Raghuram Rajan urges government to invite experts to address Covid-19's economic impact

NEW DELHI: The former governor has suggested to the government Calling people with proven experience and capabilities, including opposition parties, to address perhaps the biggest emergency the country has faced since independence after the outbreak.

He also cautioned that driving everything from the Prime Minister's Office, with the same overworked people, may not be very helpful.

"There is much to do. The government should call on people with proven expertise and capabilities, of whom there are so many in India, to help it manage its response. It may even want to reach across the political aisle to draw in members of the opposition who have had experience in previous times of great stress like the global financial crisis.

"If, however, the government insists on driving everything from the Prime Minister's Office, with the same overworked people, it will do too little, too late," Rajan said in a blog titled "Perhaps India's Greatest Challenge in Recent Times".

Economically, he said, India is likely facing its biggest emergency since independence.

"The global financial crisis in 2008-09 was a massive demand shock, but our workers could still go to work, our firms were coming off years of strong growth, our financial system was largely sound and our government finances were healthy.

None of this is true today in the fight against the coronavirus pandemic, said Rajan, who completed his three-year term at the Reserve Bank of India (RBI) in 2016.

However, he claimed that with the right resolution and priorities, and taking advantage of India's many sources of strength, he can beat this virus and even set the stage for a much more hopeful tomorrow.

Outlining the steps the country could take to recover from the economic effects of the outbreak, Rajan said the immediate priority is to suppress the spread of the pandemic through widespread testing, rigorous quarantines, and social distancing.

"The 21-day lockdown is a first step, which buys India time to improve its preparedness. The government is drawing on our courageous medical personnel and looking to all possible resources -- public, private, defence, retired -- for the fight, but it has to ramp up the pace manifold," he said, adding that the country will have to significantly increase the number of Covid-19 tests to reduce the fog of uncertainty as regards where the hotspots are.

Rajan, a professor of finance at the Booth School of Business at the University of Chicago, suggested that India should now plan what happens after the shutdown, if the virus is not defeated.

It will be difficult to block the country entirely for much longer periods, so we should also think about how we can restart certain activities in certain low infection regions with the proper precautions, he said.

Healthy young people, housed at appropriate distances in shelters near the workplace, may be the ideal workers to restart such activities, Rajan said.

Meanwhile, India obviously needs to ensure that the poor, non-salaried lower middle class, who are not allowed to work for longer periods, can survive, she said, direct transfers to households may reach the majority, but not all of them, as several commentators have pointed out, and the amount of transfers seems inadequate to see a home for a month.

However, noting that India's limited fiscal resources are certainly a concern, Rajan said: Spending on the needy at the moment is a high priority use of resources, which should be done as a human nation as well as a contributor to The Fight Against Viruses.

This does not mean that we can ignore our budget constraints, especially since our revenues will also be seriously affected this year.

Noting that a downgrade of ratings along with a loss of investor confidence could lead to a fall in the exchange rate and a dramatic rise in long-term interest rates in this environment, he said: Therefore, we should prioritize , reduce or delay less important spending expenses, while refocusing on immediate needs.

"At the same time, to reassure investors, the government could express its commitment to return to fiscal rectitude, backing up its intent by accepting the setting up of an independent fiscal council and setting a medium-term debt target, as suggested by the N K Singh committee."

Rajan said that many small and medium-sized companies, which have already weakened in recent years, do not have the resources to survive, adding that not all can or should be saved given our limited fiscal resources.

Noting that large companies can also be a way to channel funds to their smaller providers, he suggested that banks, insurance companies, and bond mutual funds should be encouraged to buy new investment-grade bond issues, and the RBI agreed to ease his way. lend against your high-quality bond portfolios through repo transactions.

The RBI Law will have to be amended to allow the Reserve Bank to carry out these transactions, and it will have to apply appropriate cuts to these portfolios to minimize their credit risk, but it will be a very necessary support for corporate loans.

"The government should also require each of its agencies and public sector units, including at the state level, to pay their bills immediately, so that private firms get valuable liquidity," Rajan said.

He concluded his blog by saying that India is said to only reform in crisis.

Fortunately, this unmitigated tragedy will help us see how weakened we have become as a society and focus our policy on the critical health and economic reforms that we so desperately need, Rajan said.