India’s former central bank governor has expressed concern over the worst-ever quarterly gross domestic product contraction in India’s history and called for immediate remedial action.
As per the National Statistical Office, the country’s growth for the April-June quarter contracted by 23.9%, the first contraction in more than 40 years. Barring agriculture, which posted a modest growth of 3.4%, all other sectors contracted in double digits with construction (-52%) and the manufacturing (-39.3%) sectors among the worst hit.
In a LinkedIn post, Raghuram Rajan said the data “should alarm us all” and urged the government to stop being complacent. He said the gross domestic product numbers may be even worse when estimates of the damage in the informal sector are factored in.
Rajan observed that the Indian government “after an initial burst of activity” has retreated into a shell, and urged it to take meaningful action. He said the government’s decision to conserve resources today for possible future stimulus measures was a “self-defeating” exercise. “Without relief measures, the growth potential of the economy will be seriously damaged,” Rajan said.
“If you think of the economy as a patient, relief is the sustenance the patient needs while on the sickbed and fighting the disease. Without relief, households skip meals, pull their children out of school and send them to work or beg, pledge their gold to borrow, let EMIs and rent arrears pile up. Similarly, without relief, small and medium firms – think of a small restaurant – stop paying workers, let debt pile up, or close permanently. Essentially, the patient atrophies, so by the time the disease is contained, the patient has become a shell of herself.”
Citing the example of Brazil, Rajan said the country had spent heavily on relief and is consequently seeing a much lower growth downgrade than India.
According to media reports, Brazil has launched a massive welfare scheme and nearly 66 million people are getting US$110 a month from the government. This is also seen as a drastic shift in President Jair Bolsonaro’s earlier stance of opposing welfare measures.
Rajan also criticized some state governments for carrying out questionable temporary reforms such as suspending labor protection laws, saying it would do little to energize industry or workers and could potentially give the public a jaundiced view of government reforms.