There may be skittish debates among the retired economists as to whether the latest package is really 10% of GDP or only 8.25%, but its boldness is welcome.
In May 2014, when Narendra Modi surprised everyone by winning a majority for the BJP on its own, many dreams were being floated about India 2.0. He was bold, a master of communications and had executive experience as Gujarat chief minister for over 12 years. But even so, he proceeded with caution in economic matters. He was a staunch champion of fiscal prudence and Arun Jaitley delivered a declining budget deficit, Budget after Budget.
Modi left the economic policy machinery he had inherited pretty much alone. He set up new initiatives such as Make in India but left the old Congress economy intact. He wanted to make it work better but not change it. He opened up new initiatives on health, cleanliness, and gender-friendly policies such as on LPG and outdoor defecation.
It has taken the coronavirus crisis to bring out the radical in Modi. He has a spectacular second victory to his credit with a larger majority. He has nothing to fear from the Congress which has inflicted injury on itself. The emergency has brought him the opportunity to become the leader of the entire nation more than just Hindu Hriday Samrat. He has thrown off the defensive posture of the fiscal conservative.
There may be skittish debates among the retired economists as to whether the latest package is really 10% of GDP or only 8.25%, but its boldness is welcome. India was the joint fourth-largest economy pre-Covid-19 with the United Kingdom. It can do its own thing just as the UK can. The rating agencies may complain but they always do. In the post-Covid-19 world, the Indian economy will emerge more intact than many developed countries.
In reaction to the oil price shocks of 1973 and 1979, inflation became the biggest enemy, imposing the discipline of low debt GDP ratio, low budget deficits and Central Bank independence. The Great Sudden Stop (GSS) — the Covid-19 shock — invalidates all those rules. Inflation is no longer the principal threat. It is livelihoods of millions. The debt GDP ratio is questioned as a suitable target. What matters is the cost of servicing the debt as compared to the GDP.
As long as the GDP growth rate in nominal terms exceeds the interest rate, you are fine. Modi has rightly decided to go for the bold option.
The GSS has exposed the long-run sickness of 70 years of Indian planning — chronic open and disguised unemployment which compels massive migration across India. India’s most precious resource are its people, who have suffered neglect.
Here is a chance to forge an economic strategy which will aim at full employment rather than making machines to make machines. It will require massive industrialisation in rural and small-town areas. It will require taking subsistence farmers out of perennial poverty and give them full-time industrial employment. All the shibboleths — the factory Acts, labour laws and restrictions on land sales — which have kept millions in the low-income trap for decades have to be jettisoned.
India frittered away the demographic dividend. But now the population growth has peaked and will fall. The population is young and will be so for the next 30 years. This is the window for India to get to the top. Quite rightly, Modi has decided to ‘Spend Whatever It Takes’.