With official estimates revealing the worst-ever first quarter GDP contraction of 23.9 per cent, former Reserve Bank of India Governor Raghuram Rajan on Monday said the data “should alarm us all” and the government and bureaucrats need to be frightened out of their complacency and into meaningful activity.
In a LinkedIn post, Rajan contended that the Centre’s decision to conserve resources today for a possible future stimulus was a “self-defeating” strategy and government-provided relief was all the more important since discretionary spending would stay low until Covid-19 is contained.
“The recently released quarterly GDP growth numbers for the first quarter of FY 2020-21 should alarm us all. 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 of 12.4% in Italy and 9.5% in the US, two of the most Covid-affected advanced economies,” Rajan said.
“The pandemic is still raging in India. So, discretionary spending, especially on high-contact services like restaurants, and the associated employment, will stay low until the virus is contained,” the former RBI governor said.
Without relief measures, the growth potential of the economy would be seriously damaged, Rajan said, while highlighting the need expand the resource envelope and spend as cleverly as possible.
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“If you think of the economy as a patient, relief is the sustenance the patient needs while on the sickbed and fighting the disease. 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 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,” he said.
Rajan also said the mindset of officials that it could not spend on both relief and stimulus due to the pre-pandemic growth slowdown and the government’s strained fiscal condition was “too pessimistic”.
The government is ready with its second round of stimulus and has identified the “non-salaried middle class and small businesses” as the target audience. In mid-May, Sitharaman had announced five tranches of the Atmanirbhar package, adding up to an economic package of Rs 20 lakh crore. Much of it was liquidity support, with extra fiscal outgo by the Central government just a little over 1 per cent of GDP.
While reforms could be a form of stimulus, temporary half-baked reforms such as the suspension of labour protection in a number of states would do little to enthuse industry or workers, Rajan said in his post.
“The recent pick-up in sectors like autos is not evidence of the much awaited 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. No doubt, GoI 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,” he concluded.
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