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Stimuli Revisited

In economic terms, the stimulus could be said to be based on a traditional approach i.e., managing the pace of economic growth by reining in inflation and adjusting the cost of private borrowing rather than by spending public money. The Government’s liquidity enhancing measures stabilised the financial system but household incomes fell.

Devendra Saksena | New Delhi |

On 24 March 2020, as soon as the Covid-19 pandemic started to manifest itself in India, Prime Minister Modi announced a pan-India, three week long total lockdown, which was extended to a record sixty-eight days. A Niti Aayog member claimed that the lockdown would end the Coronavirus pandemic by 15 May 2020. Sadly, the prophecy was not fulfilled; rather, the lockdown had a disastrous impact on the economy.

Also, since lockdown measures forced all shops and factories to close down, jobless migrant workers started trudging home; traversing the length and breadth of the country, on foot, on bicycles, on rickshaws, and even cramming themselves in tankers, dumpers and cement mixers. In an effort to stem the exodus, the Government announced a food security scheme for 80 crore beneficiaries. However, lacking an effective delivery mechanism, food aid did not reach migrant workers, and their movement continued unabated.

To rejuvenate the moribund economy, the PM announced a financial stimulus package of Rs 20 lakh crore on 12 May 2020. Elucidating the Prime Minister’s declaration, the Finance Minister announced five sets of relief measures. The first set of measures were aimed at pumping in additional liquidity of almost Rs 6 lakh crore, mostly in the Micro Small and Medium Enterprises (MSME) sector. The second tranche of the stimulus, worth Rs 3.10 lakh crore, included Rs 2 lakh crore for Kisan Credit Cards and Rs 3,500 crore for free food grain supply to migrant workers.

A One Nation One Ration Card Scheme, allowing beneficiaries to draw rations from any public distribution unit in the country was also announced. The third tranche, aimed at the agricultural sector was worth Rs 1.5 lakh crore. The fourth and fifth tranches, focused on reform in several sectors, and had a financial outlay of Rs 48,100 crore, out of which, Rs 40,000 crore was additional MNREGA allocation. For people who found that the sum of the five tranches did not add up to Rs 20 lakh crores, the Finance Minister clarified that the stimulus package included Rs 1.92 lakh crore worth subsidised food grain and cooking gas to the poor and PM-Kisan payments of March 2020, as also Rs 8.01 lakh crore of liquidity enhancing measures aimed at banks and States, announced earlier by the RBI.

Thus, according to the FM, the stimulus totalled Rs 20.97 lakh crore. Later on, another stimulus package of Rs 2.65 lakh crore was announced in November 2020, the main component of which was a Production Linked Incentive of Rs 1.46 lakh crore for ten sectors. The relief package involved a very small amount of direct government spending. Rather, most of the proposals were credit-focused, with the Government providing guarantees for loans by banks and NBFCs to MSMEs and small businesses. Many of these initiatives had timelines going beyond the financial year, making the Government’s contribution dependent upon the Government’s own pace of implementation.

Excepting PM-Kisan, there was no scheme of direct cash transfer in the relief package. Thus, the package failed to ameliorate the immediate distress of the vulnerable sections of society e.g., migrants, daily workers and street vendors. In economic terms, the stimulus could be said to be based on a traditional approach i.e., managing the pace of economic growth by reining in inflation and adjusting the cost of private borrowing rather than by spending public money.

The Government’s liquidity enhancing measures stabilised the financial system but household incomes fell, and according to research by SBI, household indebtedness increased by 5 per cent during the pandemic.In a marked change from the strategy adopted in 2008, while dealing with the Covid-19 pandemic, Western countries, particularly the US, discarded the orthodox top-down approach, preferring fiscal policy to monetary policy. The US Government distributed cash directly to households and businesses without being overly selective about the beneficiaries, devising policies to ensure that help reached the most needy.

