A probable economic crisis triggered by the COVID-19 outbreak is approaching. This could be a chance for India to enact sweeping reforms to fix ailing sectors and attract more foreign investment to the country, according to economist Raghuram Rajan.
According to an NDTV report, the former Reserve Bank of India governor said that India needs to liberalise and deepen its financial markets and take policy steps to fix the banking and farm sectors.
Reportedly the country is gearing up to move in that direction with the central bank giving overseas investors greater access to its sovereign bonds, allowing local banks to tap offshore currency markets and companies a choice of more complex hedging tools.
The three-week lockdown in a nation of 1.3 billion people will likely to result in an economic recession, millions of job losses and possible starvation among the poor.
"It is said India reforms only in crisis," Raghuram Rajan, the former governor of the Reserve Bank of India, wrote in a LinkedIn post this week.
"Hopefully, this otherwise unmitigated tragedy will help us see how weakened we have become as a society and will focus our politics on the critical economic and health care reforms we sorely need," he added.
Reforms have earlier happened in India during periods of crisis. In 1991-92, the country freed the private sector from a myriad of government controls, deregulated financial markets, reduced import tariffs and opened up the economy to more foreign investment to avoid a balance of payments crisis.
Back in 2014, PM Modi had brought in a number of reforms including introducing a nationwide sales tax and an insolvency law, reducing corporate tax rates and kickstarting the biggest sale of state assets. He, however, raised import duties and dithered on trade deals, setting back progress.
Former chief economic adviser to the Finance Ministry, Arvind Subramanian, has said that public finances are now stretched and likely to worsen amid the lockdown, fiscal policies also need an overhaul.
The government had earlier projected a budget deficit of 3.5 per cent of gross domestic product( GDP) in the year through March 2021, but some are estimating it could reach as high as 6.2 per cent.
"The focus on unattainable targets, the fact that Fiscal Responsibility and Budget Management Act has been honoured only in the breach and the consequences in terms of budgetary integrity and transparency need serious review, even overhaul, in our view," Subramanian wrote in a local newspaper along with Devesh Kapoor.
Analysts opine that the latest moves to open up India's bond market and allow banks to trade currencies abroad were unthinkable a few years back given the country's deep distrust of debt capital and its failure to acknowledge even the existence of an offshore currency market trading the rupee.
Sonal Varma, head of Asia economics ex-Japan at Nomura Holdings Inc say that more needs to be done to attract long-term foreign capital to plug the domestic saving-investment gap.
"In the current context, the biggest challenge facing India is the dearth of growth capital," she said."India has historically bitten the bullet during times of crises," she added.