India faces economic catastrophe, PMO can't handle it by itself: Rajan

Rajan said the financial sector has been in deep distress for a long while before this crisis struck
Questioning the style of function in the National Democratic Alliance (NDA) regime with the Prime Minister’s Office (PMO) dominating the decision-making process, former Reserve Bank of India governor Raghuram Rajan said the Indian economy would be a shadow of its former self if the government didn’t announce further measures.

“I’m very worried about the extent of the catastrophe we’re facing … the government must consult Opposition talent … it can’t all be done by the PMO … we must pull out all stops … if more is not done, the economy will be a shadow of its former self,” Rajan said in an interview to The Wire.

He questioned state governments that sought to suspend labour laws without wider consultations and micro-management by the Centre to force states to undertake the reforms. He advised the government to not bow under the pressure of rating agencies.

He said payment of dues to the micro, small and medium enterprises (MSMEs) would be a better response to the sector’s woes.

The former RBI governor said while the US-style bailouts were not possible in India, airlines were nonetheless bleeding and the government must offer them debt relief.

Rajan said the financial sector has been in deep distress for a long time before the crisis struck. It needs re-structuring, re-capitalisation and the hole in the leaking bucket must be plugged, he said. Rajan explicitly called for better management of public sector banks.

Rajan added that the proposed agricultural reforms could be watered down by bureaucrats.

When asked if the government’s package was an impressive or inadequate response to the economic challenge facing the country, he said almost any response was inadequate, particularly so in India’s case. He added the government must pull out all stops.

Asked for his response to Finance Minister Nirmala Sitharaman’s argument, made in an interview, that loans and credit guarantees would have a greater multiplier effect on tackling the problems of the poor than cash payments, Rajan said loans take time to work. Hunger, on the other hand, is an immediate problem.

While a lot of the labour reforms announced for three years by the governments of Uttar Pradesh, Madhya Pradesh and Gujarat were long talked about and perhaps needed, they should not be done with the stroke of a government pen, he said.
Such steps needed wider consultation, otherwise they could provoke protests. He also added that such reforms could not be done for just three years, as industry needs assurance of permanency.

Asked about the four conditions attached to the permission granted to states to increase their borrowing caps from 3 per cent of gross state domestic product (GSDP) to 5 per cent, Rajan said that while all the conditions were not objectionable, the Centre must not seek to micro-manage states.

The Centre cannot presume that it knows better, particularly when, under the Constitution, the states are prime movers in specified areas. The Centre can nudge and encourage with model laws, but must not dictate, Rajan said.

Rajan said the government should not worry about what rating agencies would do if the fiscal deficit grew. He said the agencies can be told that increased spending is necessary to preserve the economy, but also that India will return to fiscal rectitude soon.

He welcomed the reform restricting PSUs to a yet-to-be-defined strategic sector and permitting the private sector to function across the economy, but he was worried that the necessary privatisation this entailed might never happen.

Rajan said only a fraction of the privatisation committed to in any Budget has actually happened and, anyway, a lot of it was sale from one government owned entity to another.

The former RBI governor said the MSMEs sector was one of the most indebted, and loans would only add to this. There was also a danger that banks might not lend, but use credit guarantees to bail themselves out, he said.

Finally, he said a far better way to help MSMEs was to pay them their dues. Union MSME Minister Nitin Gadkari had separately said the government and the private sector owed MSMEs Rs 5 trillion in dues.

While announcing the package, Sitharaman had said MSME receivables from the government and central public sector enterprises would be released in 45 days.

Rajan said giving food grain to unemployed migrant workers, the poor and vulnerable was not enough. They also need vegetables, cooking oil, and, most importantly, money and shelter, he added.

He said now the government must make conditions in cities better if they are to entice the millions who fled to their villages to return.

Rajan was of the view that the agricultural reforms could be game-changers, similar to the end of the licence-permit raj in industry, but needed to be fully and honestly implemented. He feared they could be hijacked by the bureaucracy.

He expressed fears, especially, about the conditions based on which the restrictions under the Essential Commodities Act could be revived.

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