The 23.9% contraction in GDP growth numbers for the first quarter of FY 2020-21 “should alarm us all” and the government and its bureaucrats need to be “frightened out of their complacency” and into meaningful activity, former Reserve Bank of India Governor Raghuram Rajan said in a LinkedIn post.
With discretionary spending expected to stay low until the virus is contained, government-provided relief becomes all the more important, Mr. Rajan said, adding that the government’s reluctance to do more today to conserve resources for a possible future stimulus is a “self-defeating” strategy.
“Without relief measures, the growth potential of the economy will be seriously damaged,” he said.
Mr Rajan said that the 23.9% contraction in India, which will probably be worse when estimates of the damage in the informal sector come out, compares with a drop of 12.4% in Italy and 9.5% in the United States — two of the most COVID-19-affected advanced countries.
“Yet India is even worse off than these comparisons suggest. The pandemic is still raging in India, so discretionary spending, especially on high-contact services like restaurants, and the associated employment, will stay low until the virus is contained,” he said.
“Government-provided relief becomes all the more important. This has been meagre; primarily free food grains to poor households; and credit guarantees to banks for lending to small and medium (SMEs) firms, where they take down has been patchy,” Mr Rajan added.
“Essentially, the patient atrophies, so by the time the disease is contained, the patient has become a shell of herself. Now think of economic stimulus as a tonic. When the disease is vanquished, it can help the patient get out of her sickbed faster. But if the patient has atrophied, the stimulus will have little effect,” he said.
Even if people start earning, indebted households will not consume freely, especially if they believe they have to manage further periods without livelihoods or government help. Similarly, even small and medium firms that have stayed open but have huge unpaid bills and interest will not be able to function well.