The unpacked economic package | Opinion – analysis
Prime Minister Narendra Modi’s announcement of an economic policy package worth Rs 20 lakh crore, described by Finance Minister Nirmala Sitharaman as a stimulus, to counter the impact of the coronavirus disease (Covid-19) has turned out to be a flattering case to deceive. He had been greeted with surprise and awe as he seemed substantial and bold. Although the package had been declared to include the financial counterpart of the Reserve Bank of India (RBI) measures and government spending under the Pradhan Mantri Garib Kalyan Yojana in March, the assessment was that the resulting stimulus it would still be substantial. The details, however, were revealed days later, and there is disappointment in the content. There is now shock that given the severity of the crisis, the central government has done so little after being silent for more than seven weeks.
Before the details were announced, the guessing game had been to determine the allocation of the enhanced tax outlay that was supposed to come. This is because the economic impact of government spending will vary, depending on whether it is used to rebuild Lutyens Delhi, build roads and bridges in the four corners of the country and in its midst, recapitalize public sector banks, or cancel public debt. Now that the contents of the economic package are public knowledge, this has turned out to be a futile exercise. There will be negligible additional expenses from the government.
Beyond the commitments already made by the government and RBI, the most important element in the package is a provision of Rs 3 lakh crore to guarantee loans to the micro, small and medium-sized enterprises (MSMEs) sector to be made by banks. commercial. While this is financially creative, it is similar to RBI’s existing liquidity enhancement initiatives. Therefore, just over half of the package comprises the liquidity provision by the RBI and the Government of India, and the government aid package of March 26. The rest is a lot of funds destined for various sectors of the economy. These, like the proposal aimed at expanding infrastructure for agriculture, cannot be criticized, but their impact can reasonably be expected only in the medium term. The provision of loans worth Rs 90 billion rupees from public energy units to distribution companies in the electricity sector is also imaginative, but remains a supply-side intervention.
The largest and most applauded guarantee for bank loans to the MSME sector, better demonstrates the unbalanced nature of the package. Although important in terms of employment, the sector depends on the rest of the economy for its market. Unless the rest of the national economy is reactivated, the MSMEs sector may face a shortage of demand, and its production may end soon.
It is for this reason that an economic package for the economy that emerges from the blockade requires a stimulus that improves demand throughout the economy. The best way to do this would have been to spend on infrastructure. Infrastructure spending creates structures that increase productivity and extends spending power to the section of the population most affected by the blockade, namely daily wage workers. The crucial difference is that while the infusion of liquidity in the form of credit is an available input, a stimulus is an injection in the flow of income. The substantial increase in the allocation for Mahatma Gandhi’s National Rural Employment Guarantee System is a stimulus, but it cannot, by itself, make much difference.
The blockade has reduced aggregate demand and a fiscal stimulus is needed. However, much of what we have seen as a political response is somewhat akin to a “backup” in finance. This is uneven to the task of reviving an economy that has experienced a shock valued at around Rs 28 lakh crore, the estimated direct loss of production over seven weeks of closure. Only a fiscal stimulus of approximately Rs 20 lakh crore could have accomplished this in a relatively quick time.
Many observers, including this writer, had imagined that the package announced on May 11 was just that encouragement. We have been shown to be wrong. The conclusion is that the government is interested in pointing out fiscal prudence by sticking as much as possible to the deficit announced in the budget. Now we can see that behind the announcement by the finance ministry last week that it is raising the public debt ceiling for the fiscal year, there is the reality that government revenue is below its spending, and not any preparation for the encouragement to come. This is merely rearguard action rather than acting on the imperatives of the present.
Now that the government package is unpacked, we can assume that the adverse economic impact of the blockade will last longer than the blockade itself. This due to the probable presence of hysteresis effects on market economies, so current underperformance depresses production for some time in the future. The missing plan for economic recovery is a government failure. By declaring the closure, the State took away access to livelihood. Even if this was done to save lives, the social contract rests with the state to restore lost livelihoods.
Pulapre Balakrishnan is Professor, Ashoka University, Sonipat, and Senior Fellow, IIM Kozhikode
The opinions expressed are personal.