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COVID-19 | The economic package must promote jobs in rural sector

India has seen one of the largest reverse migrations back to the villages, and, the government must urgently redraw its development priorities to address this reality
May 14, 2020 / 12:05 PM IST

The long-awaited economic package to get the Indian economy back on track was finally announced by Prime Minister Narendra Modi on May 12. Faced with the prospects of the worst economic downturn ever, it was imperative for the government to provide the stimulus for shoring up the economy.

The Prime Minister sought to meet such expectations by making two sets of announcements: first, by setting the objective of a ‘self-reliant’ India, the contours of which are yet to be defined; and, second, by announcing a Rs 20 lakh-crore package, which is about 10 percent of India’s GDP. This package is roughly the size of the initial economic stimulus provided by the United States, which was followed up by a similar package provided by the Federal Reserve.

The first point of interest is to understand the financing of this package.

The Prime Minister mentioned in his speech that the decisions of the Reserve Bank of India (RBI) since the COVID-19 outbreak would also be regarded as economic announcements of the government. In this period, the RBI had taken four decisions, Rs 6.9 lakh-crore absorbed under reverse repo operations in April, and three other operations, namely, Targeted Long-Term Operations, Refinancing Facilities for All India Financial Institutions, and Liquidity Lifeline for Mutual, each of which was Rs 50,000 crores each. In late March, Finance Minister Nirmala Sitharaman had announced Rs 1.7 lakh-crore relief package under the Pradhan Mantri Garib Kalyan Yojana for the poor. Finally, the government enabled itself last week by borrowing Rs. 4.2 lakh-crore, which was in addition to the Rs. 7.8 lakh-crore provided in the Union Budget of 2020-21. However, all of the above measures add up to only about Rs 14.3 lakh-crore.

Can all these measures provide the stimulus that the economy needs? Perhaps not, since monetary policy is usually not effective in spurring demand directly, and especially when the economy is severely demand constrained. In such circumstances, fiscal policy can provide the necessary trigger, which is what is being done by most governments. Therefore, only the measures taken by the finance ministry should be counted in.

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It should be noted that some components of the finance ministry’s March package were already accounted for in the 2020-21 budget, and, therefore, the real stimulus through injection of new money will come from largely from the fresh borrowing of Rs. 4.2 lakh-crore. In other words, the government must do more to revive the economy.

Sitharaman’s announcement, on May 13, on the details of the economic package is really a mixed bag. Support to the MSMEs, including provisions of emergency working capital and subordinate debt for the stressed enterprises, is a step in the right direction as these enterprises need to urgently start operations, to get the millions rendered jobless back to work. However, shortage of migrant labour could well be a constraint for the MSMEs; allocation of Rs 1,000 crore for the care of migrant labourers from the PM Cares Fund should be utilised to address this issue.

Closure of industries as was evidenced by the sharp drop in manufacturing output by nearly 21 percent in March, has impacted the Discoms. While infusion of liquidity would help protect their bottom lines, the government could have insisted that electricity is provided to the struggling MSMEs at a concessional rate, at least until the stabilisation of these production units.

The Prime Minister had spoken of self-reliance as an objective for India, and the Finance Minister followed it up by promoting procurement of locally produced goods and services in government projects valued at less than Rs 200 crore. Currently, the Government of India is under no obligation to issue global tenders for its projects since India is not a party to the Government Procurement Agreement of the World Trade Organization (WTO). The value of the projects seems too low for this measure to make a real dent in the demand for domestically produced goods.

The absence of a substantive package for rural sector in Sitharaman’s announcement is one of its major limitations. It may well be that subsequent announcements would cover this sector, but in view of the severe stress that it is currently experiences, a substantial package for rural sector should have been the priority of the government.

Over the past two months, India has seen one of the largest reverse migrations back to the villages, and what is worse, there is also increasing evidence that the migrant labour is reluctant to return to the cities. This scenario requires the government to urgently redraw the development priorities at least for the near term by promoting economic activities in the rural sector, including food processing industries. It is only by making this sector the fulcrum for the economy, can the huge problem of joblessness begin to be addressed.

Biswajit Dhar is Professor at Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University. Views are personal.
Biswajit Dhar
first published: May 14, 2020 12:05 pm

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