India’s economy has sharply slowed in the past 12-15 months and as the country entered into a 21-day lockdown to curb the rapid spread of coronavirus, which has caused a havoc across the globe, any hopes of an expected recovery in 2020 were dashed. Most credit rating agencies have slashed their India GDP growth forecast; Moody’s, for instance, expects the economy to grow only 2.5 per cent this year.

“Economically speaking, India is faced today with perhaps its greatest emergency since Independence,” is how former Reserve Bank of India governor Raghuram Rajan sees it.

The immediate priority, he says, should be to suppress the spread of COVID-19 pandemic by widespread testing, rigorous quarantines and social distancing. The 21-day lockdown, he believes, is just the first step that will buy India time to improve its preparedness.

As a number of states continue to report new cases every day, many people worry if the lockdown will be extended beyond April 14. However, Rajan says it will be hard to lockdown the country entirely for much longer periods and there is, therefore, a need to plan for what happens after the lockdown, if the virus is not defeated.

One way would be to look at restarting certain activities in a few low-infection regions after taking adequate precautions, he feels. Separately, India will need to ensure the poor and non-salaried lower-middle class who are prevented from working for longer periods can survive. “We have already seen one consequence of not doing so--the movement of migrant labour. Another will be the people defying the lockdown to get back to work, if they can’t survive otherwise,” said Rajan, who is currently professor of finance at University of Chicago’s Booth School of Business.

He called for the state and the Centre to come together to figure out quickly some combination of public and NGO provision (of food, healthcare and sometimes shelter), private participation (voluntary moratoria on debt payments and a community-enforced ban on evictions during the next few months) and direct benefit transfers that will allow needy households to see through the next few months.

On March 26, Finance Minister Nirmala Sitharaman announced a Rs 1.7-lakh crore welfare stimulus for the poor and below poverty line people. However, the government is yet to come up with a huge stimulus for the various sectors of the industry. Even before the coronavirus crisis hit, the country had been facing a high fiscal deficit and shortfall in tax collections. So, clearly, the fiscal resources are limited to mount any big response. So, prioritising will be key.

Spending on the needy at this time is a high priority use of resources, the right thing to do as a humane nation, said Rajan.

However, the budgetary constraints can’t be ignored as the revenues will be severely affected this year. A spiralling fiscal deficit could raise worries of credit rating downgrades and loss of investor confidence, which in turn would lead to a plummeting exchange rate, dramatic rise in long-term interest rates and substantial losses for financial institutions.

“We have to prioritise, cutting back or delaying less important expenditures, while refocusing on immediate needs. At the same time to reassure investors, the government could express its commitment to return to fiscal rectitude, backing up its intent by accepting the setting up of an independent fiscal council and setting a medium-term debt target, as suggested by the N.K. Singh Committee,” said Rajan.

He says SIDBI could make the terms of its credit guarantee of bank loans made to small and medium enterprises even more favourable. The government could accept responsibility for the first loss in incremental bank loans made to a SME, up to a quantum of income taxes paid by the SME in the past year.

Large firms, which usually can raise money via bond markets, could also be a way to channel funds to small suppliers, he feels.

Banks, insurance companies and bond mutual funds should be encouraged to buy investment grade bond issuances and their way eased by the RBI agreeing to lend against their high quality bond portfolios through repo transactions, he said, adding government agencies and public sector undertakings should also pay their bills immediately to ensure liquidity in the private sector.

In the current scenario, Rajan does expect that the non-performing assets will rise, which will include retail loans, as unemployment rises.

“The RBI should consider imposing a moratorium on financial institution dividend payments so that they build capital reserves. Some institutions may, nevertheless, need more capital, and the regulator should be planning for that,” noted Rajan.

With so much to do, he says the government should call on people with proven expertise and capabilities to help manage the response, while also drawing in opposition members who have had experience in previous times of great stress.

“It is said that India reforms only in crises. Hopefully, this otherwise unmitigated tragedy will help us see how weakened we have become as a society, and will focus our politics on the critical economic and healthcare reforms we sorely need,” Rajan noted.





