Former RBI Governor Raghuram Rajan’s 8 cues for Budget 2022


According to a report in Economic Times, India urgently needs to move away from incremental budgetary policy moves and stop thinking only about areas like manufacturing or agriculture, according to former Reserve Bank of India governor Raghuram Rajan.

In an interview to ET Now, Rajan explained why one need neither be overly optimistic nor overly pessimistic about India at the moment.

Aside from elaborating upon pressing issues like the state of key indicators of the economy, the real shape of the recovery, India’s susceptibility to another possible round of Fed taper tantrums, etc, he also gave his take on where exactly Modi government went wrong in respect of the contentious farm laws, the report said.

Pressing Issues For This Budget

Maintaining the confidence of the markets as also of the public is among the key issues for any budget.

There has to be a definite pathway of how to get the economy back on track. The pathway should appear credible, one that doesn’t hint at profligacy.

There also a need to support demand at this point. There should be a push on infrastructure — both by the Centre but the states. “It is important to ensure that the states are doing what they can there because that will be important for creating some of the low end jobs which are desperately needed but also creating demand for domestic steel, for copper, cement etc”, the report said.

Some of the measures should include keeping MGNREGA well funded, and handholding the areas that are doing badly now.

There is a need to shun incremental moves and look at new areas like telemedicine, tele lawyering, edutech. According to Rajan, what these industries need is not funding, but better rules on data protection that meet global standards.

According to Rajan, India should stop thinking about just manufacturing or agriculture. It, instead, should start talking about services which is its big strength.

More than anything else, this year’s budget needs a vision, Rajan said: “I would see the Budget document not so much as raising tariff A and providing subsidy B but really a document which says this is the path we choose over the next five years and every year we update it a little but that path, that vision seems relatively constant”, the report said.

Relevance of Forex Power in Face of Fed Taper

While the foreign exchange buffer that India has is a good one, the fact remains that all other macroeconomic indicators must be in place as well, says Rajan.

These indicators include oil and gold imports and the widening current account deficit. Of late, oil prices have surged and gold imports are on the rise, leading to an expansion in the country’s current account deficit.

To be sure, this CAD expansion has not yet reached worrying levels. Also, exports have done well. But according to Rajan, that doesn’t mean India can ignore it anymore.

How Rates can Queer the Pitch From Here on

The time has again come to begin tracking the movement of interest rates, says Rajan.

The amount of liquidity in the system — both in India and elsewhere — is enormous and it’s only a matter of time before policymakers find themselves forced to raise rates.

Some of India’s EM peers like Brazil have already bitten the bullet.

This is an era where all markets are inter-connected, so India needs to prepare for the time US raises rates. According to Rajan, once rates go up in the US, there will be financing issues elsewhere — issued that are currently non-existent in places like India when money is still easier, the report said.

Real Shape of Economic Recovery in India

According to Rajan, one need neither be overly optimistic nor overly pessimistic at the moment. Both “bright spots and dark spots” is how the former RBI governor describes the current state of the Indian economy.

The top end of businesses — including exporters, IT companies, businesses that cater to the rich — is doing very well riding on pent-up demand. The upper middle class, in the same manner, has done very good because they never had to stop working/earning at any point during the pandemic, the report said.

At the other end of the spectrum — the lower middle class, people working contact-intensive jobs — has fallen through the crack. Rajan cites the rising employment numbers in agri sector to make his point, which he said is a very peculiar phenomenon because no developing economy sees a rise in agricultural employment, the report said.

The pandemic made that happen in India because a reverse migration abruptly started after lower-end jobs vanished, the report said.

India now has a real consumption problem because the less well-off segments did really badly during Covid, Rajan added.

Limitations of Monetary Policy at This Point

The credit scene in India is caught in a plethora of problems at this points, Rajan said. These include (a) people are finding it difficult to borrow; (b) lenders themselves are trapped; (c) credit flow is tepid at best.

According to him, the new-age credit boost from NBFCs and fintech are nowhere near enough to fill that void.

India needs not to increase the demand for loans but also the supply of the same, but monetary policy can do little to remedy such a situation, the report said.

What Fiscal Policy Can Do

Targeted measures focussed on the urban poor could be the need of the hour.

One thing the pandemic did in India was expose the glaring lack of safety nets for urban workers belonging to the lower-middle class. While rural India has MGNREGA, urban India has none.

The only way urban workers get access to any safety is go back to their villages to the safety of MGNREGA. The sharp rise in beneficiaries during the pandemic proved this beyond reasonable doubt, the report said.

So, India urgently requires an urban safety net. This budget could be a good time for that.

The Thing About Inflation

According to Rajan, inflation has a way of getting entrenched over time and the more it gets entrenched, the harder it is to push back.

India’s inflation targeting framework has served the economy well so far, he says, adding that without such a framework, the pandemic situation for India could have been more adverse.

Rajan says no country can get complacent about inflation, and that India is a case in point. The expectation that 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 this framework, the report said.

Lesson From Farm Law Fiasco

The idea is to be democratic, to talk to people, to bring together states with the Centre and then devise a plan, the report said.

The main lesson from the farm laws is that there were be a lot of good things in it but you did not sell it more widely or properly, he added. (Economic Times)