"Greatest Emergency Since Independence": Raghuram Rajan On COVID-19

Raghuram Rajan says priority is to suppress spread of the pandemic through widespread testing.

The government should prioritise spending on the poor, and cut back on or delay less important expenditure, former RBI chief Raghuram Rajan has said, describing the coronavirus pandemic as the "greatest emergency since Independence". Giving his prescription for India's coronavirus response in a blog, he also says 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".

In the blog post on LinkedIn, Raghuram Rajan says 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 ratings downgrade, we already entered this crisis with a huge fiscal deficit, and will have to spend yet more," he says.

Focusing on a plan for after the coronavirus lockdown, Mr Rajan, a professor of finance at Chicago Booth, US, says 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," he says.

"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."

He writes that 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. "None of this is true today as we fight the coronavirus pandemic. Yet there is also no reason to despair," he says, adding that India can beat the virus with the right resolve and priorities.

It will be hard to lock down the country entirely for much longer periods, he says. "...so we should also be thinking of how we can restart certain activities in certain low-infection regions with adequate precautions," he suggests.

Mr Rajan, who also served as chief economist at the International Monetary Fund, warned that non-performing assets would mount, including in retail loans as unemployment rises. The RBI or Reserve Bank of India has flooded the banking system with liquidity, but perhaps it needs to go beyond, he says, "for instance lending against high quality collateral to well-managed NBFCs".

The RBI, he says, should consider imposing a moratorium on financial institution dividend payments so that they build capital reserves.

A ratings downgrade coupled with a loss of investor confidence could lead to a plummeting exchange rate and a dramatic increase in long term interest rates in this environment, and substantial losses for financial institutions, says the renowned economist. "So we have to prioritise, cutting back or delaying less-important expenditures, while refocusing on immediate needs."

Mr Rajan also believes the government should reach out to members of the opposition who have had experience in previous times of great stress like the global financial crisis.

"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."