Stimulus packages must look through three lenses: The fiscally-challenged sectors, the economic-multiplier sectors, and the push for A ‘green’ agenda for India.
Governments around the world are grappling with the economic (and health) devastation unleashed by Covid-19. As per recent estimates, over $7 trillion may be shaved-off from the 2019 global GDP. But, the macro-economic number doesn’t tell the enormous human cost as millions lose their jobs, small businesses are devastated, and major industries like hotels and airlines face bankruptcy. ILO in May had estimated that nearly 300 full-time jobs were at risk in the April to June quarter as 94% of the world’s workforce was located in places with some form of workplace closure. Protecting these jobs and worker incomes has become the top priority of every government.
Governments have responded by announcing mega stimulus packages. The G20 countries (including India) have announced stimulus packages totalling more than $11.2 trillion, (nearly 16% of G20 GDP). However, these countries have followed different strategies for deploying this money. BCG has been working with governments in over forty countries in different capacities on the management of the crisis, and has been tracking the stimulus packages and their effectiveness. We find that while the size and composition of these stimulus packages varies significantly across countries, there are five important themes one can draw out which are instructive for policymakers in India and other countries as they continue to develop and fine-tune their policy responses to deal with a crisis, which is likely to remain with us for some time given the uncertainty on timing to develop an effective treatment. Let me point out these themes.
The first theme is that most countries have used the stimulus packages to directly support the industry as a primary policy lever for job protection. But, it has not been a blanket support. They have customised their fiscal support driven by three specific objectives/criteria. First, some countries are supporting those sectors that are the most financially stressed and close to bankruptcy, like airlines and hotels, which potentially would lead to huge job losses. An example of such support is the $25 billion to be given to the US airlines in return for worker retention. Second, fiscal support has been given to sectors with an economic multiplier effect for that country. Example of this is the support to the automotive industry in Spain or both auto and healthcare sectors in Germany. Third, many governments with an eye on the future, have innovatively tied the fiscal support to push a ‘green’ agenda by linking part of the money to the adoption of green technologies by the companies who seek the stabilisation funds.
The second theme that jumps out from this analysis is that Covid-19 has clearly served as a wake-up call to countries around the world without adequate social protection floor for the workers and the poor. As a result, countries have focused substantial part of the stimulus package on workers and weakest part of their population. While half the countries primarily adjusted their current programmes, the other half introduced new programmes. These had two interesting features. First, over half of the total social protection outlay was in the form of direct cash handout, which helped provide immediate urgently needed support (and also supported short-term demand revival). At the same time, we also found countries preparing for the future by innovatively linking pay-out to workers with them having to get new skills for the future while they are at home under lockdown.
The third theme is that, on an average, 50% of the fiscal package is directed towards consumer demand revival through revenue and expenditure measures like direct cash pay-out, wage subsidy, tax exemption. The remaining part of the fiscal stimulus is provided through government guarantees, loans and equity infusion. Of course this balance varies between countries, with countries like Japan and the US having much higher part of the stimulus as direct monetary support for demand revival, while Germany and the UK having a greater focus on using government guarantees.
The fourth interesting theme was that, in general, countries have refrained from launching major policy reforms amidst this crisis. Instead, they have tried to accelerate the use of technology and digital business models to drive the effectiveness of delivery of these stimulus programmes. These technology-led innovations have varied from smartphone-based savings accounts for the unbanked in Brazil to speeding up regulatory changes like allowing non-banking e-money providers to launch more services.
The fifth, and the final, theme is not directly from the study of the fiscal packages, but from our teams’ discussions with governments. Governments have learnt from the global financial crisis of 2008 when they had to launch economic stimulus in waves and had to launch a bigger second wave (2009) than at the start of the crisis in 2008. With a coronavirus, which makes any predictions on recovery—whether it will be L, U or V-shaped—fraught with risk, it is very likely that countries will have to roll out more than one stimulus package over coming months. Given the already stretched fiscal positions of many governments in both developing and developed world, finding the money for subsequent waves is clearly one of the biggest policy challenges they face.
What do these themes mean for India? To answer this question let us first summarise India’s stimulus package. In terms of total size (including the consolidation of earlier packages and RBI’s measures which typically are not counted in the fiscal package), we are middle of the pack in terms of % of GDP. While direct cash infusion is planned through work programmes in the rural areas, there is limited immediate relief besides free food, and most of the support is in the form of guarantees, loans and moratoriums. The government has also focused on two areas: rural poor and returning migrants, and MSMEs, and has also taken this opportunity to announce major reforms to the agriculture marketing policies.
So, the report card for the first wave of stimulus would read as follows. Excellent on the critical theme of social protection for the weaker section of the population. Good on pushing acceleration of digitisation across sectors and delivery channels. More innovative and long-term thinking (on direct worker protection and re-skilling, how to give credit to nearly 90% of them who do not have access to formal credit line) can strengthen the support to MSMEs and urban migrants (e.g. low-cost urban worker housing subsidies/loans can make a huge impact and also create demand, a policy adopted by several countries). While there will be a positive impact on consumer demand from rural works programmes, we have to perhaps think more creatively on how to push it harder using fiscal levers and/or large scale government infrastructure buildout. Finally, we have an opportunity to think through the three lenses on how to support the industry; (i) the fiscally challenged sectors (e.g. travel and tourism), where bankruptcy will create challenges for both jobs and already stressed banking sector, (ii) the economic multiplier sectors like real estate/housing and automotive, and (iii) innovatively pushing India’s ‘green’ agenda. Food for thought as the government plans the next wave of the stimulus.
The author is Managing director and senior partner, Boston Consulting Group. Views are personal