Raghuram Rajan: The Govt Package Has Some Good Elements But a Lot More Needs to Be Done

This is the transcript of the first part of the interview former Reserve Bank of India Raghuram Rajan gave Karan Thapar for The Wire on the economic challenges created by the COVID-19 pandemic and what the government needs to do to overcome them. 

The second part is published here.

Karan Thapar: Hello and welcome to a special interview for The Wire. Is India’s 20.9 lakh crore rupee stimulus package an impressive response to the challenge that the country faces economically, or is it somewhat inadequate? That’s the key issue I should raise today with the former governor of the Reserve Bank of India and former chief economic adviser Raghuram Rajan.

Dr. Rajan, you now know the details of that 20.9 Lakh Crore package that the government has announced. So let me put that question to you. Do you see it as an impressive response to the economic challenge the country faces? Or is it somewhat inadequate?

Raghuram Rajan: Well, we are facing probably the greatest economic emergency we’ve seen in our lifetime across the world. So almost any response is inadequate. I think it’s particularly so in India’s case because we’ve had years of economic drift in which our growth has slowed, our fiscal deficits have gone up. There’s lot more we need to do in order to set the economy back on track. And in the face of this emergency, basically, we have to pull out all stops. And in that light, this package has some good points, but it probably needs to do more.

KT: I want to pick up on that point that you made that we need to pull out all stops. 14 separate institutions have calculated that this 20.9 lakh crore package actually only consists of just about 2 lakh crore, which is roughly 1.1% of GDP as a fiscal stimulus. The rest is loans, credit guarantees and funding schemes. I presume fear of an uncontrolled fiscal deficit restrains the government. But in your eyes, was this wise caution or was it a mistake?

RR: Well, let’s look at what needs to be done and then look at it in that light. First, we got to stop the spread of the virus and unfortunately, that battle is still going on. The second is we’ve got to find ways to give relief to the people who are being affected, to give relief to these small firms that are affected. Third, we’ve got to repair the places in the economy that need repair. This includes some of the big firms, this includes the banks and of course, this includes the MSMEs. Fourth, we need to provide for the recovery. That means some kind of stimulus, so as to get the recovery going. And finally, we need reform. Now, where does the package sort of fail in providing resources? Primarily, that’s on the recovery, the stimulus; and hopefully down the line as we finish the fight against the virus, there is some attempt to create stimulus.

But on all the other measures also. The question is, have we done enough? Let me leave the issue of repelling the virus to the expert, the pandemic expert. I’m not one… Would we do more for the people or more in terms of food, more in terms of money, especially for the migrants who have been left adrift, but also for ordinary people who have been under lockdown for two and a half months, food grain is not just not enough. You need other things to cook, other things to ensure shelter. Money would be good. A lot more needs to be done. So that’s one example of where we could do more.

KT: Can I take you to all of those different things one by one? But before I do that, I get the feeling you’re saying that given that challenge, given the number of things [the finance minister] needed to do, she should have been prepared to let, in this instance, the fiscal deficit grow. Containing it or trying to keep it within the target of 3.5% is a mistake. This is one instance where she should have spent more. Otherwise, she cannot tackle those four or five critical things that you mentioned.

RR: Absolutely. I mean, to some extent, what we need to do is give investors, give the rating agencies more conviction that we are: one, doing what is essential to preserve and protect the economy. And that is in everybody’s interest, including the investors. It is nobody’s interest to see an economy which is broken emerge from this crisis. That’s one. And second, that we will do everything to get the economy back on to the appropriate fiscal path once the emergency is over.

So there had to be statements about how we would both come clean on the true extent of the deficit and to get us back on the fiscal path. And lots of suggestions around, for example, the N.K. Singh committee has said we should have an independent fiscal commission which can opine on the true level of the deficit as well as measures to get us back on track. Those would build some commitment in for investors, but eventually we get back. But now, in the face of this emergency, saving the economy, saving the people is most important

Also read: Five Things the Govt Needs to Do to Mitigate Rural and Migrant Distress

KT: In the light of what you just said let’s then go back and visit those four or five critical target areas that you identified earlier. I’ll go through them one by one so the audience can understand. And let’s start with immigrant migrant workers, the poor and the vulnerable. The first package of relief given to them in March gave them five kilograms of grain as well as 500 rupees ii their wives Jan Dhan accounts, but only for a three month period. This amount was considered at the time, grossly inadequate.

