Can Tonic Help After Patient Has Wasted Away? Rajan on Economy

Without relief, households would skip meals & children would be pulled out of schools to work or beg, said Rajan.

Government officials advocating the idea of injecting a stimulus package after India has fully contained the coronavirus pandemic are “underestimating the damage from a more shrunken and scarred economy” that the country could be left with, said former Reserve Bank of India Governor and notable economist Raghuram Rajan.

In a LinkedIn post, Rajan wrote that the news of India’s GDP falling by 23.9 percent in the first quarter of FY 2020-21 should “alarm us all” and that the drop will probably be worse when data estimates from the informal sector are made known.

Without Relief, Children Would Drop Out of Schools

According to Rajan, since discretionary spending on restaurants and other high-contact services is likely to remain low, government-provided relief measures have become “all the more important.” However, he contends that such relief measures have been meagre.

“This has been meager; primarily free food grains to poor households; and credit guarantees to banks for lending to small and medium (SMEs) firms, where the take down has been patchy. The government’s reluctance to do more today seems partly because it wants to conserve resources for a possible future stimulus. This strategy is self-defeating.”

Raghuram Rajan, former RBI governor

Comparing the economy to a patient, Rajan said “relief is the sustenance the patient needs while on the sickbed and fighting the disease.” Without it, he argued, entire households would be forced to skip meals, children would be taken out of schools and be sent to work or beg and EMIs would pile up.

Rajan maintained that without relief, small and medium enterprises, would stop paying workers, have debt piled up and could even close permanently. Rajan argued that by the time the pandemic is contained and the ‘tonic’ of economic stimulus is provided, it would already be too late as the patient would be wasted away.

“When the disease is vanquished, it can help the patient get out of her sickbed faster. But if the patient has atrophied, stimulus will have little effect. Even if they start earning, indebted households will not consume freely, especially if they believe they have to manage further periods without livelihoods or government help,” he added. 

Rajan’s Solutions

• Borrow more without scaring the bond markets by setting future debt reduction targets through legislation, and committing to honest and transparent fiscal numbers with a watchdog independent fiscal council.
• Prepare surplus land in prime urban areas under government & public sector entities for sale.
• Replenish MNREGA, more DBTs, especially for poor urban households without access to MNREGA.
• Rebate on corporate income or GST paid by small-firms last year.
• Set aside resources for recapitalisation of public sector banks.
• Private players like Amazon, Reliance, Walmart could help aid, fund smaller suppliers to recovery.

Since payment moratoriums are coming to an end, Rajan predicts that a number of entities will be unable to pay. For this, the government should come up with a variety of structures to help debtors and claimants like landlords and banks to “reach agreements to restructure obligations, including having unpayable amounts written off.”

In addition to this, Rajan said that “a number of arbitration forums should be set up to renegotiate claims of various sizes. Civil courts, debt recovery tribunals, and the NCLT should be beefed up to provide rapid back-up judgments.”