Government must do more to prevent recovery of K-shaped economy: Raghuram Rajan
Known for his outspoken views, Rajan also said the government must do more to prevent a K-shaped recovery of the economy hit by the coronavirus pandemic.
Typically, a K-shaped recovery will reflect a situation in which technology and large capital firms recover at a much faster pace than smaller businesses and industries that have been significantly impacted by the pandemic.
“My biggest worry about the economy is the scarring of the middle class, the small and medium business sector and the minds of our children, all of which will come into play after an initial rebound from pent up demand. A symptom part of all of this is weak consumption growth, especially for mass consumer goods,” Rajan told PTI in an email interview.
Rajan, currently a professor at the University of Chicago Booth School of Business, noted that, as always, the economy has some bright spots and a number of very dark spots.
“The positives are the health of large companies, the blistering activity of the IT and information technology sectors, including the emergence of unicorns in a number of fields, and the strength of certain parts of the financial sector,” he said.
On the other hand, the “dark spots” are the extent of unemployment and low purchasing power, especially among the lower middle class, the financial stress experienced by small and medium-sized enterprises, “including the very shy growth credit, and the tragic state of our schooling.
Rajan said Omicron is a setback, both medically and in terms of economic activity, but warned the government about the possibility of a K-shaped economic recovery.
“We need to do more to prevent a K-shaped recovery, as well as a possible decline in our medium-term growth potential,” he said.
The country’s GDP is expected to grow by more than 9% in the current fiscal year ending March 31. The economy, which has been significantly affected by the pandemic, had contracted by 7.3% in the last financial year.
Ahead of the Union budget, Rajan said that budgets are meant to be vision documents and he would like to see a five or ten year vision for India as well as a plan for the types of institutions and frameworks that the government intends to put in place. installation.
On the question of whether the government should opt for fiscal consolidation or continue with stimulus measures, Rajan pointed out that India’s fiscal situation even at the start of the pandemic was not good and that is why the Minister of Finance cannot spend freely now.
While the government needs to spend where it’s needed right now to ease the pain in the most troubled sectors of the economy, he said: “We need to target spending carefully so we don’t run into huge deficits. “.
Finance Minister Nirmala Sitharaman is due to present the Union Budget 2022-2023 to Parliament on February 1.
Regarding rising inflationary trends, Rajan said inflation is a concern in every country and it would be difficult for India to be an exception.
According to him, the announcement of a credible objective for the country’s consolidated debt over the next five years coupled with the establishment of an independent fiscal council to decide on the quality of the budget would be very useful measures.
“If these measures are seen as credible, debt markets may be willing to accept a higher temporary deficit,” he said, adding that to convince markets that “we will be responsible, we should build support institution to future fiscal consolidation”.
Furthermore, Rajan said one way to increase fiscal resources is to sell assets, including parts of state-owned enterprises and surplus state lands.
“We have to be strategic about what we can sell and how we can improve the performance of the economy through those sales…Once we have decided to sell, however, we have to act quickly, which we haven’t done so far,” he said. .
Regarding the upcoming budget, Rajan said he would be happy to see more tariff reductions and far fewer tariff increases, and far fewer concessions or subsidies to specific industries. “In particular, (I) would like an independent evaluation of production-related incentive schemes.”
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