Govt must focus on growth, not credit ratings: Rajan

The government should not focus on credit ratings, given the current situation, and should instead put its attention towards reviving growth, former governor of the Reserve Bank of India Raghuram Rajan said.

“In this environment, focusing on a credit rating is just nuts. Your credit rating just does not depend on your level of debt; it depends on how you are going to grow out of the debt. We cannot worry about spending. We certainly have to focus on the spending but we have to repair the damage now,” Rajan said.

He was speaking during a panel discussion hosted by the National Council of Applied Economic Research on Tuesday.


Rajan said the government did not take into account how deep the pandemic had impacted small businesses.

“Our MSMEs are in deep trouble. We started already in a bad way with the series of shocks they had been subjected to before the pandemic. With the pandemic, a significant portion will not survive. In India, where there are no supports, that is a serious loss to the economic muscle,” he said.

On FM’s article
Rajan termed as “thoroughly disappointing” an article on Tuesday written by finance minister Nirmala Sitharaman on the government’s economic reforms.

“I read the FM's piece, I do not know when it was written but it was thoroughly disappointing in what it talks about. It first blames the previous crowd, that is taken for granted in a politician,” Rajan said.

He said the Jan Dhan bank account scheme did not work as expected, and criticised the government for its handling of the non-performing assets crisis in the financial sector. “It talks about the Jan Dhan. We are still talking about universal transfers because we cannot target given that Jan Dhan does not really work as advertised,” he said.

With reference to a mention in the article of Prime Minister Narendra Modi’s two-day Gyan Sangam in 2015 with public sector banks on banking reforms and addressing NPAs, Rajan said, “On bank reforms, she talks about how wonderful the Gyan Sangam has been. The level of NPAs is going to be unprecedented six months from now, if we really recognise the true level of NPAs.”

Rajan questioned the suspension of proceedings under the Insolvency and Bankruptcy Code. “The only measure for dealing with this is the NCLAT (National Company Law Appellate Tribunal) which we have suspended for new cases. How are we going to deal with the huge mounting bad loans in the financial sector?”

Prachi Mishra, the chief India economist at Goldman Sachs, concurred with Rajan on ratings. Ratings firms and markets do not expect fiscal consolidation, but a growth revival strategy and a medium-term fiscal consolidation plan from the government, she said.

According to Mishra, the second quarter also saw a weak economic performance with a 45% quarter-on-quarter contraction on an annualised rate. The expected pick up in the next quarter was bringing in a sense of complacency among policymakers and market players, she said.

"Going into the third quarter, of course, there is going to be a pickup. People are getting excited about this pickup but this is almost mechanical. If you have a quarter with a very sharp contraction, the following quarter is almost mechanically going to pick up,” Mishra said.