Viral V. Acharya is a renowned economist who served as the Deputy Governor of Reserve Bank of India (RBI) from 2017-19. He also served as a member of the advisory council of the RBI Academy and was a member of the Academic Council of the National Institute of Securities Markets (NISM), Securities and Exchange Board of India (SEBI) since 2014. He resigned from the post of the Deputy Governor of RBI in July 2019 with 6 months left in the completion of his term.
With the Indian economy approaching a perilous period that it has barely faced before, Mr. Viral provided his insights to stabilize the economy in order to ensure long term sustainability and improving the state that it is currently in. In his exchange with VIT Today, he was able to elaborate on the entire situation with a suggestion to improve the economy through Targeted relief, a mechanism that is detailed in his working paper - “When is Debt Odious?
A Theory of Repression and Growth Traps”. This working paper was jointly drafted by Raghuram Rajan, former RBI Governor, Jack Shim, professor at New York University, and Viral Acharya.
Targeted relief is elaborated as a mechanism designed for developing countries to survive the shock that COVID-19 has brutally landed onto them. Surviving this shock in an efficient manner is the primary objective of Mr. Viral’s suggestion, and the foundations that the mechanism lays for the future of developing countries is inclusive of improving the welfare of the people while helping countries sustain their economies in a fruitful manner.
In our exchange, Mr. Viral shed light on how the pandemic has clearly reduced the production, taxes, future endowments, and the government’s ability to service debt. He believes that this is possibly pushing the developing countries towards defaults or towards repressive tax policies against their citizens in order to service the debt. This trajectory of the economy could hurt private consumption and investment which would eventually lead to growth traps in the near future. He mentioned how the governments need to understand the nature of this COVID shock and undertake certain actions on the welfare front while stabilizing the economy.
He suggests that government should undertake socially useful healthcare expenditures along with fiscal transfers to boost household endowments for the welfare of the people suffering from the public health crisis. It can be inferred that such socially useful expenditures and schemes affecting the populace would be the bedrock of development of the country in the recovery phase of the COVID shock in the near future. Furthermore, he recommends improving the conditions of the people by efficiently administering the Targeted relief mechanism elaborated in the aforementioned working paper.
While elaborating on the working paper and the mechanism it was suggested that the efficient mechanism to help the developing economy recover well from such a shock could be “targeted relief”, which is a combination of two steps or initiatives that the government should undertake. These steps include the following:
Providing debt relief in order to avoid the default costs which could be a significant shock to government resources in addition to the more adverse effects of the pandemic on government resources.
Facilitating continued access to the debt markets, through the utilization of proceeds from the debt issuance, which are monitored by a multilateral agency such as the World Bank or the International Monetary Fund in order to ensure specific deployment toward containing the pandemic and its economic fallout on the country.
Mr. Viral believes that such a targeted relief mechanism could both soften the immediate impact of the pandemic and ensure that the developing economy remains on a growth-enhancing path even after the pandemic. He strongly recommends that monitoring of the relief be carried out so that it is channeled towards essential expenditures and productive purposes only, rather than more wasteful ones.
Such was the glorious exchange of knowledge between Mr. Viral Acharya and our team at VIT Today. Learning of his solution and efforts on the working paper was an enriching experience for us, and we hope the same trickles down to our readers.
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