GDP numbers should alarm us all, says former RBI chief Raghuram Rajan

Former Reserve Bank of India (RBI) Governor Raghuram Rajan has said the recent GDP numbers “should alarm us all” and that the government and its bureaucrats need to be frightened out of their complacency.

A stimulus is critical to prevent an “atrophied” economy, he said in a document post titled ‘The alarm in the GDP numbers’ shared via his LinkedIn account.

“If you think of the economy as a patient, relief is the sustenance the patient needs while on the sickbed and fighting the disease. Without relief, households skip meals, pull their children out of school and send them to work or beg, pledge their gold to borrow, let EMIs and rent arrears pile up… by the time the disease is contained, the patient has become a shell of herself,” he said.

Without relief measures, the growth potential of the economy would be “seriously damaged”, he said, adding the government seemed to have retreated into a shell.

India is even worse off compared to two of the most COVID-hit advanced countries that have also suffered a contraction – the US and Italy. “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. Government-provided relief becomes all the more important,” he said.

“India needs strong growth, not just to satisfy the aspirations of our youth but to keep our unfriendly neighbors at bay,” Rajan, currently a professor at the University of Chicago, advised.

He likened the economy to a tonic which can help the patient get out of her sickbed faster when the disease is vanquished. “If the patient has atrophied, stimulus will have little effect. Even if they start earning, indebted households will not consume freely, especially if they believe they have to manage further periods without livelihoods or government help,” he said.

“No doubt, the government and its bureaucrats are working hard as always, but they need to be frightened out of their complacency and into meaningful activity. If there is a silver lining in the awful GDP numbers, hopefully it is that.”

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The government’s unwillingness to do more is partly because it wants to conserve resources for a possible future stimulus, the economist noted, calling the strategy self-defeating.

The recent pick-up in sectors such as autos was not evidence of a V-shaped recovery, but reflects pent-up demand that will fade “as we go down to the true level of demand in the damaged, partially-functioning economy”.

“Government officials who hold out the possibility of a stimulus when India finally contains the virus are underestimating the damage from a more shrunken and scarred economy at that point,” Rajan said.

“Instead of claiming there is a V-shaped recovery round the corner, they should wonder why the United States, despite spending over 20% of GDP in fiscal and credit relief measures, is still worried the economy will not return to pre-pandemic GDP levels by the end of 2021,” he said.

He said the government needs to expand the resource envelope in every way possible and spend as cleverly as possible. “All this requires a more thoughtful and active government. Unfortunately, after an initial burst of activity, it seems to have retreated into a shell,” he said.