Nirmala Sitharaman, Finance Minister of India, today concluded her 5-day mini-series of the announcements of Prime Minister Modi’s all-encompassing arthik package. These come in response to the colossal crisis faced by India, both economic and humanitarian. These reforms, claims the government, will provide the much needed relief to those at the bottom of the pyramid and will also “drive the country’s push towards self-reliance.”
The government’s claim is that the size of this stimulus package is close to 20 Trillion Rupees, which is about 10% of India’s GDP. The size of this stimulus package, as announced, is indeed staggering. Setting aside the concerns of how any government could fund a 10% of GDP fiscal stimulus, the sheer magnitude of this stimulus would indeed provide a much needed boost. However, as was clear from this test match of announcements, the fine print had a completely different story to tell. The number is inflated on several counts by items for which the government has to bear absolutely no costs. For e.g., the 20 Lakh Crore also includes the liquidity injection by the Reserve Bank of India, which itself stands at more than 8 Lakh Crore. To my knowledge, no other country in the world is counting the liquidity injection by their central bank as part of their economic aids package.
The government also topped up the economic package with certain ‘structural’ reform measures. These tinkerings are supposed to bring about transformative change and usher in growth. I am not very convinced that these ‘reforms’ will have any substantial effect for the simple reason that if such minor modifications were going to bring about ‘transformative change’ they would have been done long back.
What are the salient features of the package?
The packages were announced over a stretch of 5 days. Hence there are many elements to it. It includes, atleast on paper, support for MSMEs, NBFCs, Power Discoms, Agriculture, Farmers, Fishermen, Migrants Labourers, Street Vendors, Middle Income home owners. Heck it even has something for interplanetary space travel (I won’t blame you for wondering what that has got to do with the COVID crisis). So what are these measures? I sample a few meaningful ones in what follows.
The bulk of the thrust to MSMEs, and entrepreneurship in general, has been to facilitate access to credit. In simple words, making it easier to get loans. In most of these cases the loans will be provided by banks and the government will only act as the guarantor. The same holds true for Farmers and Agriculture. Much of this “20 Lakh Crore” are schemes which make it easier for farmers to borrow. Even the announcement to spend 1 Lakh Crore on agricultural infrastructure will not be funded by the government. It will come from money raised by the agricultural bank NABARD which will then make loans.
The issue with the package is that it is heavily concentrated on credit facilitation. Making loans easier to get for firms and farmers may be of limited help where demand has collapsed and the economy brought to a standstill. Ask the simple question, why would anyone borrow now when they know that the expected outlook for the economy is bleak? Yes, some of the loans may help a few to just stay afloat, but here we will mistake revival with survival. Hence these loan schemes provide no real impetus for resuscitating a breathless economy.
The other problem of over-reliance on loans is slightly technical. In economics there is a concept of efficient allocation of resources. The resource in this case is credit. If banks have to do the heavy lifting by lending to, where the government wants them to lend and not where they should lend (i.e. profitable and sustainable projects) then this disrupts the “invisible-hand” operating in the intermediation of credit. Overall, this impedes growth, and hurts an economy.
In some cases the FM did make announcements to spend money directly from the government coffers. However, even after being repeatedly asked, the FM refused to clarify how much of these expenditures were over and above what was already allocated in the budget. Passing of allocations already budgeted for in the Union Budget as part of a relief package is nothing short of deception.
There are 2 redeemable aspects to this blusterous “arthik package”. First, was to widen the net for free ration and include in them migrants who may not have any identification papers such as ration cards. This is much needed relief for the Crores of migrants walking back home, sometimes not having eaten anything for days. Perhaps this measure came too late, but better late than never. One, however, needs to note that calling this a stimulus would again be confusing survival with revival. Second, was the increased allocation of INR 40 Thousand Crore to MNREGA. This will help substantially in providing atleast 100 days of employment to the crores of migrant labourers who have walked back home to their villages. Importantly, this will put money in hands of the people for them to spend. This has multiplier effects across the economy.
The Demand-Side left untouched
So the question now is what should have been done? On this there is near unanimity amongst eminent economists that some form of cash transfer was needed. Most relief packages across the world has some sort of income benefit. This would achieve both survival and revival, together, as the money spent would likely improve aggregate demand. But the government shied away from any bold moves on this front. Although it must be said, India’s package does have a very small cash transfer (of Rs 500 to every women Jan Dhan Account holder) but this is by far insufficient to move demand.
Perhaps the reason the government did not do this is simply because they do not have the money. On this also there were suggestions provided. The suggestion was to borrow from the RBI. RBI would have to print this money to lend to the government. Of course there is the danger with regards to inflation. However, these are not normal times and when demand has completely collapsed the fears with regards to inflation may be misplaced.
The way forward
The path ahead for the Indian Economy is very uncertain and even scary. Uncertain because we do not know how this pandemic will pan out in the next few months. By all accounts India is yet to reach its peak level of cases and we have already started opening up. If the transmission rates pick up could we see further lockdowns in the future? Further lockdowns would devastate this already battered economy. Scary because we have no idea how the humanitarian crisis will have an impact on economic activity. The migrant labour crisis has scarred the conscience of the nation and broken the trust of crores and crores of Indians. We have stolen their dignity from them. Economies don’t work without their people and for now our people are walking back home without hope.
Asad Rauf is Assistant Professor of Finance and Economics at Groningen University.