Don’t Read Too Much Into Green Shoots, It’s A Mechanical Rebound, Says Former RBI Governor D Subbarao

Calling the 'green shoots' of economic revival a mechanical rebound, former Reserve Bank Governor D Subbarao says India's short- and medium-term growth prospects continue to remain grim and the government should not read too much into the economic activity coming back from the depressed base of lockdown.

The Indian economy was already losing pace before the outbreak of the Covid-19 pandemic . India’s real GDP growth had moderated from 7% in 2017-18 to 6.1% in 2018-19 and to 4.2% in 2019-20.

"I don't believe we should read too much into the green shoots that you refer to. What we've been seeing is just a mechanical rebound from the depressed base of the lockdown; it will be misleading to see it as a signal of a durable recovery," Subbarao told PTI in an interview.

He said the "short-term as well as medium-term prospects (for Indian economy) continue to be grim".

"The pandemic is still spiralling, the number of daily cases is rising and it is spreading to newer regions," he added.

In the medium term, India’s financial problems could only get worse. The former RBI governor said he expects that managing the economy will get tougher once the Covid-19 pandemic abates, with the fiscal deficit likely to be much higher, the debt burden much larger, and the financial sector in worse shape.

The World Bank last week projected India's fiscal deficit to rise to 6.6% of GDP in 2020-21 and remain elevated at 5.5% in the following year. This compares to the 3.5% target set by the government.

"Our medium-term prospects will depend on how effectively we resolve these challenges," Subbarao said.

As things stand, global and domestic agencies have projected a sharp contraction in India’s GDP in the current fiscal - the first in four decades. The estimated contraction ranges from 3.2% to 9.5%.

Asked whether he sees any positives at all in this grim scenario, he noted that the rural economy has recovered better than the urban economy helped by several factors and the expanded MNREGA provided a lifeline when most needed.

Subbarao said that another big, butless acknowledged positive is that the economy today has some basic safety-nets in place.

Citing an example, Subbarao said that 40 million urban labour went back to their villages post Covid-19 induced lockdown and despite that there have been no reported cases of mass starvation or hunger.

"Throw your mind back 20 years or even 15 years, and it's easy to imagine how easily this could have turned into a story of hunger, destitution and death. That story did not play out is a testimonial not just to this government but to successive governments over the last several decades," he said.

On criticism that the government is not spending enough to help the nation tide over the economic crisis, the former RBI governor said he does believe that it is critical for the government to borrow and spend more.

"Indeed, government spending is the only growth driver we have in the short term; all other growth drivers private consumption, investment and net exports - are all depressed.

"Besides, if the government does not spend more now to arrest the decline, many problems such as bad loans will only get even more intractable and take a much heavier toll on the economy," Subbarao said.

The former governor, however, added that government borrowing cannot be open ended, and limits must be set.

"That will force the government to be efficient, transparent and accountable," he noted.

Asked where he thinks additional spending should go, Subbarao opined that given the very limited fiscal space, more than ever, the government should aim to get the maximum bang for the buck.

"Spending can go either to spur consumption or production," he said, adding that he believes production should take precedence over consumption.

Noting that the RBI has already given guidelines for loan restructuring by banks, Subbarao said, "The government can chip in by taking some of the loan burden of MSMEs and of MUDRA loans."

The government also needs to spend a significant amount to recapitalize banks, and through that, provide support for recapitalization of NBFCs, he added.