With Bharat’s growth rate crawling below 6% in the quarters preceding the COVID-19 outbreak, followed by the nation-wide lockdown lasting for almost three months, there are questions galore about the economic future of the country. A long-standing demand regarding major economic reforms was pending since 2016-2017 from the Government of Bharat. Amidst the COVID-19 crisis, the Government has finally delivered its master plan to combat the economic slowdown.
On the 12th of May,2020 our Prime Minster Narendra Modi announced a stimulus package worth Rs 20 lakh crore (i.e. 10% of GDP) to resuscitate our economy from the negative clutches of the ongoing situation. Following the announcement, the Finance Minister, Nirmala Sitharaman, made a declaration clarifying the detailed blueprint of the package via gradual press conferences.
This package should not be viewed in isolation. It marks the ushering of a new paradigm in Bharat’s economic policies. The Covid-19 outbreak has led to a global economic shift and that has been coupled with major geo-political changes. The question is, do we see this as an opportunity or get bogged down? Napoleon Hill had famously said “Opportunity comes disguised in the form of misfortune or temporary defeat”.
As a trained economist I believe there cannot be a more opportune moment for Bharat’s economy to grab a larger share of the global pie. But before we embark on our journey of dissecting the stimulus and underlying economic policies, let me throw some light on the nuances of the criticisms which will help our readers fathom the theoretic positioning of the strategy. So let us wear the hat of a devil’s advocate to start
Gestation Period & Liquidity Trap: The short-term lacuna
The most common and possibly the most potent criticism of the package is its failure in making demand side corrections or to put it simply measures to increase consumption. The crux of the argument is that, all the boost to the MSME through credit access or moratoriums will only boost the supply side. But what if consumers don’t have enough money to buy the produce?
The remedial measures suggested by the likes of Abhijit Banerjee and Raghuram Rajan revolve around direct cash transfers via Jan Dhan accounts. One might question, what about the tax reliefs and fiscal reforms? Wouldn’t they boost consumption enough? The answer lies in what an economist would call “marginal propensity to consume”. The basic tenets of economic theory suggest that the poorer one is, lesser his / her propensity to save proportionately. Thus an additional 1 rupee of disposable income for the poor would lead to more consumption.
In Bharat, only 1.46 crore people pay taxes i.e a paltry 1% of the population approximately. And moreover these are the people who are earning at least 5 lakhs per annum. So tax reliefs aren’t really the best strategy to boost consumption (due to the sheer weakness of the marginal propensity to consume in the segment). Thus, the fear is that the MSMEs will writhe in agony due to this demand crunch.
The next question which comes to mind is, wouldn’t the supply side boosts lead to more employment and thereby more liquidity injection in the economy? The argument against that is the gestation period. For employment generation to happen, the MSME sector has to roll on full swing, which in turn requires domestic demand to be in place. Thus we have a chicken – egg paradox. The classic liquidity trap problem.
Loopholes in the criticism
The first word which rings in my ears when I read about these criticisms, is ‘Fiscal Responsibility’, a word that has characterized Modi regime’s economic policy. Nirmala Sitharaman has time and again mentioned the Fiscal Deficit targeting (keeping it around 3%), in her budget. In fact, according to the Fiscal Responsibility and the Budget management Act (2003), governments are required to keep the fiscal deficit below 3% of GDP.
For the information of the readers, Fiscal Deficit is simply the Government’s expenditures net of its revenue. So, what impact will the often–advocated sizable direct cash transfers do to the Government’s balance sheet? Well, it will make the Fiscal Deficit shoot up. So what? A high fiscal deficit would mean lowering of Bharat’s sovereign rating (from investment grade to junk). What would that mean? It would mean future debt financing would become way more expensive, which in turn would mean higher interest accruals in the subsequent financial years.
The second important problem with the cash transfer or monetizing suggestions lies in targeting. The pertinent question that demands attention is how much of the direct cash transfers would translate into consumption, and thereby the much talked about demand side boost? Yes, the transfers will happen to the Jan Dhan Accounts and those at the border of subsistence would indeed go out and buy with the transferred cash. But with jobs in the informal sector and MSMEs drying up, wouldn’t there be an overwhelming propensity to save and spend cautiously, thereby reducing the multiplier effect?
