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The GDP numbers “should alarm us all”, says former RBI Governor Raghuram Rajan

The Indian economy saw its worst contraction in decades, with the Gross Domestic Product (GDP) shrinking by a record 23.9% in the April to June quarter in comparison to the same period last year, according to data released by the National Statistical Office on Monday.

The contraction reflects the severe impact of the COVID-19 lockdown, which halted most economic activities, as well as the slowdown trend of the economy even pre-COVID-19. Economists expect this to contribute to a contraction in annual GDP this year, which may be the worst in the history of independent India.

Further, this 23.9% contraction in GDP growth numbers for the first quarter of the year “should alarm us all” and the government and its bureaucrats should be “frightened out of their complacency” and into meaningful activity, said former Governor of the Reserve Bank of India, Raghuram Rajan in his LinkedIn post. With discretionary spending (the nonessential spending - usually the wants rather than needs) expected to stay low until the virus is contained, government-provided relief becomes all the more important, Mr. Rajan said, adding that the government’s reluctance to do more today to conserve resources for a possible future stimulus is a “self-defeating” strategy. “Without relief measures, the growth potential of the economy will be seriously damaged,” he further added.

Mr. Rajan also said that the 23.9% contraction in India, which will probably be worse when estimates of the damage in the informal sector come out, compares with a drop of 12.4% in Italy and 9.5% in the United States which are the two most affected countries by the Covid-19 pandemic. He further added that “Yet India is even worse off than these comparisons suggest”. The pandemic is still raging in India, so discretionary spending, especially on high-contact services like restaurants, and the associated employment, will stay low until the virus is contained,” he said. “Government-provided relief becomes all the more important. This has been meager; primarily free food grains to poor households; and credit guarantees to banks for lending to small and medium (SMEs) firms, where the take down has been patchy,” Mr. Rajan added.

To further explain what Mr. Rajan said, the economy can be assumed to be a patient and the relief is assumed as the sustenance that the patient needs while in the sickbed . So, without relief the households would skip meals, children would starve and borrow more for the needs of the family. So, the interest and EMI piles up and paying back becomes increasingly difficult.

“India needs strong growth, not just to satisfy the aspirations of our youth but to keep our unfriendly neighbors at bay. The recent pick-up in sectors like autos is not evidence of the much-awaited V-shaped recovery. It reflects pent-up demand, which will fade as we go down to the true level of demand in the damaged, partially-functioning, economy. No doubt, the government and its bureaucrats are working hard as always, but they need to be frightened out of their complacency and into meaningful activity. If there is a silver lining in the awful GDP numbers, hopefully it is that,” he concluded.

Reporter: Jaya Anisika S

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