With substantial human and economic costs associated with ongoing Pandemic, the adverse implications on the demand-supply doom loops are expected. However, the magnitude of the downturn remains uncertain as it hinges on the severity, duration and spread of COVID-19, coupled with the government’s interventionist policies to support the revival. Providing the necessary stimulus is crucial to ensure ‘V’ shaped recovery, instead of ‘U’ shaped. In this context, the Stimulus Packages so far of close to Rs. 20 lakh crore (almost 10% of GDP, and equivalent to the estimated loss in GDP during the lockdown) is a welcome step to help economy tide over the disruptions. Fundamentals of sound macro-economic policies state that the ability of stimulus package in gearing economic growth depends on factors, such as immediate needs and priorities, current market conditions, borrowing space, local institutional capacity, and results of past infrastructure investment decisions. Even the potential of job creation, effective mobilization of private finance, and impact on the country’s business and environmental sustainability play an important role in assessing the efficacy of the stimulus package.
Briefly, as a part of the most recent stimulus package ‘2.0’, unveiled in five tranches, the first was the largest at Rs. 6 lakh crore. It focused on providing credit to MSMEs, non-banking financial companies (NBFCs), housing finance companies (HFCs), employees and organized workers. The second slew of measures focused on migrant labourers, street vendors, marginal farmers, and small traders amounted to Rs. 3.1 lakh crore. The third tranche, worth Rs. 1.5 lakh crore included measures related to agricultural reforms and strengthening farm infrastructure. The fourth set of measures revolved around measures such as auctioning of coal mines, encouraging PPPs in aviation, and altered FDI limits in the defence sector with an expenditure of Rs. 8,100 crore. Finally, the fifth set of announcements dealt with allocation to rural jobs under MGNREGA scheme amounting to Rs. 40,000 crore. A synoptic view of the same along with the previous stimulus package announced so far is provided as under.
Through this piece, we scrutinize the Economic Stimulus Package from the following five aspects: First, is economic stimulus package different from the fiscal impact of the package; second, should liquidity support measures be ‘part of the package’; third, what differentiates demand stimulating measures from supply boosting measures; fourth, is India’s policy of estimating the economic package different from other major economies, and finally, what differentiates short term demand management policy from the long term supply inducing structural adjustment policies.
At the outset, the magnitude of economic stimulus of around Rs. 20 lakh crore, is different from the real fiscal impact of the economic stimulus package. This fiscal stimulus package, in fact, is estimated to be much lower than Rs. 20 lakh crore. Barclays’ Chief India Economist Rahul Bajoria stated that the actual fiscal impact on the budget will be only Rs 1.5 lakh crore (0.75 percent of GDP, as against the announced 10 percent of package’s magnitude). If so, where is the remaining going? Here it is important to note that in addition to other measures, the present package includes measures announced by both the government and the RBI to provide relief to various sectors of the economy. Hence, a major part of the stimulus package is allocated towards infusing liquidity and providing credit to individuals and businesses. In fact, close to 40 percent of the economic stimulus (approximately Rs. 8 lakh crore) is in the form of providing liquidity support by RBI to sectors such as NBFCs, HFC, and mutual funds. These measures, though part of the economic stimulus do not have a direct fiscal impact, as the impacts are monetary and not fiscal in nature. In addition, though infusing money into the system also helps generate aggregate demand, the concern is when demand for liquidity remains low and there are no takers. This, in fact, has been witnessed by the Indian economy in the recent past wherein despite repeated reductions in policy rates, demand for liquidity did not pick.
In terms of immediate versus long term objective of stimulus, undoubtedly the short-term goals are to save lives, jobs and provide income and food support. In short, both lives and livelihoods need to be protected. On boosting rural employment, allocating an additional Rs. 40,000 crore under MGNREGA is a big measure indeed. Being a demand-driven programme, with the self-selection criterion of being considered as a beneficiary ensures effective targeting. Since consumption multipliers are also high for them, overall income multipliers are expected to be substantial. However, the need is to ensure that programs undertaken are sustainable and aligned with grassroots development needs. In a similar vein, providing free food for migrant workers, and ‘one nation-one ration card’ schemes are welcome and showcase the welfare-orientation of the government though there needs to be a more effective interface in accessing the relief packages.
The slew of measures for MSMEs, amounting to Rs. 3.6 lakh crore, were also aimed to assist the enterprises with stressed assets and improve their viability of revival. This primarily to ensure that employment does not take a hit. The announcement, though welcome leaves scope for more to be done. Contributing over 28 percent of India’s GDP, with large employment multipliers as well, necessitates not just stronger, but a changed composition of the stimulus packages for them. For instance, instead of directly giving the money to the enterprises in the form of a bailout package (as in the UK), the government resorted to providing guarantee free loans and took their credit risks. Fully guaranteed collateral-free loans lead to ‘moral hazard’, wherein there is no incentive for either the borrower to pay back or the lender to check the creditworthiness of the borrower. However, on the brighter side, re-defining the turnover criterion for the MSMEs will encourage them to grow, and yet remain eligible for benefits earmarked for the sector.
On the ease of doing business and introducing structural reforms, announcements related to agricultural marketing reforms such as providing adequate choices to sell produce at attractive prices, barrier-free inter-state trade, and framework for e-trading of agriculture produce will certainly benefit farmers. While these are undoubtedly welcome reforms, it needs to be appreciated that they are not direct measures which are related to the pandemic. These reforms, though announced now, have been in the pipeline for active discussions since long. The longer-term developments should focus on delivering sustainable growth trajectory by considering the adequate impact on natural, physical, and human capital along with the ability to build resilience to future shocks. In this context, the Stimulus Package that aims to make India ‘Atma-Nirbhar’ (self-reliant), through the following five pillars namely: Economy, Infrastructure, Tech-driven System, Demography, and Demand is timely and thoughtful.
On a closing note, a related issue is a genuineness of including monetary measures and also other supply-side measures, as variants of the stimulus package. In this context, it is pertinent to mention that across nations, countries have been announcing stimulus packages which include not just demand to enhance measures (expansionary monetary and fiscal policies), but also supply-side measures, incorporating structural reforms, such as ease in doing business, and adopting market-oriented policies. However, unless the institutional quality and governance standards are strengthened, the full potential of stimulus packages cannot be ascertained. Therefore, in addition to the magnitude and composition of the stimulus, analysts must focus on its implementation. Zero tolerance towards leakages, losses, and delays across policy interventions is the need of the hour. After all, every penny counts in a crisis, more so, for emerging economies facing ‘Cliff Risks’!