It hasn’t been enhanced. The period hasn’t been extended, which means in exactly 40 days from today, this relief will end. Now, what the finance minister has done is to include on Sunday those who were earlier excluded from this package.

So let me begin by asking you, what do you make of this government’s attempt to ameliorate the suffering of the poor? What do you make of its response for the plight of the poor?

RR: Well, I think this is one place where it was important to both send more money as well as more than food grains. Maybe there’s adequate amounts. But people can’t just eat food grains, they need vegetables. They need oil to cook. They need other stuff. That means a certain amount of money along with the food grains. They also need shelter. So I think at this point, the sense is, certainly from the migrants who have left the cities to go back to their villages, where they will find more welcoming relatives to look after them, I think this has been inadequate because there have been attempts to remedy the initial sort of announcements to ensure that local governments come in and out voluntary agencies. But certainly more could have been done.

KT: Now, in an article that you wrote with Amartya Sen and Abhijit Banerjee for the Indian Express on the 15th of April, you suggested that the government should be prepared to give temporary ration cards to anyone who was willing to stand in a queue. And secondly, you said they should put 5000 rupees in every  Jandhan account, and you ended that article with the following sentence: “Skimping on helping the truly needy is the surest way to lose the plot.” The government has not heeded your advice about cash payments. So are they now today in danger of losing the plot?

RR: Well, I feel for the people who have suffered or who have suffered through the lockdown, it also means that, you know, when you lift the lockdown, a lot more people will leave home because there’s really no money at home, they have to go out and look for a living. Of course, the migrant issue, on the one hand, it is really painful to see the migrants walking back to their homes, carrying children with them. But also it is not conducive to tackling the pandemic because they are moving from crowded cities where the pandemic is rife to villages where they may be carrying the virus with them. So really, this is neither in the nation’s interest and of course, is not appropriate humanitarianly. I understand we’re trying to do the best we can, but we could do more.

KT: You know, she was questioned on Sunday when she held her last press conference to declare the last tranche. She was questioned why she had not accepted the advice given by you Amartya Sen and Abhijit Banerjee to make immediate cash payments. And her reply was, there are many ways to address the problem. What we did, we’d have greater impact.

Then on Wednesday evening, she said to ANI that loans will have a greater multiplier effect than direct cash transfers. Do you accept that. But what would have a greater impact? Will those laws have a greater multiplier effect than direct cash transfers?

RR: Well, I think laws take time to work. I think what is immediately the problem is hungry people. I mean, there is a report that half of the families that, I don’t know the details of the survey to see how accurate this is, but half of the families have skipped meals at this time. This is not a good situation for a country that prides itself on being a strong emerging economy. We can certainly find the money. It’s not that much compared to the 20 lakh sort of proposal that was put on the table. It is not that much and we should find it for the most needy.

Also read: Diluting Laws Will Mean More Casual Labour – and That’s Not a Good Thing

KT: Let’s go to the second of the targets you listed at the beginning of this interview that need to be tackled. The MSMEs, which represent something like 30 percent of the economy, 45 percent of manufacturing. I’m told 50 percent of exports. Perhaps most importantly, they employ up to 12 crore people. Now, the finance minister has given them collateral free loans and credit guarantees amounting to 3.7 lakh crore rupees. 

