Raghuram Rajan says rating cut, loss of investor confidence to hurt financial institutions

NEW DELHI: Former RBI Governor Raghuram Rajan has said India needs to cut back or delay less important expenditure while refocusing on immediate needs.

Coronavirus cases in India rose to 4,281 as of Monday evening, as per Ministry of Health and Family Welfare.

In a Linkedin post over the weekend, Rajan said that unlike the US and Europe, which can spend 10 per cent or more of GDP without fear of a rating downgrade, India is entering this crisis with a huge fiscal deficit, and will require to spend yet more.

A rating downgrade coupled with a loss of investor confidence could lead to plummeting exchange rate and a drastic increase in long-term interest rates, and substantial loss for financial institutions, he said.

“To reassure investors, the government could express its commitment to return to fiscal rectitude, backing up its intent by accepting the setting up of an independent fiscal council and medium term debt target as suggested by NK Singh Committee,” he said.

Not all SMEs can, or should be survived, he said, citing India’s limited resources. The small ones, the household operations, will be helped by the direct benefit transfers. For others, one has to think of innovative and viable ways, he said.

He said all PSUs, including at the state levels, must pay dues immediately, so that private firms get valuable liquidity.