Former Reserve Bank of India (RBI) Governor Raghuram Rajan has said the government will have to expand its resources in every way possible, spending as cleverly as possible to bring the economy back to pre-pandemic GDP levels.
Rajan, in his LinkedIn post published on Sunday, stated that the Centre has "to take every action that can move the economy forward without additional spending."
He further added that the government's strategy to conserve resources today for a possible future stimulus is "self-defeating".
"If you think of the economy as a patient, relief is the sustenance the patient needs while on the sickbed and fighting the disease," he said.
Rajan added that the belief that the government cannot spend on both relief and stimulus is too pessimistic, highlighting the need to expand resources and spend cleverly.
He further opined that India could borrow more by setting future debt reduction targets through legislation and committing to honest and transparent fiscal numbers under an independent watchdog fiscal council.
He expressed that public sector firms should be prepared for on-tap share sales to make use of periods of market buoyancy as the "current period of market buoyancy already looks like a missed opportunity."
Suggesting to prioritise government spending, which should be an equally key task, Rajan suggested the following:
1. Replenish MGNREGA, which is a is a tried and tested means of providing rural relief and should be replenished as needed.
2. Given the length of the pandemic, provide more direct cash transfers to the poorest households, especially in urban areas.
3. Government and public sector firms must quickly clear payables so that liquidity moves to corporations.
4. Rebates could be given on corporate income tax and GST paid by small firms last year.
5. Resources should be set aside to recapitalise public sector banks.
6. Private sector should also be urged to give a helping hand. The government should urge cash-rich platforms like Amazon, Reliance, and Walmart to reduce receivables and pay small suppliers on time.
With the RBI provided loan moratorium now over, Rajan suggested the Centre should devise a well thought out plan to address the coming financial distress. He proposed:-
1. A variety of structures should be in place to help debtors and claimants reach agreements to restructure obligations.
2. A number of arbitration forums should be set up to renegotiate claims of various sizes.
3. Civil courts, debt recovery tribunals, and the NCLTs should be beefed up to provide rapid back-up judgments.
Rajan highlighted that since reforms can be a form of stimulus, "temporary half-baked reforms, such as the recent suspension of labor protections in number of states, will do little to enthuse industry or workers, and give reforms a bad name."
He ended his post by emphasising that each of these measures will be needed to ensure that the Indian economy returns to strong growth, which is necessary to "not just to satisfy the aspirations of our youth but to keep our unfriendly neighbors at bay."