India’s greatest economical emergency since Independence: Said Raghuram Rajan

He refers to this onboard economic crisis to be the Greatest Challenge for India in recent times.  

On this Monday, the RBI ex-governor Raghuram Rajan posted a note addressing the facts and measures that should be taken into consideration to fight the economic crisis after the COVID-19 Lockdown and further. 

He Proposes the idea of conducting significance tests in the Hotspot areas and setting up mobile resources to rush in the emergency times. The scenario after the lockdown is still uncertain. 

Steps that should be taken into account to control the Spread after lockdown period

Healthy youth, lodged with appropriate distancing in hostels near the workplace, maybe ideal workers for restarting. Of course, only a handful of employers will initially be able to ensure adequate worker safety, but they may be the largest employers. Since manufacturers need to activate their entire supply chain to produce, they should be encouraged to plan on how the entire chain will reopen. The administrative structure to approve these plans and facilitate movement for those approved should be effective and quick – it needs to be thought through now

The government should Plan for Needy, Low salaried and Poors.

In the meantime, India obviously needs to ensure that the poor and non-salaried lower middle class who are prevented from working for longer periods can survive. Direct transfers to households may reach most but not all, as a number of commentators have pointed out. Furthermore, the quantum of transfers seems inadequate to see a household over a month.

We have already seen one consequence of not doing so – the movement of migrant labor. Another will be people defying the lockdown to get back to work if they cannot survive otherwise.

Our limited fiscal resources are certainly a worry. However, spending on the needy at this time is a high priority use of resources, the right thing to do as a humane nation, as well as a contributor to the fight against the virus. This does not mean that we can ignore our budgetary constraints, especially given that our revenues will also be severely affected this year. Unlike the United States or Europe, which can spend 10% more of GDP without fear of a rating downgrade, we already entered this crisis with a huge fiscal deficit and will have to spend yet more.

Trades and Businesses are disturbed. Finance and Technology needs to work for hand by hand

“ A ratings downgrade coupled with a loss of investor confidence could lead to a plummeting exchange rate and a dramatic increase in long term interest rates in this environment, and substantial losses for our financial institutions. So we have to prioritize, 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 NK Singh committee.

Many small and medium enterprises, already weakened over the last few years, may not have the resources to survive. Not all can, or should, be saved given our limited fiscal resources. Some are tiny household operations, which will be supported by the direct benefit transfers to households. We need to think of innovative ways in which bigger viable ones, especially those that have considerable human and physical capital embedded in them, can be helped.

The Small Industrial Development Bank of India can make the terms of its credit guarantee of bank loans to SMEs even more favorable, but banks are unlikely to want to take on much more credit risk at this point. The government could accept responsibility for the first loss in incremental bank loans made to an SME, up to the quantum of income taxes paid by the SME in the past year.

This recognizes the likely future contribution of the SME to the government exchequer and rewards it with easier access to funds today. Of course, this helps the SME only if the lending bank is prohibited from directing the SME to use the guaranteed loan to repay the bank’s past loans” 

RBI has a Big Responsibility

Large firms can also be a way to channel funds to their smaller suppliers. They usually can raise money in bond markets and pass it on. Unfortunately, corporate bond markets are not very receptive to issues today. Banks, insurance companies, and bond mutual funds should be encouraged to buy new investment-grade bond issuances, and their way eased by the Reserve Bank of India agreeing to lend against their high-quality bond portfolios through repo transactions.

The RBI Act will have to be changed to enable the Reserve Bank to undertake these transactions, and it will have to apply suitable haircuts to these portfolios to minimize its credit risk, but it will be much-needed support to corporate borrowing. The government should also require each of its agencies and public sector units, including at the state level, to pay their bills immediately, so that private firms get valuable liquidity.

Finally, the difficulties in the household and corporate sectors will no doubt be reflected in the financial sector. The Reserve Bank has flooded the banking system with liquidity, but perhaps it needs to go beyond, for instance, lending against high-quality collateral to well-managed NBFCs. However, more liquidity will not help absorb loan losses. Non-performing assets will mount, including in retail loans as unemployment rises. The Reserve Bank 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.

Best Resources and Corporate, political Rivals needs to come together to make this happen.

There is much to do. The government should call on people with proven expertise and capabilities, of whom there are so many in India, to help it manage its response. It may even want to reach across the political aisle to draw in members of the opposition who have had experience in previous times of great stress like the global financial crisis. If, however, the government insists on driving everything from the Prime Minister’s Office, with the same overworked people, it will do too little, too late.

Once the government has the responsibility under control – and hopefully India’s hot temperatures and humidity will weaken the virus transmission – it has to rebuild hope. The economic outlook even before coronavirus had been weakening steadily, and the socio-political environment was deteriorating. Few would be enthusiastic about simply returning to that situation.

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.