Raghuram Rajan says relief, repair and reform should be the priority for policymakers
‘Absence of govt relief will push households towards precautionary savings rather than spending’
NEW DELHI :
Austerity is not the solution to the new coronavirus crisis, and India needs to offer more relief measures to households and businesses to sail through the pandemic-induced economic shock, said Raghuram Rajan, the former Reserve Bank of India governor.
Economic recovery could be slow in the absence of government relief as it impairs the ability of businesses to claw back to health, while future uncertainties will push households towards precautionary savings 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 turnaround," he added.
According to Rajan, what probably keeps the government from offering more stimulus measures is that India had moved into the coronavirus crisis with a 9% fiscal deficit (for both the Centre and states) and the tendency of policymakers to take sovereign credit ratings as a symbol of its economic management.
“This is not the typical emerging market crisis where austerity, etc., are the way to fix things," he said. With the covid-induced revenue shortfall and a decline in gross domestic product (GDP), India’s fiscal deficit could hit 13-15% without significant additional spending, Rajan said, adding that relief, repair and reform should be the priority for policymakers.
According to Rajan, one area for policy reform is bankruptcy. The existing model, which prefers auctioning off even reasonably viable companies for default, could be replaced with one that encourages more debt renegotiation without replacing the existing management, as the economic circumstances have changed during the pandemic.
Rajan said that suspending fresh bankruptcy cases was unfortunate as it views bankruptcy resolution as a punishment and not necessarily as a way of restructuring capital structure and ownership.
“India does need to look at this very carefully because there will be many distressed companies coming out and they need to be dealt with." Rajan explained that having a fine-tuned bankruptcy system was important as banks, especially public sector lenders, were not willing to go for out-of-court negotiations for debt restructuring.
Many operational creditors, such as material and service suppliers, have been using India’s bankruptcy courts to recover their dues as a change in control of a company is a real possibility under the existing system.
“For India, transformational reforms were the only way out. If you can’t offer relief and do repair, reform is the only way out," said Rajan.
His suggestions on giving more relief to households and businesses are in sync with the industry’s suggestions for a second round of stimulus measures. Following the phased reopening of the economy, key indicators of business activity are retracing their path, but the spurt in covid cases and the localized lockdowns can take a toll on industry’s performance, said Dilip Chenoy, secretary general, Federation of Indian Chambers of Commerce and Industry.