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Terming the uneven recovery “morally wrong and politically corrosive”, he said liquidity in the domestic market and foreign fund inflows are leading to soaring of prices of stocks and other assets despite disruptions due to Covid pandemic.
The ex-central bank governor further said that earlier expectations of a sharp economic recovery this year have been dashed by the new pandemic wave.
“The economy contracted last year, for the first time in four decades, by as much as 7.3 per cent. That was less deep than we had first feared but still deep enough to have caused distress to millions of families in the informal sector. There was expectation of a sharp recovery this year but those expectations are now tempered by the impact of the second wave,” Subbarao told PTI.
The RBI too reduced its growth forecast for the current fiscal by one percentage point, from 10.5 per cent to 9.5 per cent, he said adding that even 9.5 per cent growth might seem impressive but note that this is coming on a very low base of last year.
“Even if we clock this growth rate, the output during this fiscal 2021/22 will still be less than the output two years ago before the pandemic hit us. Compare that with China which never fell below its pre-pandemic level and the US which is expected to recover to its pre-pandemic level this year,” the former RBI chief said.
Expressing concerns, Subbarao said that while the majority of people have lost jobs and saw reduction in their income, the wealth of some rich individuals have increased during the pandemic period.
“The positive wealth effect of the upper income segments juxtaposed with the negative income effects of the lower income households tells a story of a very uneven recovery and sharpening inequalities. This is morally wrong and politically corrosive,” he said adding that it will also have a big impact on growth prospects going forward.
Explaining further, he said the booming stock market is in fact “symptomatic of the extreme unevenness of this recovery”.
The domestic liquidity coupled with foreign inflows is fuelling stock prices as also prices of other assets, he said. “Who benefits from this? People who have investable surpluses.”
“Contrast that with the findings of a study by the Azim Premji University that the one year of Covid-19 pandemic has pushed 230 million people into poverty with a 15 per cent increase in poverty rate in rural India and a 20 per cent surge in urban India,” he said citing the findings of a study.
“Add to that CMIE data showing that the unemployment rate has gone up as high as 12 per cent in May, 10 million jobs have been lost just on account of the second wave and 97 per cent of the households in the country have experienced declines in incomes,” Subbarao added.
India’s economy contracted by less-than-expected 7.3 per cent in the fiscal ended March 2021.
The Reserve Bank has lowered the country’s growth projection for the current financial year to 9.5 per cent from 10.5 per cent estimated earlier, amid the uncertainties created by the second wave of the pandemic, while the World Bank on Tuesday projected India’s economy to grow at 8.3 per cent in 2021.
To a query on urban-rural divide, he said the second COVID-19 wave has hit villages and “we are hearing grim tales of loss of lives and livelihoods”.
“Poor households have run down their savings for medical expenses, and given the weak medical infrastructure in the villages, rural households are also much more uncertain and anxious about the impact of a possible third wave,” Subbarao said.
He added that the forecast of a normal monsoon should act to counterbalance some of these fears and anxieties.
On being asked about the fiscal measures necessary to support households in distress, Subbarao said the government is under intense fiscal pressures.
“Even so, it is absolutely necessary to provide some safety-nets to households in distress,” he said.
Noting that MNREGA proved to be a very effective stabiliser last year, Subbarao said the finance minister can make an open-ended commitment to finance MNREGA to the full extent of demand.
“If it turns out that there is no uptake for MNREGA because of fear of the virus, direct cash transfers may become necessary but that should be the last resort,” he said. According to the former RBI governor, the government should also consider extending some support on the production side, especially to MSME units, particularly to those sub-sectors which are engaged in exports.
When asked if the government should borrow more than budgeted, he said given the already high debt-to-GDP ratio, borrowing beyond the budgeted level should be avoided to the extent possible.
“For sure, there is going to be additional expenditure not foreseen at the time of the budget. The free food grain programme plus the expanded free vaccines will cost the government up to 0.5 per cent of GDP. Perhaps more may need to be spent depending on how the situation evolves,” he said.
According to Subbarao, it may unfortunately become necessary to cut some desirable capital expenditure to meet the safety-net expenditures.
“But such expenditure switching is a better option than borrowing more.”
He also said that the government could of course consider some one-time tax measures such as a cess on corporate profits, capital gains and sin taxes.
On inflation, Subbarao pointed out that as per RBI’s policy statement, the current inflation reading of 5.1 per cent is largely due to supply constraints.
“If economic activity revives sooner than is currently expected, demand pressures will ignite inflation calling upon the RBI to adjust their policy stance,” he said.
On being asked about the impact of the global situation on India’s short-term economic prospects, Subbarao said the world is experiencing a multi-speed recovery. “Developed countries, and China too, are expected to grow rapidly this year, many of them reaching pre-pandemic levels of output, and in the case of China, even surpassing it,” he said adding this should provide demand for our exports as was evident to some extent in the growth number for the first quarter (Jan-March) of this year.
Subbarao opined that the flip side of global recovery is that global commodity prices, including the price of crude, will firm up which will have substantial implications for India’s growth and inflation prospects.
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