SME Times News Bureau | 06 Apr, 2020
Former RBI Governor Raghuram Rajan has said that due to the coronavirus
crisis, India currently faces the greatest economic emergency since its
independence.
He noted that although the global financial crisis in 2008-09 had a severe
impact on the country, economic activity was going on and India's financial
system was largely sound. Currently, none of the fundamentals are positive, he
observed.
"Economically speaking, India is faced today with perhaps its greatest
emergency since Independence. The global financial crisis in 2008-09 was a
massive demand shock, but our workers could still go to work, our firms were
coming off years of strong growth, our financial system was largely sound, and
our government finances were healthy. None of this is true today as we fight
the coronavirus pandemic," Rajan said in a note on LinkedIn.
He, however, said that there is no reason to despair and with the right resolve
and priorities, and drawing on India's many sources of strength, it can beat this
virus, and even set the stage for a much more hopeful tomorrow.
Rajan said that the immediate priority is to suppress the spread of the
pandemic through widespread testing, rigorous quarantines, and social
distancing.
"The 21-day lockdown is a first step, which buys India time to improve its
preparedness. The government is drawing on our courageous medical personnel and
looking to all possible resources -- public, private, defense, retired -- for
the fight, but it has to ramp up the pace manifold."
He said that tests will have to be done significantly increased to reduce
uncertainty on where the hot spots are, and some personnel and resources will
have to be kept mobile so that they can be rushed to areas where shortages are
acute.
Rajan also said that the country must plan now for what happens after the
lockdown if the virus is not defeated.
"It will be hard to lock down the country entirely for much longer
periods, so we should also be thinking of how we can restart certain activities
in certain low-infection regions with adequate precautions," the noted
economist said.
About the under-privileged who have suffered due to the lockdown, he noted that
India needs to ensure that the poor and non-salaried lower middle class who are
prevented from working for longer periods can survive. Direct transfers to
households may reach most but not all, as a number of commentators have pointed
out, he added.
Furthermore, the quantum of transfers seems inadequate to see a household
through a month, he said.
According to Rajan, the states and Centre have to come together to figure out
quickly some combination of public and NGO provision of food, healthcare, and
shelter, private participation, and direct benefit transfers that will allow
needy households to see through the next few months.
"We have already seen one consequence of not doing so - the movement of
migrant labour. Another will be people defying the lockdown to get back to work
if they cannot survive otherwise," he said in the note.
Rajan said that the country's limited fiscal resources are certainly a worry,
but spending on the needy at this time is a high priority use of resources.
"This does not mean that we can ignore our budgetary constraints,
especially given that our revenues will also be severely affected this
year," he said.
"A ratings downgrade coupled with a loss of investor confidence could lead
to a plummeting exchange rate and a dramatic increase in long term interest
rates in this environment, and substantial losses for our financial institutions.
"So we have to prioritise, cutting back or delaying less-important
expenditures, while refocusing on immediate needs. At the same time, to
reassure investors, the government could express its commitment to return to
fiscal rectitude, backing up its intent by accepting the setting up of an
independent fiscal council and setting a medium-term debt target, as suggested
by the N.K. Singh committee."
Large firms can also be a way to channel funds to their smaller suppliers. They
usually can raise money in bond markets and pass it on, he said, adding that
corporate bond markets are not very receptive to issues currently.
Banks, insurance companies, and bond mutual funds should be encouraged to buy
new investment-grade bond issuances, and their way eased by the Reserve Bank of
India agreeing to lend against their high-quality bond portfolios through repo
transactions.
The RBI Act will have to be changed to enable the central bank to undertake
these transactions, and it will have to apply suitable haircuts to these
portfolios to minimise its credit risk, but it will be a much needed support to
corporate borrowing, he said.
"The government should also require each of its agencies and public sector
units, including at the state level, to pay their bills immediately, so that
private firms get valuable liquidity," Rajan said.