.
In a post on Linkedin, Rajan said that India’s economy had fared worse than the United States and Italy – two developed countries which have been severely hit by the coronavirus crisis. “The recently released GDP growth numbers for the first quarter of the financial year 2020-’21 should alarm us all,” Rajan said. “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 12.4% in Italy and 9.5% in the United States, two of the most Covid-affected advanced countries.”
Rajan warned that spending in India will remain weak till the coronavirus is brought under control. “India is even worse-off than these comparisons suggest,” Rajan added. “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.”
The former RBI governor said that the Centre’s relief measures had been insufficient. “This [government relief] has been meagre; primarily free foodgrains to poor households; and credit guarantees to banks for lending to small and medium firms, where the takedown has been patchy.”
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Rajan said that the government was reluctant do more in the present time because it wanted to conserve resources for a possible stimulus in the future. “This strategy is self-defeating,” Rajan said. “If you think of the economy as a patient, relief is the sustenance the patient needs while on the sickbed and fighting the disease.”
Rajan added: “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 [equated monthly installment] and rent arrears pile up...Similarly, without relief, small and medium firms – think of a small 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.”
The economist said that the economic stimulus was like a tonic. “When the disease is vanquished, it can help a patient get out of her sickbed faster,” Rajan said. “But if a patient has atrophied, a stimulus will have little effect.” Rajan said that Brazil has been spending significantly on relief measures and is seeing a much lower downgrade in comparison to India.
Rajan wrote that the Indian government’s belief that it cannot spend on both relief and stimulus was pessimistic. He advised the government to spend its resources in a more clever way. “It [the government] also has to take every action that can move the economy forward without additional spending,” he added. “All this requires a more thoughtful and active government. Unfortunately, after an initial burst of activity, it seems to have retreated into a shell.”
Rajan warned that the uptick in certain sectors like the automobiles was not proof of a 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 said. “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. If there is a silver lining in the awful GDP numbers, hopefully it is that.”
India is now the world’s second-worst coronavirus hit country. It has overtaken Brazil with a tally of 42,04,614 cases. More than 71,000 people have died of the infection in India.
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