GDP figures haven’t accounted for informal sector, says former RBI Governor

By Jit Kumar
Raghuram Rajan

The sector was worst-hit by pandemic, explains Raghuram Rajan

Former Reserve Bank of India Governor Raghuram Rajan has for the first time cast doubt on the country’s dismal gross domestic product (GDP) figures, saying the data didn’t take into account the informal sector that has been the worst hit by the Covid pandemic.

The recently released GDP figures by the Indian government showed a sharp contraction in the first quarter of this fiscal. The GDP shrank by 23.9%, its worst slump since the country started releasing quarterly data in 1996. Another contraction in the next quarter and India will formally slip into recession.

But in a recent interview with an Indian TV channel in the wake of his blog post on the country’s economy, Rajan claimed the GDP numbers would “probably be worse when informal sector estimates are accounted for”.

The economist, who had predicted the 2008 recession, has also come down heavily on the Indian government for doing “too little” so far, given the pandemic is still raging in this country. “So far, whatever measures have been taken are meagre and patchy.”

Rajan feels the government’s approach of conserving resources for a possible future stimulus, “instead of spending it now”, would only prove to be a “self-defeating” strategy.

“If you think of the economy as a patient, relief is the sustenance the patient needs while on the sickbed and fighting the disease. Without relief, households skip meals, pull their children out of school and send them to work or beg, pledge their gold to borrow, let EMIs and rent arrears pile up… by the time the disease is contained, the patient has become a shell of herself,” he said.

Drawing a parallel with the US, Rajan said that India should wonder “why America, despite spending over 20% of its GDP in fiscal and credit relief measures, is still worried the economy will not return to pre-pandemic GDP levels by the end of 2021”.

“This mindset is too pessimistic, but the government will have to expand the resource envelope in every way possible, and spend as cleverly as possible… This requires a more thoughtful and active government. Unfortunately, after an initial burst of activity, it seems to have retreated into a shell,” Rajan said.

For resources, Rajan suggested Indian could borrow from the bond markets if it committed to return to fiscal viability over the medium term and advocated the sale of public sector firm shares and assets to tide over the crisis.

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