Former Reserve Bank of India (RBI) Ex governor Raghuram Rajan believes the government should not focus on credit ratings, given the current situation. It should instead put its attention towards reviving growth.
The interaction was on COVID-19 impact on economies and the way forward.
“If we in India can summon up the necessary political push for serious reforms, which we have always kept on the shelf and not implemented, or waited till there is a political consensus, I think if we can build the political consensus quickly and enact those reforms that will be a bold political move,” he noted.
He said that though there has been a mild recovery in Indian economy, a lot needs to be done as the full recovery will take a long time. He stressed on factors impeding India’s comeback such as containing coronavirus, coming out with a vaccine, effective method of testing, and getting medical policy right.
Rajan said that for countries like India and the US that are still battling the virus, the main issue right now is to contain the virus.
Former chief economist at IMF, Raghuram Rajan also believes that the US-China rift will be crucial for India’s economic recovery from COVID-19.
Q] Is achieving growth that drives jobs a priority and a challenge for economies right now? How will the unemployment scenario pan out?
A] Well, it’s bad. Unfortunately we don’t know the full extent so far because we have a lot of support programs. In the US you have the paycheck protection program, the main street lending program, you have a lot of money going directly to consumers. A lot of firms are being kept alive through a variety of credit and subsidy programs. And at some point they will have to come off. You can’t keep supporting the economy indefinitely. So there will be significant job losses.
Even in the developed countries that have thrown enormous amounts of money at the problem, things could get worse before they get better. In India, of course, we haven’t been able to spend as much, or we haven’t spent as much. I was just talking to some small and medium entrepreneurs from Chennai and Kolkata, and they are really hurting and our government says that it will come in with the money eventually when the economy is opening up fully. But by that time, a number of these entrepreneurs may not have the resources to continue and may have closed.
Q] How can emerging markets turn this crisis into an opportunity?
A] You can make it a less worse crisis. If we can, in India summon up the necessary political push for serious reforms, that will be a bold political move. Given our lack of resources, we have to do much better on other fronts, both in repairing the economy, which is trying to fix the firms that come damaged out of this crisis, but also helping the households that come damaged. And then in creating the reforms that give foreign companies an incentive to invest in India, but also Indian companies to invest more in India. That kind of animal spirit has to be created by really bold government action.
Q] What shape of recovery do you foresee for India in the coming months?
A] Like many other countries, our second quarter will be horrible. The US just announced a 33% annual fall in GDP. And I have no doubt that in many countries, including India, it will be of that level or worse. A recovery from rock bottom always looks V-shaped until it stops. China has had a V-shaped recovery, but eventually after the pent-up demand is exhausted, the question is what is left over. And if some parts of the economy are still subdued, you’re going to have a sort of V which is cut off, rather than a V, which goes back to the full extent of where you were before this happened.
I think for any part of the world to expect to go back to where it was before, you really need a very good rollout of the vaccine so people can go out and spend. How far it will go depends on how we contain the virus. And right now we’re not doing a good job of it.
Q] Are the current fiscal deficit numbers the new normal, and if that is true, what impact do we foresee in terms of long term inflation and exchange rates?
A] First, the deficits in the West are significantly higher typically then deficits in emerging markets with a few exceptions, and India is an exception because it entered this pandemic with already a pretty stretched fiscal deficit. That stretches even further because the numbers that were estimated in the fiscal in the previous budgets are now overly optimistic. And the revenues that’ll be collected will be much smaller than was anticipated. So even without spending, the fiscal deficit is going to go up significantly.
In India, what we can do is strengthen the commitment to a new fiscal responsibility bill, but also put in place targets for how much we will bring down debt over the medium term, become much more transparent about our budget. If instead, we try and contain the spending now, even though our deficits are big, we may impair longer term growth. And if we’re doing this in order to maintain credit ratings, we may end up neither with credit ratings nor with growth.
Q] The US trade policy is uncertain. EU is talking about the carbon border tax, which could be a protectionist nightmare. Do these things worry you? Are we becoming more inward looking?
A] I think the impetus towards opening up to a freer trade has obviously weakened and it had weakened even before the crisis, because the biggest champion, the US seemed to have turned against it in a big way. It may still reverse a little bit post pandemic, but I think it’s important for emerging markets to note that if they can’t over time spend within their own economies because of various budget constraints, they are dependent on catering to demand elsewhere for growth.
So for all these reasons, I would say we need to be open and we have to recognise something that sometimes our politicians don’t, that constraints on imports actually become constraints on exports. If you can’t buy the input material cheaply, you cannot export the finished product cheaply because you spent so much on input costs, way above what your competitors in the rest of the world spend.
Q] Goldman Sachs recently said that the dollar may not be the favoured reserve currency going ahead. If this happens, what currency or currencies do you see emerging as the preferred reserve currency?
A] The preference for reserve currencies follows economic activity. If that was only the case, it would be the US, the Euro and the Renminbi, which would be the primary candidates for reserve currencies with the Japanese Yen coming a little behind because Japan is smaller. But people also look at the depth of the markets in those countries, the ease of moving in and out, and also whether that country can impose strictures on you, prevent you from taking out your money. Yes, the dollar may weaken because the US Fed is being really accommodative and the US economy is not doing well right now. But these are ups and downs that will not alter the broader point about it being the reserve currency.
The Chinese are doing their best to increase the trading of the Renminbi and making it more a central reserve currency. But what traders need to have is more confidence in Chinese markets, as well as confidence in the Chinese government for it to play a bigger role. I would see the Euro as having a chance now because Euro markets are coming back strong.
Q] Do you have a hierarchy of what would be the five leading economies in the short to medium term?
A] A lot depends on what policies you enact. We are never a victim of the environment. We can shape the environment. The moment you say, Oh, we’re doomed because we are an emerging market and we were going down and the world is turned against us, we are being defeatist. We have to recognise the reality of the circumstances, not minimise it.