Country is in the midst of growth recession: Rajan
■ Former RBI governor calls for asset quality review of NBFCs
New Delhi, Dec. 8: Former RBI governor Raghuram Rajan said India is in the midst of a "growth recession" with signs of deep malaise in the economy that is being run through extreme centralisation of power in the Prime Minister's Office and powerless ministers.
Penning down his recommendations to help the ailing Indian economy out of the ongoing slowdown in a magazine, he called for reforms to liberalise capital, land and labour markets, and spur investment as well as growth.
Rajan said the starting point to address the economic slowdown will be for the Modi government to acknowledge the problem.
"The starting point has to be to recognise the magnitude of the problem, to not brand every internal or external critic as politically-motivated, and to stop believing that the problem is temporary and that suppressing bad news and inconvenient surveys will make it go away," he said. "India is in the midst of a growth recession, with significant distress in rural areas."
India's economic growth slowed to a six-year low of 4.5 per cent in the JulySeptember quarter. With inflation rising, fears of stagflation -- a fall in aggregate demand accompanied by rising inflation -- have resurfaced.
He said construction, real estate and infrastructure sectors are in "deep trouble" and so are lenders to the sector, like the nonbank finance companies. The crisis among shadow lenders and a build-up of bad loans at banks have curbed lending in the economy. He also sought asset quality review of the nonbank finance companies.
He said corporate and household debt is rising, and there is deep distress in parts of the financial sector.
Unemployment, especially amongst youth, seems to be growing, as is the accompanying risk of youth unrest. "Domestic businesses have not been investing either, and the stagnation in investment is
Though the RBI has pegged GDP growth at 5 per cent for the current fiscal, the actual figure could be slightly below that mark in FY20, as the impact of stimulus measures will take time to filter through to the economy. Despite several measures taken by the government, high bad loan levels of public sector banks will drag down India's growth momentum, according to an IHS Markit release on Sunday.
"Financial sector fragilities continue to weigh on India's economic growth momentum, with the high level of non-performing
the strongest sign that something is deeply wrong," he said.
Rajan called for reforms in land acquisition, labour laws, stable tax and regulatory regime, fast tracking bankruptcy resolution of developers in default, proper pricing of electricity, preserving competition in telecom sector and giving farmers access to inputs and finance. loans on the balance sheets of the public sector banks constraining their new lending," IHS said.
For the first half of 201920 fiscal, GDP growth slowed to a pace of 4.8 per cent compared to the 7.5 per cent a year back. Furthermore, there are also risks from potential contagion effects from troubled non-bank financial companies (NBFCs) to the balance sheets of some commercial banks, which could further weigh on the overall pace of credit expansion, it said.
"Following the weak GDP outturn for the September quarter, Indian real GDP growth in FY 2019-20 is expected
He also wanted decentralisation of power by empowering ministers and engaging states, beginning with amending the terms of reference of the 15th Finance Commission by not curtailing states' share of tax revenue.
Rajan said the government should desist from cutting personal income tax rates for the middleclass for now and should to be slightly below 5 per cent, as it is anticipated that the impact of stimulus measures will take time to filter through to the real economy," it said.
"Confronted with the sharp slowdown in economic growth momentum, the government will face increasing pressure to roll out additional fiscal measures to bolster manufacturing output and kick-start an upturn in the investment cycle. Such measures could include accelerated government spending on infrastructure projects such as roads, railways, and ports, as well as urban infrastructure such as affordable housing and hospitals,"
use its scarce fiscal resources to support the rural poor through schemes such as the MGNREGA.
The repeated government allusions to a $5-trillioneconomy by 2024, which would necessitate steady real growth of at least 8-9 per cent per year starting now, seem increasingly unrealistic, he added.