"Govt Packages Are Relief Measures, Not Stimulus": Former RBI Governor Raghuram Rajan

The Indian government on November 12 announced a fresh stimulus of $16.1 billion, to be spent on creating jobs and boosting the potential recovery observed in various sectors. However, according to former Reserve Bank of India Governor, Raghuram Rajan, these are only relief measures, not stimulus.

Speaking to The New Indian Express in a webcast session, Rajan said that while such measures are the need of the hour, the time for stimulus will come too.

Government's Stimulus Measures

Speaking on whether the government's stimulus measures are good enough, the former RBI governor said as India entered into the pandemic with a very strained fiscal situation, years of budgetary overruns. As a result, we've had little room to spend.

Rajan said that the impact of the COVID pandemic has been huge in industrial countries. If one looks at the actual stimulus in terms of spending, in the Indian context, that could be about 40 lakh crores in additional spending.

He went on to explain how spending during the pandemic takes two forms: One to help households that are in difficulty, and the other is to protect MSMEs running out of cash. "I see this more as relief, not so much stimulus. The time for stimulus will come when the economy picks up more strongly," Rajan as quoted.

He added that after the pent up demand slows down, there will be a need for stimulus. But the country is currently in the distance from that and enjoying the recovery based on pent-up demand. "The sustainability level of the demand can only be observed after this falls off," Rajan said.

He also appreciated the government's measure of the provision of free food grain as well as some targetted cash transfers to poor households.

Not Stimulus But Relief Measures

Rajan said its as much about the supply side of the economy as the demand side. "When you talk about the stimulus, you usually say demand is weak, so let's add to it. But what is happening in the pandemic is your ability to produce is shrinking. When an MSME closes down, jobs are lost and the ability of the country to produce reduces.

Relief is an attempt to make sure that when demand comes back, there is supply waiting to satisfy that," Rajan said.

So, in a situation of weak demand, high inflation is not seen. But in India, higher rates of inflation are observed, because the supply chains are in great difficulty, some entities are not able to prude, and as a result, prices are going up despite weak demand. Currently, this package will save the damaged but not stimulate the economy.

Recent Reforms Introduced For Growth

When questioned whether the recent reforms by the Centre were sufficient, Rajan said they were not enough to drive the growth; however, these are moves in the right direction.

India's Scope Of Recovery

When questioned about the scope of India to export it way out, if it rebounds strongly in a slower growth scenario, Rajan said that there are many things India can do to enhance productivity and logistics.

"We can take advantage of this, but for that, the country needs to reach out to the world effectively, and that can be done by showcasing the progress we have made to change the image of India as the difficult place to do business to a place open to doing business and investments.

Besides, Rajan suggested the country should not depend on growth numbers, instead should look at the level of GDP and the jobs required. Because jobs are needed not just to replace the ones that have died as a result of the pandemic, but to create more jobs for youth who are entering the labour force. But if it's delayed more, it will result in a bigger problem, Rajan added.

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