New Delhi: Austerity is not a solution to coronavirus crisis and India needs to offer more relief measures to households and businesses to sail through the pandemic-induced economic shock, said former Reserve Bank of India governor Raghuram Rajan.
Economic recovery could be slow in the absence of relief, while uncertainty about future nudges households towards precautionary saving rather than spending, Rajan said at a webinar hosted by Princeton’s Bendheim Center for Finance.
“Relief is extremely important because if you don’t have relief, the economic muscle is impaired and you cannot climb back when things turn around," said Rajan.
According to him, what probably keeps India from offering more stimulus measures is the fact that the country moved into the coronavirus crisis with a 9% fiscal deficit (Centre and states together) and the tendency of policy makers to take sovereign credit rating as a symbol of its economic management.
“This is not the typical emerging market crisis when austerity etc are the way you convey you fix things," Rajan said. With the coronavirus pandemic induced revenue shortfall and decline in gross domestic product (GDP), India’s fiscal deficit could scale 13-15% without significant additional spending, Rajan said, arguing that relief, repair and reform should be the priority for policy makers.
Experts said private healthcare was not a solution to the coronavirus pandemic and problems of hunger and housing have undermined people's condition. Building a robust publicly funded health system ought to be the imperative, according to Vikas Bajpai, assistant professor, Centre of Social Medicine and Community Health, at Jawaharlal Nehru University (JNU).
One area of policy reform needed, according to Rajan, is bankruptcy. The current model which is biased towards auctioning off even reasonably viable companies for default could be replaced with one which encourages more debt renegotiation without replacing existing management as the economic circumstances have now changed during the pandemic.
Rajan said suspending fresh bankruptcy cases was unfortunate as it's not necessarily viewed as a way of restructuring capital structure and ownership.
“India does need to look at this very carefully because there will be many distressed firms coming out and they need to be dealt with," he said. Rajan explained that having a fine-tuned bankruptcy system was important as banks, especially public sector lenders, are not willing to do out-of-court negotiations for debt restructure. Many operational creditors like material and service suppliers have been using India’s bankruptcy courts to recover their dues as change in control over the company is a real possibility under the current system.
“For India, transformational reforms are the only way. If you can’t offer relief and do repair, reform is the only way out," said Rajan. His suggestions about giving more relief to households and businesses are in sync with the industry’s suggestions for a second round of stimulus measures.
Following the calibrated opening up of the economy after a tough lockdown, leading indicators of business activity are retracing their path and green shoots of recovery are visible, but the spurt in covid-19 cases and the localised lockdowns could take a toll on industry’s performance, according to Dilip Chenoy, secretary general of industry chamber Federation of Indian Chambers of Commerce and Industry (Ficci). “More importantly, there is a need to strengthen demand in the economy," he said in a statement to Mint.
Rajan said central banks in Brazil, Indonesia and India have shown the willingness to help the government spend on relief but many governments did not seem to have gone for it. “Many small firms will fold up if they do not get relief. The relief in a pandemic is an attempt to keep the capital stock of an enterprise or the human capital in a family together and not providing that relief implies that the capital stock could be permanently damaged or lost," said Rajan.