The government must spend on the poor and delay less important expenditure to deal with the economic impact of the coronavirus pandemic, former RBI chief Raghuram Rajan has said, describing the situation as India's "greatest emergency since Independence" .
Rajan, in a blog post, cautioned that driving everything from the Prime Minister's Office may not be a suitable idea.
"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," Rajan said in the blog post called "India's Greatest Challenge in Recent Times".
He said due to the coronavirus crisis, India currently faces the greatest economic emergency since Independence.
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"The global financial crisis in 2008-09 was a massive demand shock, but our workers could still go to work, our firms were coming off years of strong growth, our financial system was largely sound, and our government finances were healthy."
"None of this is true today as we fight the coronavirus pandemic," Rajan, who completed his three-year term at the Reserve Bank of India (RBI) in 2016, noted.
He, however, asserted that with the right resolve and priorities, and drawing on India's many sources of strength, it can beat this virus back, and even set the stage for a much more hopeful tomorrow.
Laying out steps the country could take to recover from the economic effects of the Covid-19 outbreak, Rajan said the immediate priority is to suppress the spread of the pandemic through widespread testing, rigorous quarantines and social distancing.
"The 21-day lockdown is a first step, which buys India time to improve its preparedness. The government is drawing on our courageous medical personnel and looking to all possible resources -- public, private, defence, retired -- for the fight, but it has to ramp up the pace manifold," he said, adding that the country will have to significantly increase the number of Covid-19 tests to reduce the fog of uncertainty as regards where the hotspots are.
Rajan, a professor of finance at the University of Chicago Booth School of Business, suggested that India should now plan for what happens after the lockdown, if the virus is not defeated.
"It will be hard to lock down the country entirely for much longer periods, so we should also be thinking of how we can restart certain activities in certain low-infection regions with adequate precautions," he said.
Healthy youngsters, lodged with appropriate distancing in hostels near the workplace, may be the ideal workers for restarting such activities, Rajan pointed out.
About the under-privileged who have suffered due to the lockdown, he noted that India 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, he added.
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Furthermore, the quantum of transfers seems inadequate to see a household through a month, he said.
According to Rajan, the states and Centre have to come together to figure out quickly some combination of public and NGO provision of food, healthcare, and shelter, private participation, and direct benefit transfers that will allow needy households to see through the next few months.
"We have already seen one consequence of not doing so - the movement of migrant labour. Another will be people defying the lockdown to get back to work if they cannot survive otherwise," he said in the note.
Rajan said that the country's limited fiscal resources are certainly a worry, but spending on the needy at this time is a high priority use of resources. "This does not mean that we can ignore our budgetary constraints, especially given that our revenues will also be severely affected this year," he said.
"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 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."
The RBI Act will have to be changed to enable the central bank to undertake these transactions, and it will have to apply suitable haircuts to these portfolios to minimise its credit risk, but it will be a much needed support to corporate borrowing, he said.
"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," Rajan said.
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The country is under a 21-day lockdown as part of larger efforts to curb the spread of the coronavirus announced by PM Narendra Modi on March 24.
Several international agencies including ADB Bank, Moody's and S&P have cut in their growth estimates for India in recent days on concerns about the fallout of the Covid-19 outbreak.
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