Explained: The real measure of India’s stimulus package

Published: May 22, 2020 6:30:13 AM

In effect, there has been no large scale giveaway by any country, rich or poor, as a response to Covid-19. The Indian government may have studied many such models and has tried to create its response within constraints.

PM Modi announced a Rs 20 lakh crore stimulus package—close to 10% of the Indian GDP.

By Ashish Kumar Chauhan
Over the last week, the only issue being discussed in Indian business circles is about how much more the Indian government could have done to revive the economy, which has stalled due to Covid-19. PM Modi announced a Rs 20 lakh crore stimulus package—close to 10% of the Indian GDP. The figure of Rs 20 lakh crore is also very similar to the entire tax receipts of the central government for FY21, if the year did not have Covid-19 related problems.

Subsequently, India’s finance minister provided details of the stimulus package over five days. The stimulus package is a mix of fiscal support, monetary support, ease of doing business processes, as well as some fundamental reforms.

The reforms announced by the FM are far-reaching and cover a large gamut of activities, which most right-minded people have been asking for over three decades. There are other reforms such as land reforms that are happening at the level of states, which were not even mentioned. There is no doubt or debate about the need for these reforms. These reforms were needed and will take India into a different trajectory, as, without them, India is stifled. They may require some tweaks and some upgrades. However, there hasn’t been a discussion on these reforms. Everyone was focussed on the details of Rs 20 lakh crore, the stimulus being given to sectors, and how much will be a giveaway.

Who doesn’t like a giveaway?
Much before the Indian stimulus was announced, the US, Japan, the UK, Europe, etc, had already announced their huge packages. The cumulative numbers projected as stimulus seem very large and run into trillions of dollars. Most of us genuinely believe that the governments of the rich countries have given away the money to citizens and businesses. It looks that our understanding is not exactly correct. The largest part of the stimulus announced even by the rich countries is not a giveaway. If we compare the stimulus package of India with other developing countries with similar per capita GDP, the Indian response to Covid-19 seems to be very large as a % of GDP as well as the areas it covers.

Across the world, country stimulus responses vary from 1% of GDP to 12%. Rich countries seem to have announced larger stimulus packages (5-10%) and developing countries have announced smaller packages (2-5%). No country seems to have done large giveaway programmes except for the impoverished in rich countries. Even forgivable loans seem to be connected to keeping employees for much longer than what the eligibility for a business is, putting an actual additional burden on the businesses instead of solving their problems. News about some malpractices and mismanagement in the implementation of these programmes in rich countries have also emerged.

Government spokespersons and economists have been reiterating on television and print that they would like not to spend all their ammunition at one go. They would like to come out with newer support modules at the appropriate time depending on how long the Covid-19 pandemic lasts. In that context, I presume, the Rs 20 lakh crore stimulus is not the last stimulus package.

In almost all countries, stimulus measures have focussed on providing food and relief to the poorest and most vulnerable sections till the time the Covid-19 pandemic lasts. In rich countries, it is known as social security or social safety net. In India, it has now come to be known as free ration through ration shops and money transfer through Direct Benefit Transfer (DBT) using the Jan-Dhan account model.

The second common factor in the stimulus packages has been the money to be spent on providing and improving health care available to citizens. Indian response to Covid-19, across states, has been generally commendable given the real tough situation, even the richest countries find themselves in. It is a testimony as much to the skills and commitment of Indian medical professionals but also of the hard work put in by non-state actors across India. With all this praise, we also need o praise the Union government and the state governments. Despite difficulties, they have been providing as much support as possible. Given the new infections coming up at a faster rate, we have a long way to go.

The third common factor across all stimulus is supporting small formal and informal businesses. Even the US is struggling to provide loans to the SMEs currently. They had to bring two tranches for approval and are not able to meet most requirements. These are loans and not giveaways. There are reports that 30-50% of all small businesses across all economies will find it difficult to survive. They also generate a large number of jobs in the informal sector.
There are other areas of support given by way of delays in tax payment, interest payment moratorium, loan guarantees for SMEs, cutting benchmark rates, infusing huge liquidity into the banking system with a hope that they will on-lend to industry, giving loans or guarantees to support strategic businesses like airports, airlines, etc, which have seen their fortunes dwindle. China, the first affected country with tremendous resources at its disposal, seems to have announced very little except some monetary stimulus as of now.

In effect, there has been no large scale giveaway by any country, rich or poor, as a response to Covid-19. The Indian government may have studied many such models and has tried to create its response within constraints. Its hands are tied due to the direct and indirect tax income going down drastically due to the stoppage of economic activities across the country.

The government has also tried to reduce its costs by cutting down increases in DA for its employees, reducing the MP salaries, perks and other expenses, etc. Many more cost-cutting measures are expected to be announced by the Centre and state governments given the difficulty of managing increasing fiscal and revenue deficit. The monetisation of deficits, cannot be resorted to lightly, as it will have implications on future inflation as well as on the expected interest rates. Many economists and commentators have mentioned that the government announcement on stimulus of Rs 20 lakh crore tries to resolve only supply-side issues. There is nothing to bring in additional demand. It could be done by way of putting money in the hands of people—without work or by creating large scale infrastructure projects creating demand for manpower and goods alike. I hope the government is working on the demand revival side packages without hurting the fiscal discipline too much.

MD&CEO, BSE. Views expressed are personal

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