Former RBI Governor Dr Raghuram Rajan has said that the road to recovery for the Indian economy will be a long and arduous one. Dr Rajan and Dr Jayati Ghosh, former Chairperson of the Centre for Economic Studies and Planning at the Jawaharlal Nehru University, have also cautioned against believing that the Indian economy was back on track suggesting that the government hasn't done enough to mitigate the damage caused by the pandemic.
Dr Rajan and Dr Ghosh made these comments while speaking at a virtual panel discussion moderated by BOOM's Govindraj Ethiraj at the 2020 Tata Literature Live.
After the lows of the COVID-19 pandemic-induced slowdown in the March, the Indian stock markets have rebounded strongly and have recorded all-time highs in the last couple of weeks. Global investment banking and brokerage firm Morgan Stanley has projected that the Sensex will cross 50,000 points by December 2021. Building on the momentum, Goldman Sachs revised its growth forecast for India from -14.8% to -10.3% while Moody's trimmed its contraction estimates to -8.9% from -9.6%.
"I think the most important thing to remember is we entered this crisis with a very modest fiscal room partly as a result of significant fiscal mismanagement over the last decade," Dr Rajan said.
The former RBI governor stated that despite seeing pent-up demand, many firms will remain indebted and even go under leading to the growth potential of the economy shrinking. "It's a long road ahead. And the sooner we realise it's a long road ahead. A lot more needs to be done. And government has to be far more active than it has been so far. Until we realise that I think we will be much lower than we can afford," Dr Rajan added.
Dr Ghosh urged the government to increase spending so as to ensure consumers have money to spend thereby stimulating demand and supply.
"We have entered a pandemic in which the fiscal gap was already large. But in a situation like this, if you don't spend, you're actually making matters worse. The government has to spend to put money in the hands of those who would actually spend it and have large multiplier effects. If they don't, and they continue to spend less, that's the worst possible scenario and completely counterproductive.
"Because that actually means lower than anticipated economic activity, lower revenues, and therefore larger deficit anyway. The deficit to GDP ratio will rise even more because the GDP will not have risen. So, they are being counterproductive in the worst possible way. If ever, there was an absolute no-no time for austerity, it's now and governments across the world have recognised this" she said.
Despite the gloomy outlook of the economy, both Dr Rajan and Dr Ghosh agreed that the pandemic has provided the government an opportunity to reimagine how the Indian economy functions.
"The revival, obviously, in the first instance has to be based on demand, which is hugely influenced by existing programs like the employment guarantee. We have to make the employment guarantee (scheme) available to every adult and not per household, expand the number of days and introduce an urban employment guarantee (scheme)," Dr Ghosh said.
Dr Ghosh also called upon an increase in the provision of basic services, health and education which would also double up as employment generating opportunities with very strong multiplier effects.
"We need to change the direction of our economy in a more green and blue way that is more conserving of water, and more enabling of the new kinds of technologies that will mitigate climate change, allow us to adapt to climate change. It is also time to reimagine the food systems to make them more local sustainable, to encourage the distribution chains to develop in ways that do not destroy both health and ecology and to change the way to agriculture," she added.
Dr Rajan advocated for a decentralisation of governance and resources giving more decision-making powers to state and local governing bodies. "I have been emphasising the need to be decentralised far more. We are to larger country to be driven by centre. But also, the state governments have to decentralise far more to the local governments, to the panchayats who know what the real problem on the ground is. More local power means people have a greater sense that it's their responsibility, are willing to monitor what is done with the funds, are willing to act up if it's not spent properly. And that's really an energising of our democratic forces," he said.
The panel discussion, 'Emergency Room: How To Rescue India's Economy' can be watched below.