In his address to the nation on May 12, Prime Minister Narendra Modi announced a relief package of Rs 20 lakh crore, six weeks into the national lockdown. At 10% of GDP, and of the same order as that of the relief package of the US, Modi appeared to have finally taken the big decision that was the need of the hour.
The cautious mindset committed to containing the fiscal deficit within the government seemed to have been finally set aside. After all, a consensus had emerged among prominent economists and commentators that a large relief package was the need of the hour. Even monetising the deficit was fine to most as long as it was for a short period and this was made clear at the outset.
Relief measures were, in fact, announced in the developed countries at the same time as the lockdowns were imposed. In a radical shift, conservative governments jettisoned their long standing commitment to a minimalist role of the state and fiscal prudence and assumed the responsibility of using public money for payment to workers and to keep enterprises going.
Rishi Sunak, the Indian-origin UK Chancellor of the Exchequer, put it well:
“This is not a time for ideology and orthodoxy…We will support jobs, we will support incomes and we will support business…”
In the US, about half of the relief package is for payment to workers, directly if they are unemployed, and through firms if they retain their workers.
Most of the other half is for direct support to enterprises, state governments and municipal authorities. As a result though these economies are contracting, ordinary people are being able to sustain themselves. There is public discussion on the adequacy of the health care response and the extent of lockdown required, but not of the relief measures.
We had these examples before us and needed to adopt an equivalent approach. Most of our workers, including migrant workers, in the urban economies are either casual workers or are self employed. They needed state support through payments to subsist till their livelihoods returned with the easing of the lockdown and not the pittance that is currently being given.
A reasonable benchmark for payment to workers who lost their livelihoods would be the prevailing minimum wage. This is as affordable in India as the equivalent relief to workers has been elsewhere. The monthly expenditure on this would have been about Rs 1 lakh crore, approximately 0.5% of the GDP. With this India would not be having the unique distinction of causing so much avoidable hardship and hunger to so many.
The poignant images of the poor from the metros walking with their children and belongings to their villages would weigh heavily for a long time on the nation’s conscience.
The mass exodus to rural India with the state, finally driven to facilitating it, has other unintended adverse consequences. Many are carrying infection to villages in the weaker states of India where the capacity to test, quarantine and treat is inadequate. The benefit of containment from the prolonged lockdown is being partially undone specially when the total number of cases are still rising. Workers are now leaving in larger numbers in buses and trains.
The absence of workers would make restoration of economic activity that much more difficult. It is still not too late to give adequate relief to urban workers and prevent their exodus. This should be done immediately. The absence of ‘lists’ is a difficulty of such a clerical nature that it should never come in the way of governments doing what they have to do. As a classical fiscal stimulus, this would also moderate the collapse in aggregate demand, economic activity and government’s tax revenues.
Enterprises are in deep trouble; no revenues as yet for most, continuing fixed costs and depleting reserves. Survival is the issue for most. Imposing pay cuts and laying off better paid regular employees has begun to happen. This would gain momentum in the coming weeks and months.
A wave of bankruptcies is imminent. The daunting challenge is to revive the economy as much as possible in the coming quarters. Faster recovery would lower the decline in tax revenues and the increase in the fiscal deficit. This only strengthens the case for a fiscal stimulus. The expectation was that the Finance Minister’s series of announcements would give a plausible road map and hope for early recovery. This has been belied.
To begin with, the arithmetic has turned out to be problematic. The RBI had been infusing additional liquidity into the financial system. To include this quantum now as over 60% of the Rs 20 lakh crore relief package has needlessly undermined credibility. The direct fiscal stimulus is around 1.5 % of GDP.
The positives in the Finance Minister’s announcements only buy some time. Bankruptcy proceedings have been kept in abeyance till the next financial year. Loan guarantees of over Rs 3 lakh crores for MSMEs without collateral is the most substantial and welcome part of the relief package.
This should enable SMEs to borrow to cover their fixed costs and survive in the short run. Getting banks to actually lend with no credible revenue streams to be able to repay debt, even if there is a government guarantee and no need for collateral, may still be a challenge in the present circumstances. Government may still need to push this administratively with the public sector banks. But this at best enables survival and does nothing for recovery.
In the series of announcements of the Finance Minister there are a large number of well sounding small ticket items cutting across the spectrum. Strong on rhetoric, they have modest implications and could well be part of a Budget speech. Then there are a large number of ‘reform’ announcements. These are a surprise. So many items on the wish lists of so many for so long have suddenly become government decisions.
Without going into their merits and possible benefits, there can be no doubt that these have implications only for the medium and long term and none for the present crisis of a sinking economy. One can only hope that this focus on reforms and a new India is not the result of an internal acceptance that nothing more can be done for the present except to wait and see. If this is so, this is indeed unfortunate and unnecessary.
The core issue of the state acting to generate demand as the lockdown eases will, however, not go away. The case for an immediate larger fiscal stimulus rests on the fact that only the government through its actions and expenditures can now create additional demand. Where can government expenditure, tax or other policy interventions generate additional demand with the maximum multiplier effect?
Here are some illustrative options:
> Increasing hospital bed capacity across the country on a war footing and making good the neglect of decades.
> The government providing a 50% GST rebate for the trade in of any BS 1,2,3 and 4 vehicle and the purchase of an equivalent new one. The traded in vehicle is physically scrapped. This would amount to a 10% reduction in price for the buyer who trades in his old vehicle and would generate demand for the auto sector with its positive backward linkages. There would be no budgetary expenditure. 50% GST would also come in instead of none. Further, government could finance the replacement of all old buses and trucks with government and municipal agencies. Air quality, a critical public good, would improve substantially.
>The completion cost of all the incomplete housing projects with developers in distress has been estimated at about Rs 1.75 lakh crores. A take over of all these projects, government guaranteed bank financing for completion, and immediate recommencement of work with completion targeted in 12-18 months would generate employment and demand for cement , paint, electrical fittings etc. This would amount to a fiscal stimulus of 1.75% of GDP.
> By announcing an attractive feed in tariff at which Distribution Companies would buy solar power up to 1 MW from decentralised small units in rural India, something announced in the FM’s Budget speech, there would be a surge in private investment enhancing farmers incomes. By doing so, the Distribution Companies would actually save money as their cost of delivery with conventional power is much higher today. With 6 lakh villages, there is a potential of 6 lakh MW of solar power.
> Getting industrial investment into India from global supply chains seeking some diversification from China would have a realistic chance only if the state invested with great speed in creating large industrial parks with quality infrastructure, including rental housing for workers, along with expressway connectivity to the National Highway network and on to ports and airports.
The government has a large menu of choices which it can begin seeing only if it starts thinking out of the box . It needs to focus on possible results in this financial year and think of achieving a critical mass in whatever it attempts and ignore fiscal deficit concerns till recovery commences. Even after best efforts, some sectoral relief packages may be unavoidable in the coming months. The alternative to doing nothing more now is much greater economic distress. Job losses would hit the middle classes in increasing numbers. The fiscal deficit would balloon as tax revenues, which have collapsed, would not rise. Greater human misery that seems imminent is avoidable.
Ajay Shankar was Secretary, Department of Industrial Policy and Promotion (DIPP) in the government of India. He was part of the core team which worked out the 2008 stimulus package for India.