Sense and nonsense of stimulus package

Subir Roy
Senior economic analyst

Is there even the remotest link between atomic energy and fighting the coronavirus pandemic? There is, going by the government’s action.

Union Finance Minister Nirmala Sitharaman spelt out over five successive press conferences the full ramifications of Prime Minister Modi’s Rs 20 lakh crore or 10 per cent of the GDP package to combat the economic blow delivered by the coronavirus. At the end of it all, the consensus among the analysts was that the actual fiscal cost to the government will be no more than 1 per cent of the GDP. The rest will be enabled by bank guarantees and permissions given.

Also read: RBI ramps up economic support; cuts interest rates, extends loan moratorium

Even the Rs 20 lakh crore needs to be put into context. It includes Rs 8 lakh crore of the mainly liquidity support measures already initiated by the RBI and Rs 1.9 lakh crore of the initiatives already announced by the government under the Pradhan Mantri Garib Kalyan Yojana.

Why this huge hiatus, the reluctance to spend cash? Sitharaman has explained that it is better to empower people than to dole out cash. The government initially did rush money to the more vulnerable, but it felt that in the long run, it was best to enhance liquidity as that would reopen the economy, make enterprises viable and restore jobs.

But then, despite the RBI opening several liquidity windows, banks are reluctant to lend. Instead, they are parking government-approved funds with the RBI. Sitharaman’s explanation is that firms with sanctioned loans are not availing themselves of them as they are waiting for the lockdown to end. It has not yet officially ended and the lockdown, in its fourth phase, has been extended till end-May. But within that, relaxations are being made in the lockdown regime to enable economic activity to resume.

The overarching reality is that the pandemic forced the government to take a quick decision to declare a lockdown, unlike mature economies like the US and the UK which were initially in endless denial. Prime Minister Modi has earned global praise for this. The lockdown kept infections under control but brought the economy to a standstill, literally. This took away the livelihoods of a huge section of the less well off. Their plight has been most dramatically illustrated by the trudge across India by millions of migrant workers who were trying to go home so as to ward off hunger.

Any stimulus package has to address the economic reality that the lockdown has annihilated demand and, consequently, with there being hugely curtailed consumption, the supply chain has also collapsed. (If my buyers have disappeared why will I produce/sell?) What needs doing immediately is putting buying power — it’s called cash —in the hands of the people and working capital in the hands of all businesses except large companies which can fend for themselves.

Against this requirement, what has the stimulus given us? First, the decisions that make sense. Free food — five kg of rice per adult per month and one kg of channa — has been sanctioned for two months. Rs 3,500 crore has been allocated for this. Plus a ‘one nation one card’ to overcome the problem faced by migrant labour who had left their ration cards at home for the family has been promised for all by next March. Actually, there is nothing new in this as the scheme already covers the majority of the people.

Another move which will put cash in the hands of the people is raising the funding for the rural employment guarantee scheme by Rs 40,000 crore, compared to the budgetary allocation of Rs 61,000 crore. This will generate 300 crore of person days in total. Critically, this will create a means of livelihood for the labour who have returned to a home which is itself at the edge of survival.

Equally praiseworthy is the scheme to support five million street vendors who will get a loan of Rs 10,000 each which will cost Rs 5,000 crore. These vendors who had eaten up whatever little savings they had would find it hugely difficult to restock themselves without some help. The catch here is that the banks don’t know how to lend to vendors as they have not done so till now.

There is also a scheme to offer collateral-free loans to small businesses and the definition of ‘small’ has been widened to cover a bigger universe. The government will guarantee these loans offered by banks and NBFCs.

All this makes sense, but a whole set of economic reforms have been announced as part of the stimulus. In fact, they make up the bulk of the proposals, when they have little to do with fighting the consequences of the lockdown. Many of them have been on the anvil for a long time and none of them can be implemented in a short while to revive the economy.

Here are just a few of them. The beginning of the end of the public sector has been signalled. Critical reforms, sought by experts for ages, which will transform the agriculture sector have been promised. The Companies Act will be decriminalised; most offences under it will be allowed to be compounded. The IBC (insolvency and bankruptcy code) will be suspended for a year.

While these are wide in their scope, look at two more. The private sector will be allowed into the space sector and it will be able to gain access to ISRO facilities. Plus, in the field of atomic energy, a research reactor on the PPP model will be set up to produce medical isotopes for cancer treatment. This must have something to do with the novel coronavirus which will elude ordinary mortals.