Rajan's take on GDP contraction

Globally-renowned economist and former governor of Reserve Bank of India Raghuram Govida Rajan is known for his accurate assessment of worldwide economic trends. Shot to global fame when he predicted 2008 global recession in advance, Rajan who is currently working as the Professor of Finance at the University of Chicago Booth School of Business sounded alarm bells on Monday about the steep contraction in India's economy during April-June this year.

As per official statistics, the country's economy witnessed a sharp 23.9 per cent decline during the three month period, the first quarter of our financial year. This decline is expected to go further down once data from the informal sector comes in. As he pointed out in his post in a social networking site, India's economic de-growth was far worse when compared to the US whose economy was down by just 9.5 per cent during the same period.

Interestingly, the US has more number of Covid cases as compared to India. Still, its economy saw lower decline. Even Italy, another developed country highly impacted by the pandemic, also fared better than India with a GDP contraction of 12.4 per cent. This shows how badly our country's economy is doing now.

Perhaps, that's the reason why Rajan, who worked as RBI governor from September 2013 to September 2016, underlined the need for the bureaucracy to come out of complacency and take meaningful actions to revive the economic activity. However, he cautioned that economic woes would continue to haunt India unless the pandemic is contained. The economist warned that without adequate relief measures, the growth potential of the economy would be seriously damaged. He wanted the government officials to announce relief measures immediately instead of waiting for the virus to subside.

As Rajan rightly suggested, the central government could expand its resource base by borrowing from the bond market. Further, it can disinvest stakes in public sector undertakings (PSUs). Besides, it can monetise prime lands owned by PSUs. The MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act, 2005) scheme could be used to boost economic activity in rural areas, thereby reviving consumption in hinterlands. More direct cash transfers are needed for the sustenance of the poor households in urban areas.

Furthermore, the central government and PSUs should immediately clear pending dues to MSMEs - a step that will for sure improve liquidity position in the market. Also, small firms should be offered exemption from last year's GST payment. The central government should also chalk out an effective plan to deal with financial stress among companies and individuals as moratorium on loan repayments came to an end. It should encourage cash-rich online platforms like Amazon to support smaller suppliers. All large private companies should also be asked to clear their payments to suppliers and small firms quickly.

These measures will definitely infuse life into the ailing economy and enhance confidence among people. At the same time, efforts should also be made to contain the spread of pandemic. It's an undeniable fact that the economic activity in the country will not pick up unless the pandemic is controlled effectively. Hope the central government takes Rajan's suggestions into consideration and initiates more proactive steps at the earliest to revive the economy at a faster pace.