Raghuram Rajan raises alarm over falling GDP data, calls for action

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Former RBI governor Raghuram Rajan
Former RBI governor Raghuram Rajan

New Delhi : The GDP data from Q1FY21 "should alarm us all," said former RBI governor Raghuram Rajan.

In a document post titled ‘The Alarm in the GDP Numbers’ shared via his LinkedIn account, Rajan pointed out that the 23.9 percent contraction in India’s GDP numbers “will probably be worse” when informal sector estimates are accounted for.

He compared the downfall with rest of the world specially pointing to Italy and United States which were also badly affected by coronavirus.

"Yet India is even worse off than these comparisons suggest. The pandemic is still raging in India, he said adding that government relief becomes "all the more important" but has been "meagre and patchy."

"If you think 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... by the time the disease is contained, the patient has become a shell of herself," he reasoned.

"Instead of claiming there is a V-shaped recovery round the corner, they should wonder why the US, despite spending over 20 percent of GDP in fiscal and credit relief measures, is still worried the economy will not return to pre-pandemic GDP levels by the end of 2021.

"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 … this requires a more thoughtful and active government. Unfortunately, after an initial burst of activity, it seems to have retreated into a shell," he added.

He also suggested options to the government for quick recovery:

- Replenishing of “tried and tested” MNREGA,

- Direct cash transfers to the poorest households, especially in urban areas without MNREGA,

- Quick clearance of government and public sector firm payables,

- Rebate in GST or corporate income tax for small and medium firms,

- Recapitalisation of public sector banks (PSBs),

- Encouragement of private sector to “give a helping hand”, where “cash-rich platforms like Amazon Reliance, and Walmart could help smaller suppliers get back on their feet, even funding them”, and

- All large firms should be incentivized to clear their receivables quickly

He also emphasised the need for a “well-thought-out plan to deal with the coming financial distress” as loan moratoriums come to an end. He suggested:

- Structures to help debtors and claimants such as landlords and banks reach agreements,

- Setting up of arbitration forums to renegotiate claims

- Support to civil courts, debt recovery tribunals, and the NCLT to provide rapid back-up judgments