Former Reserve Bank of India chief Raghuram Rajan has termed the ongoing coronavirus pandemic India’s greatest economic emergency since independence, adding that the current situation is more challenging than the 2008-09 financial crisis as the country’s finances were healthier than is the case now.
However, he expressed hope that India can fight the pandemic and “set the stage for a much more hopeful tomorrow.”
“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 wrote in a three-page LinkedIn post.
“Yet there is also no reason to despair. With the right resolve and priorities, and drawing on India’s many sources of strength, it can beat this virus back, and even set the stage for a much more hopeful tomorrow.”
In his post Rajan goes on to write a prognosis for the country post-lockdown. He conceives a plan where healthy youth can restart work to kickstart economy with necessary safeguards in place.
“Healthy youth, lodged with appropriate distancing in hostels near the work place, may be ideal workers for restarting. Of course, only a handful of employers will initially be able to ensure adequate worker safety, but they may be the largest employers.
“Since manufacturers need to activate their entire supply chain to produce, they should be encouraged to plan on how the entire chain will reopen.”
He goes on to add that to do so, the administrative structure has to be well thought out and that process should begin immediately. “The administrative structure to approve these plans and facilitate movement for those approved should be effective and quick – it needs to be thought through now.”
Rajan, who currently holds the Katherine Dusak Miller Distinguished Service Professor of Finance chair at the University of Chicago Booth School of Business, goes on to advocate direct benefit transfers and in sufficient amount for the poor and non-salaried to get through the lockdown.
He expresses concern about India’s fiscal health and how it limits the country’s resources to fight the pandemic.
”Our limited fiscal resources are certainly a worry. However, spending on the needy at this time is a high priority use of resources, the right thing to do as a humane nation, as well as a contributor to the fight against the virus. This does not mean that we can ignore our budgetary constraints, especially given that our revenues will also be severely affected this year.”
In such a situation, Rajan advises prioritisation as a viable course of action. “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 NK Singh committee.”
In Rajan’s prognosis, the central bank has a big role to play, including lending to well-managed non-banking finance companies.
“Finally, the difficulties in the household and corporate sectors will no doubt be reflected in the financial sector. The RBI has flooded the banking system with liquidity, but perhaps it needs to go beyond, for instance lending against high-quality collateral to well-managed NBFCs.”
He also advises the government to solicit help of “people with proven expertise and capabilities” from across political divide if need be.
“There is much to do. The government should call on people with proven expertise and capabilities, of whom there are so many in India, to help it manage its response.”
He adds that centralisation of power in a scenario like now is a recipe for disaster.
“It may even want to reach across the political aisle to draw in members of the opposition who have had experience in previous times of great stress like the global financial crisis. If, however, the government insists on driving everything from the PMO, with the same overworked people, it will do too little, too late.”
He also pins hope on hotter summer temperature in India to counter the contagion.
Rajan, ultimately hopes that the unfolding disaster will help the nation see how weakened it has become as a society and will eventually help in starting reforms “we sorely need.”“Hopefully, this otherwise unmitigated tragedy will help us see how weakened we have become as a society, and will focus our politics on the critical economic and healthcare reforms we sorely need.”