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Prioritise spending on poor, Raghuram Rajan urges PM Modi

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New Delhi, Apr 06: Former Reserve Bank of India (RBI) governor Raghuram Rajan, while calling the coronavirus pandemic the greatest emergency perhaps since Independence, urged Prime Minister Narendra Modi to prioritise spending on the poor.

In a blog post, Rajan suggested some measure that could help country contain the economic damage from lockdown imposed across the country.

Raghuram Rajan

Rajan, a professor of finance at Chicago Booth, US, says India needs to ensure that the poor and non-salaried lower middle class who are prevented from working for longer periods can survive.

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"The state and Center have to come together to figure out quickly some combination of public and NGO provision (of food, healthcare, and sometimes shelter), private participation (voluntary moratoria on debt payments and a community-enforced ban on evictions during the next few months), and direct benefit transfers that will allow needy households to see through the next few months," he says.

"It is said that India reforms only in crisis. Hopefully, this otherwise unmitigated tragedy will help us see how weakened we have become as a society, and will focus our politics on the critical economic and healthcare reforms we sorely need."

"We have already seen one consequence of not doing so - the movement of migrant labour. Another will be people defying the lockdown to get back to work if they cannot survive otherwise."

"Our limited fiscal resources are certainly a worry. However, spending on the needy at this time is a high priority use of resources, the right thing to do as a humane nation, as well as a contributor to the fight against the virus. This does not mean that we can ignore our budgetary constraints, especially given that our revenues will also be severely affected this year. Unlike the United States or Europe, which can spend 10% more of GDP without fear of a ratings downgrade, we already entered this crisis with a huge fiscal deficit, and will have to spend yet more," he writes.

The global financial crisis in 2008-'09 was a massive demand shock, the country's workers could still go to work, firms were coming off years of strong growth, the financial system was largely sound, and government finances were healthy. "None of this is true today as we fight the coronavirus pandemic. Yet there is also no reason to despair," says Rajan.

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The immediate priority was to suppress the spread of the pandemic through widespread testing, rigorous quarantines, and social distancing, he says.

But it will be hard to lock down the country entirely for much longer periods, he says. "...so we should also be thinking of how we can restart certain activities in certain low-infection regions with adequate precautions," he suggests.

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