Govt must bear full cost of coronavirus testing but must not overdo stimulus: Ex-RBI Governor Urjit Patel

The government should bear the entire cost for testing for coronavirus and must spend more on massive testing to avoid another national lockdown, former RBI Governor Urjit Patel said on Monday but warned against resorting to bigger stimulus packages to deal with its aftermath.

"Fiscal or monetary responses, if overdone, may threaten macro-economic stability, going forward. For India to replicate what developed countries have done is not possible as willy-nilly we have to confront the reality of limited financial space”. Patel, who surprised the country by announcing his sudden resignation in December 2018, said in perhaps his first write-up since he quit.

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“Some of those who have argued for an upfront bigger packages, stimulus, asset buyback, impromptu liquidity windows, automatic monetisation etc. have, inter alia, used stability as the rationale. But if the fiscal and monetary responses are overdone, the likelihood of non-trivial consequences for macroeconomic stability increases. It is a fine line between aggressively proactive and being perceived as reckless,” he said in an article he wrote for Indian Express.

Patel said hardly any emerging market economy, with the possible exception of China, can match, what developed countries like the US, UK and Germany, have announced in stimulus.

These countries have basically set out, at least in the short run, to offset, through generous direct government entitlements to large sections of the population and extraordinary central bank activism, the adverse demand shock following the primary negative supply shock of the pandemic.

“Countries that can issue reserve currencies have much more elbow room. EMEs, like India, obviously don’t have this luxury,” he said.

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Patel also criticised the recent RBI move to open up key government securities to full foreign investment in an attempt to find a place in global bond indices.

He said over the past year, India has incessantly relaxed prudential norms related to external flows management, opening up yet more possibilities of surges and sudden stops of “hot” foreign capital with well-known attendant consequences.

“It is an expedient policy in the hope that it will lower borrowing costs for the central government; this may only help in the short run, and in the current environment even that is not apparent,” he said.

“While we erect trade barriers to imports through higher custom duties, we are opening the capital account for “bond tourists” further (even as hurdles are raised on outward remittances for households). How does one square this circle since it is well-founded that high import barriers ultimately undermine national competitiveness? And it is mostly export earnings that will have to service,” Patel said.