RR: Well, I think this is a sector which has been targeted by the government for a number of years with the Mudra scheme. A lot of money has gone into the sector. Borrowing has gone up and not all of it has been good. If you look at the public sector banks, even in 2018, the NPAs on the MSME loans were 15 percent. The private sector banks were doing a lot better. And this is almost always a consequence of the government giving diktats on lending – you make bad loans. But the problem here is that this sector has been distressed time and again by policies which limit its business capabilities. Demonetisation was one. They haven’t been able to adapt adequately to the Goods and Services Tax,.And the slow growth, the slowing growth over the last few years has hit them once again. So this is a sector in deep distress, but also heavily indebted. Now, how do you resolve this? I mean, giving them more debt at this point – You have to be very careful. You have to be very careful that you don’t add to the debt problem. And you also have to be very careful that the banks, when they lend more to these entities, don’t use it as a way to funnel out the money back to themselves, to bail out the bad loans they’ve given in the past. Now, I looked at some of the early announcements of the scheme, I need more detail, but, I don’t know what there is right now which prevents the banks from using this to essentially bail themselves out – rather than helping the MSMEs.

What we really need for the MSMEs is an improvement in their business conditions – which means stronger growth as we come out of this recession –but also looking at the debt situation and finding ways to give them debt relief rather than additional debt; restructure the debt they already have, but also, and this is the last point º The scheme, essentially the three lakh loan scheme gives more loans to those who already have loans. What about the MSMEs where no loans whatsoever – who are trying to find ways to get working capital as they get out of this pandemic who have been closed for a couple of months, who need money.

 Are they going to get any lending? What is that going to be? So I think it’s important to make sure the scheme works for the MSMEs is rather than a way to help the banks get their money back. And it is important that we give additional funding not just to the ones that already have a lot of debt, but also put those who need the money to grow at this point out of this situation.

KT: What you’re saying up the Dr. Rajan is perfectly clear. the MSME sector is a badly indebted sector, in the case of Mudra loans, they’re not not able to pay them. There was the widespread belief before the coronavirus happened that those mudra loans would turn sour. Giving them more debt is not a solution to the problems it would only increase that indebtedness. In an interview that your body Abhijit Banerjee gave me on the 3rd of May, he said that the way to help MSMEs is for the government to make every effort it can to revive demand by spending liberally. That is the way, rather than trying to target MSMEs directly with some sort of package. Would do you agree with that broad statement?

RR: Well, I would say there are a variety of ways that they need to be helped. For example, a lot of public sector firms have, you know, payments that they owe MSMEs. Make them today, in fact, make them yesterday. A lot of private firms that are large, that have access to capital markets, could make payments to their MSME  suppliers. So these things could be done fairly quickly. Growth will help , stronger growth will help the MSMEs. And, of course, the whole idea of making business easier that the government has emphasised over so many years, if that could actually be made realistic for the MSMEs, that would help tremendously. So I think there are a variety of things that can be done. Primarily growth, but also debt relief. Also, repayments of monies that they owed – perhaps, you know, we’ve sort of alleviated some of the tax burden. But really, we need to focus on all these, rather just still more debt.

KT: Very quickly for the sake of the audience, I’ll add that anything that Nitin Gadkari has said that the dues owed to MSMEs by the central government, by PSUs and the state government is just the excess of 5 lakh crore. That’s an enormous amount that would help. But one of the problems these MSMEs face is that just as the lockdown is being relaxed and the government is trying to revitalise the economy, tens of millions of their workers have actually upped sticks and gone back. But even as I talk to you every day, there are millions walking back by train or by bus or simply trudging down the road. How much of a problem will that create for the MSME sector? And can the government do anything to help?

RR: Well, it certainly would be a problem for some because the workers have left. I think it is a bad idea to restrict the movement of the workers by saying thou shalt not leave the city. You have to make conditions in the city better for them to want to come back. And that means first, of course, tackling the pandemic problem. But second, trying to think about what the lessons are from this episode. We have a number of migrants in the city who have no safety net whatsoever. And all this talk about, you know, Jandhan Yojna, JAM,  Aadhar mobile – with all this in place, we still have no way to identify the truly poor, truly marginal, the unemployed, and make transfers to them in bad times. We need to do that on an expedited basis so that if we have further calamities or further recessions, we find ways so as to help the marginalised so that they don’t have to leave the cities and go to their, you know, trudging long ways to their villages.

Hopefully we will not see a pandemic of this kind again. But nevertheless, this highlights the need for a stronger safety net for workers in the cities so that they feel comfortable coming back. That is something that we have to think about, perhaps sooner rather than later, to attract workers back to the cities. Many of them at this point in their villages, with MNREGA open and with wages increased from MNREGA, are probably going to prefer that kind of safety for a while before coming back.

