Former governor of Reserve Bank of India Raghuram Rajan. Photo: AFP
Raghuram Rajan, the former governor of the Reserve Bank of India. Photo: AFP

Former Reserve Bank of India chief Raghuram Rajan said the economy will reach pre-Covid levels by late 2022 and that the forthcoming Union Budget should provide relief to poor households and small and medium-sized enterprises to boost consumption.

In an interview with TV channel ET Now, the former central banker pointed out that serious problems in the informal economy have not yet been recorded properly and that job losses could be permanent.

“This pandemic has a much greater effect on the informal sector, the small and medium enterprises, the ones that don’t have deep resources…Certainly when you look at formal employment. It’s down significantly. But, informal employment is probably down much more and guesstimates are, you know, maybe 18 million people are unemployed right now relative to what they were before the pandemic hit,” he said.

As for the recovery of the Indian economy to pre-Covid levels, Rajan expects it to take longer time than what the central bank and the government are forecasting. India is currently going through a “technical recession” with two consecutive quarters of contraction (23.9% in April-June and 7.5% in July-September) in the gross domestic product, but the Reserve Bank of India expects a rebound this year and growth of 14.2% in the first half of the 2021-22 fiscal.

“My guess is we probably will not be back to, until late next year, 2022, where we might have been, before the pandemic. And of course, then to make up the ground that we lost because we were growing at 4% or 5% before then. It will take a little longer to go back to status quo,” he said.

Rajan said one of the best ways to get the economy back on track was to boost spending on infrastructure. As state governments are responsible for the bulk of such spending, they should get the money, he added.

To generate resources to boost spending, Rajan said the government should step up the sale of state-owned units. It should take advantage of the buoyant equity markets to sell stakes in state-owned enterprises. He said a “greater source of reducing the deficit [between the revenue generated and expenditure] may be in selling assets.”

Rajan pointed out that low interest rates, an improving manufacturing sector and “the fact that many large companies are benefiting while small companies are going out of business – all that creates a temporary positive sense about where the economy is going.” He said the damage will show up in the medium term and wondered whether the “positives are enough to offset the negatives?”

Citing an example of automotive sales in India, he said, “Look at the divergence between auto sales, which are growing year-on-year, while two-wheeler sales are not. They cater to two different groups – the upper middle class who are buying four-wheelers and the lower middle class and poor people who buy two-wheelers. As is true of certain industrial countries, this is a two-speed process. The rich, partly because of their wealth, are doing pretty well and the not so well off are not. The question is can we completely ignore that segment? Certainly we cannot politically, but even economically. It is quite important to see how the consumption comes back.”

Rajan served as the governor of the Reserve Bank of India from September 2013 to September 2016 and then returned to the University of Chicago Booth School of Business, where he was teaching prior to taking the post.