Bright spots and very dark stains on the Indian economy: Raghuram Rajan

The Indian economy has some bright spots and a number of very dark stains, says former RBI Governor Raghuram Rajan. He believes the government should target its spending carefully so that there are no huge deficits. The government needs to do more to prevent a K-shaped recovery of the economy hit by the COVID-19 pandemic.

Rajan highlighted that a K-shaped recovery will reflect a situation where technology and large capital firms recover at a far faster rate than small businesses and industries that have been significantly impacted by the pandemic. “My greater worry about the economy is the scarring to the middle class, the small and medium sector, and our children’s minds, all of which will come into play after an initial rebound due to pent-up demand. One symptom of all this is weak consumption growth, especially for mass consumption goods.”

Currently, a professor at the University of Chicago Booth School of Business, Rajan noted that as always, the economy has some bright spots and a number of very dark stains. “The bright spots are the health of large firms, the roaring business the IT and IT-enabled sectors are doing, including the emergence of unicorns in a number of areas, and the strength of some parts of the financial sector,” he explained. “On the other hand, dark stains are the extent of unemployment and low buying power, especially amongst the lower middle-class, the financial stress small and medium-sized firms are experiencing, including the very tepid credit growth and the tragic state of our schooling.”

The former central bank governor says Omicron is a setback, both medically and in terms of economic activity, but cautioned the government on the possibility of a K-shaped economic recovery. “We need to do more to prevent a K-shaped recovery, as well as a possible lowering of our medium-term growth potential.”

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In regards to the upcoming Budget, Rajan said budgets are supposed to be documents containing a vision and he would love to see a five- or ten-year vision for India as well as a plan for the kinds of institutions and frameworks the government intends to set up. He highlighted that India’s fiscal situation, even coming into the pandemic, was not good and this is why the finance minister cannot spend freely now. “While the government must spend where necessary at this time to alleviate the pain in the most troubled areas of the economy, we must target the spending carefully so that we do not run huge deficits.”

The professor feels inflation is a concern in every country. He believes announcing a credible target for the country’s consolidated debt over the next five years coupled with the setting up of an independent fiscal council to opine on the quality of the budget would be very useful steps. If these moves are seen as credible, the debt markets may be willing to accept a higher temporary deficit. We will be responsible, we should strengthen the institutional support to future fiscal consolidation.”