India’s GDP Data Should ‘Alarm’, Says Raghuram Rajan

Raghuram Rajan, former governor of the Reserve Bank of India (RBI), speaks during a Bloomberg Television interview at the Jackson Hole economic symposium, sponsored by the Federal Reserve Bank of Kansas City, in Moran, Wyoming, U.S., on Thursday, Aug. 23, 2018. Photographer: David Paul Morris/Bloomberg

Former Reserve Bank of India Governor Raghuram Rajan said India's GDP data should “alarm” all of us. The reported 23.9% contraction in the economy is likely to worsen when informal sector data is accounted for, Rajan wrote in a post on his LinkedIn page on Sunday night.

The damage to the Indian economy is far worse than in the U.S. and Italy—two of the worst affected by the pandemic, said Rajan, adding 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.

Raghuram Rajan, Former RBI Governor

This relief from the government has been meagre, Rajan said.

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.

If you think of the economy as a patient, relief is the sustenance the patient needs while on the sickbed and fighting the disease, he 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.

Raghuram Rajan, Former RBI Governor

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 said. He added that public sector firms should be prepared for on-tap share sales to make use of periods of market buoyancy. “The current period of market buoyancy already looks like a missed opportunity.”

An equally key task will be to prioritise government spending. 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.

Each of these steps will be needed 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.

Raghuram Rajan, Former RBI Governor