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Steep fall in GDP alarming: Rajan

Reserve Bank Governor Raghuram G Rajan
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Reserve Bank Governor Raghuram G Rajan

Highlights

Says bureaucracy should come out of complacency, take meaningful action

New Delhi: Terming the 23.9 per cent fall in the economic growth in June quarter alarming, former Reserve Bank Governor Raghuram G Rajan has said bureaucracy should come out of complacency and take meaningful action.

The current crisis requires a more thoughtful and active government, he said, adding "unfortunately, after an initial burst of activity, it seems to have retreated into a shell".

"The sharp decline in economic growth should alarm us all. The 23.9 per cent 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 per cent in Italy and 9.5 per cent in the United States, two of the most Covid-19-affected advanced countries," Rajan wrote in a post on his LinkedIn page.

He further said the bureaucracy needs 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, currently a professor at the University of Chicago, said the Covid-19 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. The eminent economist pointed out that 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," he opined.

Emphasising on the importance of government relief or support in the current scenario, Rajan said," Without relief measures, the growth potential of the economy will be seriously damaged."

He said Brazil, which has spent tremendously on relief, is seeing a much lower downgrade to medium term growth than India.

"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," Rajan noted.

Citing an example, Rajan said if one thinks of the economy as a patient, relief is the sustenance the patient needs while on the sickbed and fighting the disease. "Without relief, households skip meals, pull their children out of school and send them to work or beg, pledge their gold to borrow, let EMIs and rent arrears pile up. Essentially, the patient atrophies, so by the time the disease is contained, the patient has become a shell of herself," he noted.

Rajan stressed that the recent pick-up in sectors like auto is not an evidence of the much awaited 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," he noted.

Rajan pointed out that because of the pre-pandemic growth slowdown and the government's strained fiscal condition, officials believe it cannot spend on both relief and stimulus. "This mindset is too pessimistic, but the government will have to expand the resource envelope in every way possible, and spend as cleverly as possible," he said.

Rajan suggested that on the resource front, India could borrow more without scaring the bond markets if it is committed to return to fiscal viability over the medium term. In addition to borrowing, he suggested that the government should prepare public sector firms' shares for on tap sale, to take advantage of every period of market

buoyancy.

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