In a manner of speaking, the government could be said to have missed the trees for the wood with its Rs 20-lakh crore economic package. Certainly, its big bang, structural reform announcements will go a long way in improving the efficiency of industry, the lot of farmers and pave the way for a prosperous India in the long run. But here’s the thing – we need to surmount the mountain called COVID-19 before we step into that prosperous future. The measures the finance minister announced suffer on three counts when it comes to the immediate term – they do little to boost demand, they are inadequate although the package adds up to a notional 10 percent of GDP, and they lean too heavily on a spluttering financial system.
With the current lockdown extension on till June 1, India probably has the most stringent and longest lockdown among big economies. The actual fiscal stimulus, in other words direct government spending, is less than 1 percent, according to economist estimates. The biggest component is the increase in allocation to the Mahatma Gandhi National Rural Employment Guarantee Scheme of about Rs 40,000 crore. That’s good but remember that even in past years the average number of days of employment a household got under the scheme was around 50 days a year. Moreover, wage support for companies in the formal sector – especially in the hardest hit sectors such as aviation, travel and tourism etc. – is totally missing from the package. Layoffs and salary cuts continue and so will demand deterioration as a consequence.
Can state governments pick up the slack and do something for the vulnerable by way of a direct spending? Well, they have been allowed to borrow more (unlike the Centre, the states can’t borrow freely), but this has come with riders. According to State Bank of India research, only eight out of 20 big states will be able to fulfill all the conditions set by the Centre, although they will account for 70 percent of the Rs 4.28 lakh crore incremental borrowing estimated by the finance minister.
Thus the package is inadequate from the point of view of migrants. Direct money support is little, the free grains and cereal transfer could have been more while the cheap rental housing for migrants will do little to mitigate their immediate stress.
A good part of the package is focused on ensuring that cash flows are freed up and businesses continue to remain going concerns. This has been done mainly via increasing access to credit for everyone from farmers to street vendors to the states. One of the best measures via the credit channel is a 100 percent government guarantee for loans to MSMEs up to Rs 3 lakh crore. There are also some partial credit guarantee schemes whose ultimate aim is to increase credit for MSMEs and other sections. But these total to around 2 percent of GDP and pale in comparison to the public guarantees offered by other big nations.
Secondly, a good 38 percent of the Rs 20-lakh package is accounted for RBI’s liquidity measures. The central bank has pumped in Rs 8 lakh crore into the banking system, but lenders have parked an equivalent amount with the central bank because they are afraid to lend. Overall, about 75 percent of the package is through these loan guarantees and RBI liquidity measures and contingent upon bank’s willingness to lend. This, however, hasn’t been backed up with bank recapitalisation measures. Apart from MSMEs, there are no loan guarantees for other sections such as the Rs 2 lakh crore loans envisaged through kisan credit cards. Suspending the insolvency and bankruptcy code for a year and announcing that COVID-19 related debt cannot go into default won’t exactly increase the confidence of the banking industry. Thus, the credit enhancing measures might just end up proving inadequate for industry and MSMEs given the state of the financial system and persistent risk aversion.
Of course, the government’s hands are tied because of its finances and a reluctance to borrow more. Another way of looking at it is that New Delhi sees a second wave of the pandemic and is conserving its ammunition. That is not good news as well.
Investment bank Nomura has a more optimistic way of looking at this. Its research team said that the government response will be spread across multiple phases. The current one is a survival phase where measures are aimed at ensuring that a temporary shock doesn’t cause permanent damage to the economy. It expects actual demand stimulus from the government during a growth phase “which starts when the infection curve is firmly under control and a majority of the economy returns to a ‘new normal’.” That could be a long time in coming. Hopefully, the stressed sectors of the economy won’t be irretrievably damaged by then.