Govt should spend on profitable firms to boost economy: Raghuram Rajan

Former RBI Governor Raghuram Rajan on Wednesday said the government should focus on spending on profitable firms, which have been incurring costs but have not earned revenues in the last four months.

Speaking at NCAER's India Policy Forum 2020, Rajan said in the pandemic, unlike normal recession, there is enormous amount of destruction, which has happened to households and also to firms, and that's where relief and repair has to come in along with stimulus.

When asked by Expenditure Secretary T V Somanathan on what Rajan thinks would be safe level for expenses on repair and what is the appropriate level of fiscal deficit up to which one can finance repair, Rajan said it is necessary to spend money on the profitable firms to boost economy in the longer run.

"The reality right now is not to say open the flood gates and spend on anything. The reality is we need to spend on those firms which will benefit the economy going forward. So, we need to spend on profitable firms which are now in danger ... because they haven't produced revenues for 4 months, but have been incurring costs along the way.

"That's the kind of judgement that has to be made ... that is required for longer run health of economy," he said.

Stating that repair is important to recover from the impact of pandemic, Rajan said if a firm is unable to function, that's a loss to GDP going forward. "If it can benefit from additional funding, writing down of debt it may contribute significantly more than the normal Keynesian stimulus," he added.

To contain the spread of Covid-19 pandemic, the government had imposed the lockdown from March 25. The gradual opening up of economy started since June. In May, the government had already announced a nearly Rs 21 lakh crore package to support the economy.

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