KT: Let’s come Dr. Rajan to the third of the points that you just said the government needs to address. I’m talking now of the industry, and I suppose in particular of those aspects of it that have been grounded to a halt by the locked down hotels, restaurants, aviation, car manufacturers and construction.

Other than a 70000 crore boost to an existing scheme for middle income housing being developed on a PPP basis, I didn’t hear very much that would encourage big business. Was that a mistake or a lapse on the finance ministers part? Or is she right on the assumption this is a sector that can take care of itself and will get back on its feet without assistance from the government.

RR: I suspect this is the place where the resources required, if you wanted a bail out of the kind that the US is undertaking right now would be enormous.

So we have to look for alternative ways to deal with the problem, take  the airlines. I mean, many of them have reasonable amounts of debt and have gone through two or three months without any passengers. They are bleeding and it’s not likely that revenues will come back fast. So this is, again, a situation if you don’t have the money to bail out, which, again, bailouts are costly and probably unwarranted, then you have to look for alternatives.

The alternative here would be debt relief, that is, given the high debt loads, given the fact that they have been burning through cash for some time, you have to restructure the debt in these companies so that you don’t close them down. But they can fight another day. And given that this crisis was not the fault of management, you keep the management in place, but restructure the debt quickly. Now, that requires a speed up in the restructuring process, instructions and enabling devices for the banks to do it. And it also requires, at the back end, a bankruptcy code which is geared up in case the restructuring fails to deal with the problem itself. Now, what we’ve done is a mix of things. We’ve suspended the bankruptcy code for a year. I don’t know why we did that. It is not meant to be the first port of call, but it is meant to be there to tell people that if restructuring fails, there’s an alternative. So, how do lenders actually threaten the borrower to do an appropriate restructuring and vice versa?It’s not clear to me.

I would have thought that for these large companies that have difficult problems, the government cannot keep replenishing their coffers. But certainly debt relief would have been a viable act. I hope it is still in the works, but we need to do more to speed up that process and to make sure that they come back when they are needed.

Also read: Increased Care Work, Reduced Wages: Informal Women Workers Are Barely Getting By

KT: Very quickly, Dr. Rajan, from that answer, I get the feeling that you sort of think the government hasn’t thought through carefully enough, or maybe I mean, clearly enough the different ways it could help the industry. And as a result of not thinking through it carefully or clearly , it’s opted to do very little or sometimes things that are not quite as straightforward and clear as they should be.

RR: Well, I’m hoping it hasn’t communicated yet what its thinking is, but these are issues that every government is now grappling with.

How much of bankruptcy, how much of support, how much of restructuring, given the nature of this virus, especially given the fact that it’s affecting our large companies also, it is extremely important we think about this quickly and we have in place structures that allow these entities to come out with moderate amounts of debt rather than become so indebted. You know, to some extent, we need to deal with with this if we are to get the economy back on track.

KT: One last question before I take a break and let me begin by saying this is not something the finance minister herself mentioned, but the agriculture minister has almost, in so many words, said that he believes agriculture has come through the lockdown without much damage. He believes that the rabi harvest has happened very satisfactorily. Procurement is almost complete, and he’s then gone on to say that agriculture growth, this year will be three percent. That is just marginally below last year’s 3.7 percent. You get the feeling he’s being overoptimistic? Or do you think he might be right?

RR: He may well be right because agriculture as a sector, well, certainly relies a lot on on labour, but it’s not clear to me that that labour has disappeared at harvest time – is perhaps in places like Punjab, which use a lot of migrant labor – but maybe the farmers have made do and and maybe he is right that this is a sector which has survived the downturn. Now, the big issue is really going forward.

There have been a number of reforms that have been announced in the agricultural sector by the government, reforms that have been talked about for a long time. And it is extremely important we implement them because the agricultural sector is one that has seen steadying or growing stress over time. And if we implement these reforms, there’s some hope for that sector,

Transcript prepared by Kabir Varadarajan Arora