The economy needs a stimulus package as much as an RBI ready to act like an asset rebuilder
The COVID-19 pandemic is not just a health crisis; it is in equal measure an economic crisis, the consequences of which could potentially be catastrophic. As policymakers scramble to contain the outbreak’s economic fallout, the Reserve Bank of India (RBI) must play a critical role in financing both the government and private sectors. Prof. Chetan Subramanian, from the Economic & Social Sciences area and Prof. Ventakesh Panchapagesan, from Finance & Accounting area, at IIMB, observe that addressing the economic fallout would require a massive effort on all fronts, in an article in Mint. The central bank must do what it takes, even if it means temporarily morphing into an asset reconstruction company. It is time for us to follow pragmatic and not dogmatic economics.
A conventional recession typically occurs when people choose to cut their spending. It is usually dealt with by designing a broad-based stimulus package intended to stimulate economic activity. An off-the-shelf package, however, may not be very useful in a pandemic-induced slowdown where large parts of the economy cannot operate, as they are under a lockdown. The first order of business, therefore, is for the government to transfer resources to sectors impacted by social distancing measures to help them minimize the cost of the crisis.
Countries have lost no time in mobilizing resources to confront the crisis. Japan, for example, has earmarked a whopping 20% of gross domestic product (GDP) to fight it. The Indian response, at barely 1% of GDP thus far, is woefully inadequate. Conservative estimates suggest that India would need upwards of 10% of GDP to address the fallout from the crisis. However, this then begs the question of how the Union government, with limited fiscal elbow room, proposes to finance these expenditures.