As India’s economy is hoped to stagger back to life with the country reopening, which had already slipped into an unprecedented downturn over three years before the pandemic, former RBI governor Raghuram Rajan advises that concerted emphasis on the medical sector and not intermittent lockdowns are the answer to revive the nation’s financial health. As for the economy itself, investment in the infrastructure sector – which will automatically spur investment in other sectors – and “cleaning up” the financial sectors so that it can lend more to companies is the key.
Making the comments in an interview to CNBC-TV18, Rajan said that closing down from time to time “creates a lot of uncertainties for businesses.” “So we got to get our medical policy right. But the number of cases is increasing and until we contain it, it is going to be very hard to open up. What is happening in Tamil Nadu? If you have to keep closing down business gets stuck at a moderate level. So there is no second guessing the fact that we need to contain the virus, bend the curve. We haven’t bent the curve. We need to bring the number of cases down,” he said.
He also emphasized on the need to learn from countries like Ethiopia and Vietnam and called for a “massive amount of education” on public health strategies in other countries. “Until we fix that, it is not clear to me that we will make progress on the economic front more than a certain amount,” he said.
Rajan also explained the anomalous situation where financial markets, like in India and the US are doing well, despite poor macroeconomic indicators like the Gross Domestic Product (GDP), Index of Industrial Production (IIP) and employment rates, especially in India. “There has been so much intervention, especially in the United States both in terms of fiscal support which has maintained income level especially for the low income people and maybe equal to or even higher than what they were earning earlier, and financial market support to amidst lowered interest rates. So given that rates are needed to discount stock prices, maybe that’s keeping stock prices buoyant because we are discounting with a very low rate,” he explained.
But a couple of years of low earnings would depress stock prices which would lead to sectors represented in the stock market would do better than the sectors that are not, according to Rajan. “For example, industrial firms will recover faster, but also within industrial firms if their small competitors are knocked out, it would benefit firms that are traded on the market,” he added.
Asked how he would categorize the current practice of global central banks printing more money and keeping liquidity flowing by keeping low interest rates low viz., equity or asset inflation, he said it was a “fool’s game” trying to decide what was driving the prices and advised investors in keeping their “portfolio diversified and not putting all your eggs in one basket.” “Some domestic, some international, some in fixed income, some in the stock market. Don’t go chasing after one particular sector,” he said.
On his thoughts on the fiscal stimulus by the government and how it can finance it, Rajan said helping companies by helping them obtain working capital to make up for their losses incurred in paying for salary costs amidst a halt in revenues is important. “The National Company Law Tribunal (NCLT) should also be working 24/7, with multiple new offices, clearing out old cases and be prepared for an avalanche of new cases. We don’t have the money to bail out every small firm as the US has done with Paycheck Protection Program, but we have to make sure that those companies are ready to turn. So that is one example of what we need to do,” Rajan said.
He also asked why, despite the stock market being buoyant, the government wasn’t selling public sector firms. “We talked about privatization; why haven’t we spent these 4-5 months preparing the entities to be privatized and to sell them so that we can have more resources to spend on repairing the economy?” Rajan asked.