Former RBI Governor Raghuram Rajan said that India needs to do more to prevent a K-shaped recovery, as well as a possible lowering of our medium-term growth potential.

Former RBI governor Raghuram Rajan
news Economy Monday, January 24, 2022 - 11:52

Former RBI Governor Raghuram Rajan, on Sunday, January 23 said that the Indian economy has “some bright spots and a number of very dark stains” and the Union government should target its spending carefully so that there are no huge deficits. Rajan has also said that the government needs to do more to prevent a K-shaped recovery of the economy which was hit by the COVID-19 pandemic. Generally, a K-shaped recovery will reflect a situation where technology and large capital firms recover at a far faster rate than small businesses and industries that have been significantly impacted by the pandemic.

"My greater worry about the economy is the scarring to the middle class, the small and medium sector, and our children's minds, all of which will come into play after an initial rebound due to pent up demand. One symptom of all this is weak consumption growth, especially for mass consumption goods," Rajan told PTI in an email interview. Rajan is currently a professor at the University of Chicago Booth School of Business.

He said that the economy has some bright spots and a number of very dark stains. "The bright spots are the health of large firms, the roaring business the IT and IT-enabled sectors are doing, including the emergence of unicorns in a number of areas, and the strength of some parts of the financial sector," he said. On the other hand, "dark stains" are the extent of unemployment and low buying power, especially amongst the lower-middle-class; the financial stress small and medium-sized firms are experiencing, including the very tepid credit growth, and the tragic state of our schooling", he stated.

Rajan opined that the Omicron variant of the coronavirus is a setback, both medically and in terms of economic activity but cautioned the government on the possibility of a K-shaped economic recovery. "We need to do more to prevent a K shaped recovery, as well as a possible lowering of our medium-term growth potential," he said.

The country's GDP is expected to grow over 9% in the current financial year that ends on March 31. The economy, which was significantly hit by the pandemic, had contracted 7.3% in the last fiscal.

Ahead of the Union Budget, Rajan said that budgets are supposed to be documents containing a vision and he would love to see a five or ten-year vision for India, as well as a plan for the kinds of institutions and frameworks the government intends to set up. Finance Minister Nirmala Sitharaman is scheduled to present the Union Budget 2022-23 in Parliament on February 1.

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