India needs a strong fiscal stimulus – analysis
India has seen among the strictest prevention responses to coronavirus disease (Covid-19) so far. With a full crash for three weeks already, and another 19 days added on Tuesday, it has peaked at a stringency index designed by the UK’s Overseas Development Institute. But their economic response has been one of the weakest, with a disbursement of less than 1% of GDP compared to 10% in the case of the United States (USA), 16% in Malaysia and the staggering 20% in Japan. It is important to dismiss the argument that India is poor and therefore cannot be expected to do what the wealthier countries have done. When an answer is classified as weak, the evaluation is not in terms of absolute sums of money, but of disbursement in relation to a country’s capacity as measured by its GDP.
As economic policy in India after the start of Covid-19 must address both the necessary relief from the blockade and the restoration of the level of activity after it is lifted, we can consider these two aspects together, calling the overall response necessary as ” stimulus “. What should be the scope of this fiscal stimulus? The level of the US stimulus can be taken as a benchmark. Concern has already been expressed that a stimulus in India should be approached with caution as it has implications for the fiscal deficit. At 10% of GDP for 2019-20, the stimulus would amount to approximately Rs 20 lakh crore. This may seem like a great figure.
However, it is actually quite close to the direct loss of GDP due to the one-month blockade, estimated at 12th of annual GDP. If we are to take the multiplier as 1.25, the final figure for loss due to blocking will exceed ~ 20 lakh crore. So, with a fiscal stimulus equivalent to 10% of GDP, we would only be offsetting the economic shock that accompanied the blockade.
Now, what about the implications for the fiscal deficit? A stimulus of ~ 20 lakh crore by the Union government would lead to an estimated deficit of approximately 14% of GDP in 2020-21. The figure is assumed that nominal GDP will grow at 6% (growth in real production of 2% plus inflation of 4%), and that public revenues would also. Public spending has been calculated by adding the proposed stimulus to the budget estimate for 2020-21. These can only be stadium figures. What should we do with the estimated figure of 14% of GDP for the fiscal deficit that implies a stimulus package of 10% of GDP? Well, as we are working with the US stimulus figure as a benchmark, it should be mentioned that a published estimate of the $ 2 trillion US stimulus deficit implication is that it will lead to a 14% fiscal deficit. So what is proposed here is not unknown.
Although Prime Minister Narendra Modi has stated “Jaan bhi aur jahan bhi“Implying that the economy cannot be ignored even when we are committed to saving lives, the government has yet to announce a stimulus beyond a meager aid package of Rs 1.7 lakh crore.
Some economists look suspiciously at the proposal for a fiscal stimulus on the basis of macroeconomic stability. However, for now, India has significant food grain reserves and reasonably high foreign exchange reserves. In its latest assessment, the Reserve Bank of India (RBI) figures show reserves that exceed short-term outstanding debt and cumulative inflows of portfolio capital. Finally, the displacement of private investment can be avoided if the RBI absorbs the government bonds that will have to be issued. Before looking at this mechanism in horror, it would be worth recalling that growth accelerations have occurred in India at a time when the budget deficit was monetized through accommodation by the central bank.
However, it is important to go beyond the numbers and imagine the role of fiscal policy in creating the economy that we value. If there is one thing this pandemic has done for us, it is to expose the sorry state of health infrastructure in India. In any reconstruction of this infrastructure, it would first be hospitals, primary health centers and laboratories, but we are also constantly reminded of the poor state of public health services, which extend from sanitation to waste management. We have few public toilets, inadequate sewage or guaranteed water supply for most. The coronavirus pandemic has made us realize the importance of public goods for a dignified and safe life. Focused public spending is essential for the reconstruction that must begin now if we want to have a significant future.
Pulapre Balakrishnan is Professor at Ashoka University and Senior Fellow of IIM (Kozhikode)
The opinions expressed are personal.