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"Need To Be Frightened Out Of Complacency": Raghuram Rajan Comments On Contracting GDP

"Without relief measures, the growth potential of the economy would be seriously damaged," former RBI chief Raghuram Rajan said.

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Reacting to the sharp contraction in India's GDP, former RBI chief Raghuram Rajan has said that the government and its bureaucrats need to be "frightened out of their complacency" and a stimulus is important to prevent an "atrophied" economy.

"Without relief measures, the growth potential of the economy would be seriously damaged," Rajan said.

The growth numbers should alarm everyone, Rajan wrote in a post on LinkedIn on September 7, claiming that India is even worse off compared to two of the most COVID-hit advanced countries that have also witnessed a contraction, the United States 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 added.

"India needs strong growth, not just to satisfy the aspirations of our youth but to keep our unfriendly neighbours at bay," the renowned economist 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."

"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...Similarly, without relief, small and medium firms - think of a small restaurant -- stop paying workers, let debt pile up, or close permanently. Essentially, the patient atrophies, so by the time the disease is contained, the patient has become a shell of herself," Rajan said.

Economic stimulus, the economist said, was like a tonic, but "if the patient has atrophied, stimulus will have little effect".

Rajan suggested that the government needs to expand the resource envelope in every way possible, spend as cleverly as possible and take every action without additional spending.

"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.

Also Read: India's GDP Growth Plunges To -23.9% In First Quarter Due To Covid-19 Pandemic, Worst Quarterly Contraction

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