The COVID-19 recession has forced businesses to restructure their company, whilst facing a second round of unemployment. Sure, the firm has limited the amount of employees. But without a human it would seem difficult to paint a image of the business.
The former Reserve Bank of India governor, Raghuram Rajan, stated that austerity is not the solution to the new coronavirus crisis, and India needs to offer more relief measures to households and businesses to sail through the pandemic-induced economic shock.
According to Rajan at a webinar organized by Princeton’s Bendheim Center for Finance, economic recovery may be sluggish in the absence of policy relief because it impedes companies’ ability to claw back to health, whereas potential uncertainty would drive households into precautionary investments rather than expenditure.
“Relief is extremely important because if you don’t have relief, the economic muscle is impaired and you cannot climb back when things turnaround,” he further mentioned.
“It is not the typical emerging market recession where deflation, etc., are the way to address problems,” he stated. India’s fiscal deficit might reach 13-15% without substantial increased investment with the COVID-induced tax gap and a decrease in gross domestic product ( GDP), he added.
As per Rajan, bankruptcy is one aspect of government change. The new paradigm, which favors by default auctioning off still fairly viable businesses, should be substituted by one that allows further debt renegotiation by changing the current management, because the economic conditions shifted after the pandemic.
Further he stated “India has to look really closely at this, as there will be a number of struggling firms come out and they need to be dealt with.”
Rajan clarified that getting a fine-tuned bankruptcy mechanism was necessary as banks, particularly public sector borrowers, were not willing to participate in out-of-court debt settlement negotiations.
“For India, transformational reforms were the only way out. If you can’t offer relief and do repair, reform is the only way out,” stated by Raghuram Rajan.
This recommendations for further support for families and enterprises are in line with the industry ‘s proposals for a second wave of stimulus steps.
Amid the gradual re-opening of the economy, main measures of economic operation are retracing their course, but an upsurge in coronavirus cases and regional lockdown will take a toll on the output of the industry, said Dilip Chenoy, Secretary General of the Federation of Indian Chambers of Commerce and Industry.