Thirdly, the critics seem to have an underlying assumption of the post-COVID world being a resumption of the pre-COVID scenario. But in reality it will lead to structural changes in the global economy. As Ruchir Sharma of Morgan Stanley puts it, we might witness ‘de-globalization’. Supply chains would be transformed dramatically. Thus, mere demand alleviation will not prepare Bharat’s economy to deal with the vicissitudes of the future. We need strong long-term structural reforms to counter them.
The Four pillars of the new Paradigm
- Capital Injection and Credit access to the MSME segment: This seems to be at the heart of the gargantuan (10% of the GDP) stimulus. Now, this has a two-pronged benefit mechanism. Firstly, this will pave the way for employment generation, which in turn will alleviate the domestic demand shortage in the medium and long run. It will also create self–sufficient supply chains for Bharat’s economy, which will be an absolute must in the de-globalized post COVID world.
- Re-capitalization of the banks and NBFCs: The NPA hit financial sector has been in dire need of government support. Non-performing assets (NPAs) have been on the rise, thanks to crony capitalism of the last UPA regime. This has been coupled with the badly hit domestic enterprises defaulting. This is what Arvind Subramanian refers to as the ‘twin balance sheet’ problem. Hence, the big promise of the stimulus comes in the form of credit guarantees to the NBFCs and the Public Sector Banks. This will go a long way in smoothening the credit channel and will set the ball rolling. The banks, being overtly sceptical of lending out, are parking more than Rs. 2 lakh Crore of their funds with the RBI through the reverse repo channel. The stimulus will provide the confidence for that locked-up fund being injected in the market as credit.
- Atma Nirbhar Production, Viswa-Vyaapi Export: Being ‘Atmanirbhar’ (self-reliant) seems to have been misconstrued as a regression to Nehruvian protectionism, the revival of the license Raj and import substitution. It clearly isn’t. Modi in his announcement speech and the government’s subsequent press conferences have time and again reiterated the ambition to appropriate a key position in the global supply chain. If I have to really decipher this stimulus package, which promises an ‘Atmanirbhar Bharat’, I would break it up into two components, namely – Atma-nirbhar Production and Vishwa-vyaapi Export.
It is the latter which may prove to be Modi’s master stroke and it might go down in Bharat’s economic history as a watershed moment. All arguments against the stimulus have been based on an unsaid premise that domestic demand is the essential pillar, on which the efficacy of the supply-side reforms rest. And that’s understandable since Bharat has always been dependent on the local market. In fact, it has been primarily an importer, historically, post independence.
Barring agro–exports followed up with ITeS from the 80s and 90s, Bharat has not participated as a major player in the upstream segment of the supply chain. In electronic parts for example, China is the global leader; when it comes to finished apparels, Bangladesh rules the roost. But now the time has come for that to change. With Europe swinging into recession, and US–China trade relationship reaching new lows, is it not time for Bharat to grab this opportunity with both hands and gouge out a large chunk of the global export market share? And if it is coupled with a nation-wide boycotting of Chinese products by the populace, it’ll not only dig into Chinese wounds, but would also improve the demand for domestic produce – a double whammy!
- Direct Benefit Transfers through JAM, PDS and Targeting: The increased expenditure in the public distribution system has ensured adequate food grain supply to weather the bad times and keeping the body and soul together at the bottom of the pyramid. Free LPG and women income schemes have received major attention in the stimulus. Well targeted direct benefit transfers through the JAM trinity is ensuring that every penny is worth the salt (i.e in increasing consumption and demand).
Another point which deserves mention is that most developed economies, with interest rates hovering around zero, have very little ‘monetary space’. Bharat on the other hand, despite being constrained fiscally still has sufficient leveraging to be done when it comes to Monetary policy vis a vis Fiscal.
Myopic hysteria versus Long-term victory
Now to wrap it up, do we see Bharat bouncing back? Will the structural changes prepare Bharat for an advantageous position in the post-COVID global economy? As an economist, my hunch is a resounding Yes. Yes, the measures may lead Bharat into short-term difficulties, but will pave the path of re-establishing Bharat as the Vishwaguru.
I would end on a lighter albeit relevant note. I am reminded of this famous one–liner from a Shah Rukh Khan potboiler…”kabhi kabhi kuch jeetne ke liye kuch haarna bhi padhta hai…aur haar kar jeetne wale to Baazigar kehte hai..”
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