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Govt needs to be scared out of complacency & Q1 contraction could do that, Raghuram Rajan says

Former RBI governor Raghuram Rajan says saving resources now for future use is self-defeating, ‘patient needs relief when sick, not after atrophy’.

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New Delhi: Former Reserve Bank of India governor Raghuram Rajan has said the GDP contraction in the first quarter of 2020-21 is alarming, and may hopefully frighten the government and bureaucracy out of their complacency and into meaningful activity.

The Indian economy had contracted by 23.9 per cent in the April-June quarter, led by a sharp contraction in construction, manufacturing, and hotels and transportation.

Rajan posted on social networking site LinkedIn Sunday night that the relief provided by the government has been meagre so far, and said the strategy to save resources today for future use is self-defeating.

“This (relief) has been meagre; 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,” Rajan said.

Without relief measures, he added, the growth potential of the economy will be seriously damaged, and that the GDP numbers will worsen once the extent of the damage on the informal sector is gauged.

Also read: India’s fiscal crisis can only get worse as tax revenue is seen dropping 12.5% in 2020-21

‘Relief needed when patient is sick, not when she atrophies’

Rajan, who is currently the Katherine Dusak Miller Distinguished Service Professor of Finance at The University of Chicago Booth School of Business, advocated higher allocations for MGNREGA, more direct cash transfers to the poorest of households and faster clearances of dues by government departments. He also pushed for providing adequate funding to state governments to undertake infrastructure expenditure and recapitalisation of state-run banks.

Rajan pointed out that India’s contraction is more severe than the worst Covid-hit countries like the United States and Italy, even more so because the pandemic is still raging in India. “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,” he said.

Likening the economy to a patient, Rajan said relief is needed when the patient is on a sickbed and is fighting the disease, and not when she atrophies.

“Now think of economic stimulus as a tonic. 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,” he said.

Rajan pointed out that even if the indebted households start earning, they will not consume freely if they are not assured of government support. Similarly, even small and medium firms that have stayed open but have huge unpaid bills and interest will not be able to function well, he said.

Also read: India is paying higher costs for its Covid crisis than we know yet

Rajan doubts India will see V-shaped recovery

Rajan said instead of claiming a V-shaped recovery, officials should wonder why the US, despite spending over 20 per cent of its GDP in fiscal and credit relief measures, is still worried the economy will not return to pre-pandemic levels by the end of 2021. He added that India needs strong growth, not just to satisfy the aspirations of our youth, but to keep its unfriendly neighbours at bay.

“So 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,” he said.

Chief Economic Advisor Krishnamurthy Subramanian had talked about India seeing a V-shaped recovery as people would start spending after months of holding back spending. The Union finance ministry has also talked about green shoots in the economy, and the possibility of seeing a V-shaped recovery.

Rajan, however, said the recent pick-up in sectors like automobiles is not evidence of 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, 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,” Rajan said.

Also read: Jolted by Q1 slump, economists rush to further lower GDP forecast for fiscal 2020-21

Govt will have to expand the resource envelope

Rajan dismissed the government officials’ stand that India cannot spend on both relief and stimulus due to the pre-pandemic growth slowdown and the government’s strained fiscal condition as “too pessimistic”.

“The government will have to expand the resource envelope in every way possible, and spend as cleverly as possible. It also has to take every action that can move the economy forward without additional spending. All this requires a more thoughtful and active government. Unfortunately, after an initial burst of activity, it seems to have retreated into a shell,” he said.

Rajan said India could borrow more without scaring the bond markets if it returns to fiscal viability over the medium term by committing to future debt reduction targets through legislation, and also opt for transparent fiscal numbers with a watchdog in the form of an independent fiscal council.

Rajan added the government should prepare public sector firm shares for on-tap sale as well as selling surplus land in prime urban areas. It will also need to come out with a well-thought out plan to address financial distress with payment moratoriums coming to an end, he said.

Also read: Govt finances deteriorating. Postpone fiscal deficit goals, make economics more transparent


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  1. The pattern of some “experts” airing views on known partisan grounds is a bit distressing. The narratives whatever merit they may have, sound shallow when the impression given is only they are right and everyone else is wrong. That, of course, is not right.
    We expect from these experts, who have been there and done it (Experts?), more equanimity. It is only then can hey get credibility and wider acceptability.
    E.g. Printing and distributing three trillion dollars by the US, has not really cheered the US economy.
    Tail piece: A big question is, do the people (Banks) have to pay for the mismanagement of Finances by the Companies?

  2. I don’t think there is any complacency on the part of the government. The economic team is simply not upto the task of mentoring the economy during peacetime, much less during war. And the sort of resources Dr Rajan is pleading to be spent are simply not there. The rating agencies have put the fear of God in us, which is a wonderful thing to happen.

  3. Dr. Rajan, please give another interview to All India Favourite Pappu.
    Then Pappu G can make a video in which he uses difficult words like strategy & strategically.

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