C Rangarajan, former-chairman of economic advisory council to the Prime Minister of India speaking at length about how the central government and the central bank should respond to this unprecedented crisis. said the situation we are facing is very acute and very unusual. The impact of virus is not essentially known, but certainly given the situation some drastic action is required.

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“However, we need to see what kind of actions are required and even if you look at it from the point of view of the central bank whether the reduction in the policy rate or the repo rate is the right kind of answer. One would say that given the situation the rates need to come down significantly – 50 bps or even more – but that may not necessarily be the full answer to the problem because what is happening today is not only the impact on external demand, domestic demand but also supply disruptions both due to the inability to import certain commodities as well as many other bottlenecks that were developed,” he said.

“Therefore, one has to look at the sectors that maybe affected very badly and whether certain regulatory forbearances are required in order to be able to meet the problem,” added Rangarajan.

Speaking about longer repayment period for MSMEs, he said, “The regulatory forbearance must extend to a much larger section. I don’t think it is only the micro, small and medium enterprises (MSMEs) which are going to be affected. I think even the larger firms will be affected. Therefore, we really need to make a general deviation or a general regulatory forbearance rather than restricting to only MSME because the larger firms are also affected more or less in the same manner.”

“Therefore, we will have to think in terms of larger flow of credit because of the holding up of inventories, holding up of stocks on the part of the people and therefore, let us think in a wider term rather than looking at it only from the point of view of MSMEs. They do need the support but the support needs to go beyond that,” Rangarajan added

On taskforce front, Rangarajan said, “It’s a difficult situation because the fiscal deficit very certainly will go beyond what has been indicated in the budget since the revenues are falling and therefore, I would think that even without doing anything the fiscal deficit is going to be much higher than what has been budgeted.”

“I would only think that immediately there are expenditures that have to be incurred by the government in order to test, prevent and take care of the patients and so on. All those expenditures must be met immediately. I think the first task of the government is to be able to provide for all of these expenses without the actual patients or actual victims taking care of it. This is going to be a substantial amount of expenditure,” he added.

“In fact, one of the offshoots of the crisis is also the fall in the oil prices and that is why excise duty has been increased. I think the entire amount that comes out of the additional excise duty must be set aside for the purpose of meeting the expenditures that would be required to bring to halt the spread of the virus,” he further added.

However, cash transfer is not the direction in which the government should go, he said.

“All that I want to say is take care of all the expenditures of the people who are victims of the virus and when we say private hospitals will also be brought into the picture, we cannot allow the private hospitals to charge them and even if they charge it should be met by the government. Therefore, the task is going to be much larger,” he mentioned.

First Published:Mar 20, 2020 11:59 AM IST