in an interview with ET Now, Rajan explained why one should neither be too optimistic nor too pessimistic about India at the moment.
As well as elaborating on pressing issues such as the state of key indicators of the economy, the real shape of the recovery, India’s sensitivity to another possible round of Fed tantrums, and more. , he also gave his opinion on the exact mistakes of the Modi government regarding controversial agricultural laws. Here is a summary of everything he said.
Urgent questions for this budget
Maintaining market and public confidence is one of the key issues in any budget.
There must be a well-defined path to get the economy back on track. The way must seem believable, one that does not hint at extravagance.
It is also necessary to support the request at this stage. There should be a push on infrastructure – both by the Center but the States. “It’s important to make sure that states do what they can there, because that will be important to create some of the low-end jobs that are desperately needed, but also to create demand for domestic steel, copper, cement, etc,” Rajan said.
Some of the measures should include maintaining good funding for MGNREGA and taking care of areas that are currently doing poorly.
There is a need to avoid incremental moves and look at new areas like telemedicine, tele-lawyer, education. According to Rajan, what these industries need is not funding, but better data protection rules that meet global standards.
According to Rajan, India should stop thinking only about manufacturing or agriculture. Instead, he should start talking about services, which is his great strength.
More than anything else, this year’s budget needs a vision, Rajan said: “I wouldn’t see the budget document so much to increase tariff A and provide subsidy B, but really a document that says it’s is the path we choose over the next five years and every year we update it a bit, but this path, this vision seems relatively constant.
Relevance of forex power in the face of Fed tapering
Although the foreign exchange reserve that India has is good, the fact remains that all the other macroeconomic indicators must also be in place, says Rajan.
These indicators include oil and gold imports and the widening current account deficit. Lately, oil prices have surged and gold imports are on the rise, causing the country’s current account deficit to expand.
Admittedly, this expansion of CAD has not yet reached worrying levels. In addition, exports performed well. But according to Rajan, this does not mean that India can no longer ignore it.
How tariffs can disrupt the field from now
Now is the time to start tracking interest rates again, says Rajan.
The amount of liquidity in the system – both in India and elsewhere – is enormous and it is only a matter of time before policymakers find themselves forced to raise rates.
Some of India’s MS peers like Brazil have already bitten the bullet.
This is a time when all markets are interconnected, so India needs to be prepared for when the United States raises its rates. According to Rajan, once rates rise in the United States, there will be problems with financing elsewhere – issued which are currently non-existent in places like India where money is even easier.
Real shape of economic recovery in India
According to Rajan, one should neither be too optimistic nor too pessimistic at the moment. The former RBI governor describes both the “bright spots and dark spots” of the current state of India’s economy.
The high end of businesses – including exporters, IT companies, businesses that cater to the wealthy – are doing very well thanks to pent-up demand. The upper middle class, similarly, did very well because they never had to stop working/earning money at any time during the pandemic.
At the other end of the spectrum – the lower middle class, people in contact-intensive jobs – fell through the cracks. Rajan cites the increase in employment in the agricultural sector to make his point, which he says is a very peculiar phenomenon because no developing economy is seeing an increase in agricultural employment.
The pandemic made this possible in India because a reverse migration abruptly started after low-end jobs disappeared, he said.
India now has a real consumer problem as the less affluent segments have done very badly during Covid, Rajan added.
Limits of monetary policy at this stage
India’s credit scene is caught in a plethora of problems at this point, Rajan said. These include (a) people find it difficult to borrow; (b) the lenders themselves are trapped; (c) credit flow is lukewarm at best.
According to him, the increase in new-age credit from NBFCs and fintechs is far from enough to fill this void.
India does not need to increase the demand for loans but also the supply of them, but monetary policy cannot do much to remedy such a situation, he said.
What fiscal policy can do
Targeted measures aimed at the urban poor may be the need of the hour.
One of the things the pandemic has done in India has been to expose the stark lack of safety nets for lower-middle-class urban workers. While rural India has MGNREGA, urban India does not.
The only way for urban workers to gain access to safety is to return to their villages to the safety of MGNREGA. The sharp increase in the number of beneficiaries during the pandemic has proven this beyond reasonable doubt.
Thus, India urgently needs an urban safety net. This budget could be a good time for that.
The inflation problem
According to Rajan, inflation tends to take root over time and the longer it takes root, the harder it is to push it back.
India’s inflation targeting framework has served the economy well so far, he said, adding that without such a framework, the pandemic situation for India might have been worse.
Rajan says no country can be satisfied with inflation, and India is a good example. The expectation that the RBI will keep inflation under control keeps borrowing rates reasonable for India; some of the credit for G-Sec still being in the 6% range also goes to that framework, he says.
Lessons from the agricultural law fiasco
The idea is to be democratic, talk to people, bring states together with the Center, and then come up with a plan, Rajan said.
The main lesson from the farm bills is that there were a lot of good things but you didn’t sell them more widely or properly, he added.