India faces military, health & economic threats, govt must restore faith, says Manmohan Singh

In a column for The Hindu, former PM Manmohan Singh advocates significant cash transfers to the poor, better access to capital for firms and autonomy for financial institutions and RBI.
Manmohan Singh
Former Indian Prime Minister Manmohan Singh

New Delhi: India is confronted with a dangerous trinity of military, health and economic threats and it is imperative that the government restore the confidence of people in banks and businesses, said former prime minister Manmohan Singh Monday.

In a column published in The Hindu, co-authored with Congress leader Praveen Chakravarty, Singh said that India cannot afford to be fiscally restrained in these distressing times and, therefore, higher borrowings by the government are inevitable.

Singh and Chakravarty pointed out that since the global economy is set to experience one of its worst years because of the Covid-19 pandemic, Indian economy will also contract significantly, for the first time in decades.

A contraction in the economy will reverse many years of progress, push many people into poverty, force firms to shut shop and lead to severe unemployment, they wrote.

The Indian economy is forecast to contract by at least 5-10 per cent in the current year.

Furthermore, according to data from the Centre for Monitoring Indian Economy (CMIE), salaried jobs that were lost in April and May are recovering at a sluggish pace.

Anecdotal evidence shows that many businesses have also shut down due to the complete halt in economic activity in the two months following the lockdown announcement on 24 March.

Meaningful cash transfers can restore confidence in poor

In their column, Singh and Chakravarty highlighted that it is important to allow institutions like the Reserve Bank of India, state-owned banks and other regulators to function freely and professionally, to restore people’s confidence in the financial system.

“There is also a dire need to restore confidence in the financial system which acts as the vital lubricant for the economy. COVID-19 assistance measures undertaken by the RBI and the government such as interest rate reductions, credit guarantee and liquidity enhancement schemes are welcome steps, but they have largely failed since banks are not confident of lending,” they wrote, adding that reviving the health of the banking sector is not merely about capital infusion or disinvestment of public sector banks.

They noted that the government needs to look at not only the GDP numbers for its diagnosis of the economy but also at the prevailing underlying sentiment of fear and uncertainty.

They also noted that there is “extreme duress” among the poor in the country, and a “meaningful cash transfer” can restore confidence in these families. The authors dismissed the moral hazard fears that large cash transfers will discourage labour to return to work in industries.

“Money in the hands of people can provide an immediate sense of security and confidence, which is the cornerstone to restoring economic normalcy,” they added.

Deficit monetisation should be last resort 

Singh and Chakravarty also pointed out how confidence can be restored in banks and businesses.

“Restoring confidence in people through direct cash assistance and other welfare programmes can help them live their lives and spend. Restoring confidence among bankers through autonomy of institutions and processes will help them lend. Restoring confidence among businesses with greater access to capital will help them invest and create jobs” they wrote.

The authors added that India must make full use of loan programmes of the International Monetary Fund and World Bank.

However, they warned that deficit monetisation — RBI directly lending to the government — should be the government’s last resort.

“Deficit monetization imposes high intangible and institutional costs, as we have experienced in the past. It is perhaps prudent to adopt deficit monetization as the last resort when all other options are exhausted,” they wrote.

Singh and Chakravarty pointed out that India entered the Covid-19 pandemic in a “precarious position” — slowing growth, rising unemployment and a choked financial system — and the pandemic exacerbated the situation.

Taking a swipe at the Narendra Modi government, they said that diverting people’s attention from the health, military and economic threats through “choreographed events and headlines will not make them disappear”.

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