The recently released quarterly GDP growth numbers for the first quarter of FY2020-21 should alarm us all, said former RBI chief Raghuram Rajan, adding that the government and its bureaucrats need to be frightened out of their complacency and into meaningful activity. He was responding via a LinkedIn post to India's economy suffering its worst slump on record in April-June, with the gross domestic product (GDP) contracting by 23.9 per cent as the coronavirus-related lockdowns weighed on the already-declining consumer demand and investment.
The GDP contraction in the world's fifth-largest economy compared with 3.1 per cent growth in the preceding January-March quarter and 5.2 per cent expansion in the same period a year back, according to official data released on Monday. This is the sharpest contraction since quarterly figures started being published in 1996 and worse than what was expected by most analysts.
Rajan stated that the recent pick-up in sectors like autos is not evidence of the much awaited V-shaped recovery, but that it reflected pent-up demand, which will fade as the the numbers descend to the true level of demand in the damaged, partially-functioning, economy.
"The 23.9 percent 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 percent in Italy and 9.5 percent in the United States, two of the most COVID-affected advanced countries. Yet India is even worse off than these comparisons suggest," he wrote.
He said that government-provided relief becomes all the more important. "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. If you think of the economy as a patient, relief is the sustenance the patient needs while on the sickbed and fighting the disease. Brazil, which has spent tremendously on relief, is seeing a much lower downgrade to medium term growth than India."
"On the resource front, India could borrow more without scaring the bond markets if it committed to return to fiscal viability over the medium term – for example, by setting future debt reduction targets through legislation, and committing to honest and transparent fiscal numbers with a watchdog independent fiscal council."
He said that reforms and rural relief were urgently needed. "Turning to government spending, the key will be to prioritise. MNREGA is a tried and tested means of providing rural relief and should be replenished as needed. Given the length of the pandemic, more direct cash transfers to the poorest households, especially in urban areas that do not have access to MNREGA, is warranted. The government and public sector firms should clear their payables quickly (something that has been talked about for years) so that liquidity moves to corporations. To improve our competitiveness, long debated reforms to land acquisition, labor, power, and the financial sector should be implemented, as should recently announced reforms in agriculture."
Rajan urged for a massive stimulus, especially investment in infrastructure construction which creates jobs and increases demand for all manner of inputs like cement and steel. "The Centre should replenish the coffers of the state governments, which typically spend more on infrastructure. This can be accounted for as part of the GST dues the center owes the states. In addition, the Centre should notify shelf-ready projects that are in the National Infrastructure Pipeline for implementation. Given the lead time for such spending, all this should happen now. Reforms can be a form of stimulus, and even if not carried out immediately, a timeline to undertake them can boost current investor sentiment. The world will recover earlier than India, so exports can be a way for India to grow. For that to happen, the government has to reverse its recent raising of tariffs so that inputs can be imported at low cost. Once it resets tariffs, the government should make it harder to change them at whim, else firms will not have the confidence to invest in export production, given how competitive the world is."
