It is inevitable that confining millions to their homes will have a direct bearing on the economy through sales and production losses. Economic growth is also a function of the speed at which transactions take place, described as the 'velocity of money’.
How do you frame policies in a scenario that calls you to lock down the entire economy? How do you prescribe strategies when the only known solution so far, is persistent, extreme social distancing for an indeterminate period?
As these questions dominate policy wonks from New York to New Delhi, a popular textbook theory is fast gaining traction to deal with the economic fallout of COVID-19: 'Helicopter Drop’ of money.
In India, an unlikely destination has taken the lead in carrying out the proof of concept of this approach, Uttar Pradesh — the country’s most populous, but also among the poorest states.
Earlier this week, the UP government announced that it would make online payments to poor and daily wage workers if they lost work because of the global pandemic. Vegetable vendors, construction workers, rickshaw pullers, autorickshaw drivers, daily wage earners and temporary staff at shops who have seen their earnings collapse dramatically because of severe restrictions on economic activity, are among those that will be eligible for this direct cash transfer to their banks.
Tiny as it may appear in value, in its method though, it mirrors what United States President Donald Trump and Treasury Secretary Steven Mnuchin have proposed: mailing out cheques of up to $1,000 to American adults.
It is inevitable that confining millions to their homes to contain COVID-19’s infection spread will have a direct bearing on the economy through sales and production losses. Economic growth, among other things, is also a function of the speed at which transactions take place, described as the `velocity of money’.
As customers stay away from shops, people defer travelling plans, and restaurants, malls and theatres shutter down operations, the dash of money among establishments and individuals have swiftly moved on to a much slower lane.
This consequential low money velocity has hit the informal sector — the Indian economy’s lifeblood — the worst.
Weekly haats, where one could buy a range of things from vegetables and fruits to crockery and clothes for a good haggle, are now banned in most states, endangering the income of tens of thousands of street vendors. Likewise for rickshaw pullers and e-rickshaw drivers, who have seen their incomes drop sharply as more and more people work from home. Temporary staff, employed in small stores and roadside vends, are equally at risk as falling business could force many of their employers to retrench.
An economy-wide squeeze has made them the most vulnerable for which they are the least responsible. They don’t have deep pockets and have weak borrowing power. These are the class of people that need immediate hand-holding, and one of the surest ways of doing that is to put more money directly into their pockets and bank accounts.
The problem, however, is where will the governments (the Centre and states) get the money from to finance such a programme. The key question is: Will India be open to adopt the `Helicopter Drop’ approach?
Helicopter Drop (a metaphorical descriptor), first coined by Nobel laureate Milton Friedman, is an unconventional policy tool, where the country’s central bank prints large sums of currency notes. These are printed specifically to allow the government to distribute it among citizens to raise their income levels, enable more spending and stimulate a falling economy.
The Helicopter Drop Theory is predicated on the basic assumption that putting money directly into people’s bank accounts will prompt them to spend parts of it on goods and services, boost demand for products and help keep the economy stay afloat.
Such an approach, despite a rather elegant theoretical construct, has not been popular among policy makers across world. First, it brings into question the central bank’s independence. Why shall the Reserve Bank of India (RBI), for instance, print extra notes for the political establishment to distribute? Second, it has practical execution hurdles. Who determines how much need to be paid for how long and to whom?
Valid questions. The second is a matter of administrative targeting, efficiency, and, of course, data quality. It is the first that will throw up questions of legality and fiscal and political morality.However, the world economy, indeed India, is engulfed in an extraordinary condition. There are no guidebooks to refer to. The policy toolkit has no levers to deal with economy-wide forced lockdowns for an undefined period of time. It may be just the right time for a Helicopter Drop of money as a last resort measure. For, no one is sure how long this slide will last.
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