For example, after announcing a stimulus of $2.2 trillion on 27 March 2020 under the Cares Act, the US launched another stimulus in March 2021, committing $1.9 trillion to Covid-19 relief encompassing five major cashtransfer programmes, including $1,400 to Americans earning up to $75,000, an additional $300 a week in unemployment benefits up to 6 September 2021 and assistance for rent and health care and a child allowance of $250 to $300 a month per child.

The Fed wholeheartedly supported the Government’s initiatives by buying Government debt and keeping borrowing costs low. Even the International Monetary Fund, a die-hard votary of fiscal prudence, endorsed Government stimulus measures. The aftermath of the stimulus for the US economy surprised traditionalists. Right from the second quarter of 2020, at the time when the US GDP shrank by 34.3 per cent and Covid-19 infections were on an upward trajectory, U.S. household incomes, which were already higher by 60 per cent than average European incomes, actually increased.

The US economy grew by 6.4 per cent in the third quarter of 2021, and is poised to grow by a record-breaking 7 per cent in fiscal year 2021 (which ends on 30 September). The mood in the US is one of optimism; the US stock market has risen by 250 per cent in the last one year. On the other hand, an ultra-conservative approach has impeded the recovery of the Indian economy, which shrank by 7.3 per cent in FY 2020-21. Household incomes went down in India; our per capita GDP is now less than that of Bangladesh. The distress is most at the lowest level; while India added 40 more billionaires last year, more than 23 crore people have been pushed back into poverty.

Also, poor implementation has marred the implementation of the fiscal stimulus. For example, during the second wave of Coronavirus infections, a large number of migrant labour could not get the rations intended for them, because the much hyped One Nation One Ration Card Scheme had not been implemented, even after one year. Then, there were not many takers for the loans offered by the Government; the overall credit growth has been only 5.7 per cent, while credit growth for MSMEs was a meagre 3.8 per cent.

An additional sum of Rs 1.5 lakh crores has been allotted for MSMEs in the stimulus package of Rs.6.28 lakh crore announced on 28 June 2021, even though 10 per cent of the Rs 3 lakh crore earmarked for MSMEs in May 2020 had not been utilised. There is also some evidence that the liberalised definition of MSMEs, combined with a reluctance of institutions to lend to the really needy, enabled bigger players to corner most of the loans meant for their smaller brethren. Moreover, in some instances, creditworthy borrowers renewed old loans at lower rates.

Also, the latest stimulus package is fully credit based; the major part of the package, Rs 3.03 lakh crore is for DISCOMS, which had been provided Rs 90,000 crores in the 2020 stimulus. Probably, more than credit, major reforms are needed in the power sector. Then, Rs 30,000 crores is earmarked for 25 lakh beneficiaries, who would be able to borrow up to Rs 1.25 lakh through micro-finance institutions (MFIs). The usefulness of this scheme is doubtful as MFIs typically lend at an interest rate of 30-35 per cent. Certain questions come to mind vis-à-vis the financial stimulus.

Firstly, whether loans or guarantees, so liberally doled out by the FM, can really be classified as ‘stimulus’, because loans add to the liability of the recipients. Secondly, automatic loans to farmers through Kisan Credit Cards, at a time when the agricultural sector is not under distress, would increase rural indebtedness, the biggest problem of village society. Thirdly, almost all measures announced in the stimulus would boost the economy in the medium-term, while the distress of the unemployed and migrant labour demands immediate succour.

Fourthly, whether a supply-side monetarist approach is the best way to reboot our economy?Looking to the experience of other countries in dealing with the pandemic induced economic slowdown, cash transfers to vulnerable sections would have addressed the misery of the poor better. One also wishes that instead of concentrating on the supply side, the Government could have tried to boost demand by spending a part of the stimulus amount on rural infrastructure building so as to employ workers rendered jobless due to the pandemic, in activities like reforestation and soil reclamation that can retrieve millions of hectares of overused soil from erosion and devastation.

Then, the Government could start projects in villages and small towns, aimed at building schools, connecting and internal roads, bridges, hospitals, waterworks, sewers etc. that would create much-needed infrastructure and provide employment at the same time.

(The writer is a retired Principal Chief Commissioner of Income-Tax)