On the monetary policy side, the RBI should be willing to allow a certain amount of regulatory forbearance. There are certain rules for non-performing assets (NPAs) and these may need some relaxation.
With Covid-19 disrupting economic activities and people being confined to homes, the Centre and the Reserve Bank of India must come out with fiscal and regulatory measures to deal with the extraordinary situation without bothering too much about the fiscal deficit, former Reserve Bank of India governor C Rangarajan said. While the RBI has to adopt regulatory forbearance on prudential norms related to income recognition and NPA classification, the Centre has to loosen its purse strings to augment expenditure related to coronavirus prevention measures and provide free food for the poor on a priority basis, he said in an interview with FE’s Prasanta Sahu. Edited excerpts:
Some major economies have announced massive stimulus measures to deal with the impact of coronavirus. Shouldn’t the Indian authorities take a cue?
On the monetary policy side, the RBI should be willing to allow a certain amount of regulatory forbearance. There are certain rules for non-performing assets (NPAs) and these may need some relaxation. Many small- and large-scale businesses will find it difficult to abide by the current norms. Therefore, income recognition rules may have to be relaxed.
Secondly, a certain amount of additional liquidity can be provided, and this the RBI of course is already doing. It is doing open market operations in a big way. They are also doing long-term repos with banks. All of these will considerably enhance the liquidity in the system. Banks can, in turn, provide additional benefit to borrowers.
What should the Centre do on the fiscal side?
On the fiscal side, the problem essentially is that the fiscal situation is already difficult. But in a time like this, we need to allow fiscal deficit to rise. But the question is what kind of expenditures will have to be incurred. The government should spend on expenditures required to combat the virus. Each Covid-19 test costs Rs 4,500. There are reports that the number of testing being done now is not adequate and that we should do testing in a big way. Then, there are other expenditures needed for creation of isolation wards, getting adequate ventilators, availability of masks and sanitisers, etc. We may not need big hospitals, but certainly we need isolation wards.
As for the succuor to the industry, especially the SMEs…
There is a need to give some relief to firms that have severely been affected, such as those in hotel industry and transport industry (road, rail, aviation). Thousands of businesses have been affected because of lockdowns and other restrictions and shortage of workforce. Some relief can be given by deferring their payments due to the government. They should be allowed to defer payment of taxes and duties to the government (Tuesday’s announcement by the finance minister has addressed these issues to an extent). But if virus threat were to persist for a much longer time, the industry and others will require larger support from the government. The problem is how the government will find the resources to fund (the likely rise in expenditure requirements.
What about the steps needed to aid the poor?
To take care of the people who have been affected, an idea of giving everybody some cash transfer is being talked about. In my view, that may be difficult. But, I do think that just like in the case of droughts or floods, the authorities should provide food and other essentials to people who have thrown out of jobs or employment now. The government, in collaboration with NGOs, must do this. A lot of people, particularly daily wagers and non-permanent employees, must be helped.
How do you see economic growth panning out in FY21?
The impact on economic growth will depend on how long this (disruptions due to virus) lasts. If it is about two months or so, probably one quarter or even two quarters will be affected. But if continues longer, it will affect the economy more severely. As of now, the GDP growth rate for FY21 will not be more than 5%. Even that is going to be tough. Certainly, it is not going to higher than in FY20.