GDP Decreasing at an Alarming Rate, Government Must Focus on Taking Meaningful Actions: Raghuram Rajan

Citing the 23.9% contraction in GDP, Raghuram Rajan said that the situation requires a more active government that takes meaningful actions.

Decline in GDP is Frightening

The former RBI governor said that the estimate of GDP contraction would increase further once the data for damage in the informal sector is available. Further, he added that the economic activities have retreated into a shell after an initial burst. He opined that the government’s strategy of saving resources for future stimulus is self-defeating. Subsequently, the potential for economic growth will get damaged.

Also, he noted that the government’s strategy of waiting for containment of the pandemic to release stimulus indicates that it is underestimating the damage of a shrunken economy. Further, he explained that without relief and stimulus, people would skip meals, pull their children out of school, and let EMIs and rent arrears pile up. He also mentioned massive spending by Brazil on relief which lowered its medium-term downgrade than India.

Indian Economy Requires Both Relief and Stimulus

A professor of Finance, Rajan at the University of Chicago, explains that recovery of the auto sector is not evidence of V-shaped recovery. On the contrary, it reflects the repressed demand. Besides, the government’s mindset of unable to spend on both relief and stimulus is too pessimistic. The eminent economist added that India needs strong growth.

Government and PSUs Should Clear Payables

Rajan mentioned that India’s half baked reforms, including the recent suspension of labour protection laws, will do a little. Hence, he suggested that reforms can take the form of stimulus. Even if not immediate, a timelined undertaking can increase investment sentiments. Besides, exports are the right way for India’s growth as the world economies will recover faster than India. Also, he advised the government to prepare public sector firms’ shares for on tap sale, giving the advantage of buoyancy. Besides, urban land with public sector firms must be readied for sale.

Moreover, the government must clear their payables immediately to move liquidity to corporations. Stressing on the importance of MGNREGA, Rajan

said that these should be replenished quickly. Also, it must set aside resources to recapitalize public sector banks.

In all, COVID-19 is raging in India, and hence the government should provide both relief and stimulus to restore financial stability. 

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