The COVID-19 Pandemic is the "greatest emergency since Indian Independence," according to the former Reserve Bank of India Governor and economist Raghuram Rajan. To tackle the economic downtrend Rajan recommended few steps that India needs to take to bounce back in a blog post titled "Perhaps India's Greatest Challenge in Recent Times".
Rajan opined that the government should prioritise spending on the poor, and cut back or delay less important expenditure. If the government insists on driving everything from the Prime Minister's Office, "with the same overworked people, it will do too little, too late," he added.
According to Rajan, spending on the poor is the "right thing to do" even though the government's resources are strained.
"Unlike the United States or Europe, which can spend 10% more of GDP without fear of a rating downgrade, we already entered this crisis with a huge fiscal deficit and will have to spend yet more," read the post.
Rajan who is currently a professor of finance at University of Chicago Booth School of Business, US felt that India needs to ensure that the poor and non-salaried lower middle class who are prevented from working for longer periods can survive.
"The state and Center have to come together to figure out quickly some combination of public and NGO provision (of food, healthcare, and sometimes shelter), private participation (voluntary moratoria on debt payments and a community-enforced ban on evictions during the next few months), and direct benefit transfers that will allow needy households to see through the next few months," Rajan wrote.
"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," the former RBI chief added.
According to him while the global financial crisis in 2008-'09 was a massive demand shock, the country's workers could still go to work, firms were coming off years of strong growth, the financial system was largely sound, and government finances were healthy.
Adding that India can defeat the outbreak with the right resolve and priorities, he wrote, "None of this is true today as we fight the coronavirus pandemic. Yet there is also no reason to despair."
He suggested that since it will be hard to lock down the country entirely for much longer periods, we should also be thinking about how to restart certain activities in certain low-infection regions with adequate precautions.
The non-performing assets would mount, including in retail loans as unemployment rises, he warned. The RBI should consider imposing a moratorium on financial institution dividend payments so that they build capital reserves.
"It is said that India reforms only in crisis. 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 healthcare reforms we sorely need," said Rajan, who also served as chief economist at the International Monetary Fund.