The long and short story of India’s ‘stimulus package’

Venky Vembu | Updated on May 22, 2020

The lack of urgency in the Centre’s ‘stimulus package’ to revive the virus-stricken economy may end up prolonging the agony it is aimed at easing

* The five-part announcements of the ₹20-lakh-crore economic stimulus package mostly relate to injecting liquidity in the banking system

* The economy is expected to shrink by 5 per cent in FY2021

When one’s daadi (beard) is on fire, it is folly to ask for a matchstick to light a bidi. That folksy aphorism, which sounds more searing in the Malayalam language to which it is native, is a cautionary tale about the unwisdom of failing to address a crisis at hand. If one may take some permissible liberties with it, it also encapsulates, in large part, the NDA government’s measures to revive the economy, which has been laid low by the Covid-19-induced lockdown.

A wholesale collapse of consumer demand has compounded the malefic effect of the forced closure of factories and retail services; millions of people, across industries and across economic strata, have lost their jobs; and a humanitarian crisis — in the frail form of inter-state workers, rendered jobless in the cities, trudging to their villages with their families and meagre belongings in tow — stalks the land. Taken together, these represent the nearest thing to an inferno in one’s facial hair. And yet, the policy exertions of the government — as exemplified in the announcements over five days last week — seem lacking in the urgency that a firefighter needs to summon up in the face of a crisis of the kind India has seldom experienced. Notwithstanding the headline-grabbing razzle-dazzle claim of a ₹20-lakh-crore economic stimulus package (or about 10 per cent of GDP), the five-part announcements mostly relate to mechanisms to inject liquidity in the banking system. At a time when consumer demand is slack, and there is little incentive for producers to scale up (much less to borrow to get their factories humming), these liquidity lifelines, while important as a backstop, don’t have any firepower to kick-start a stalling economy — here and now.

All this is not to suggest that there was nothing in the government’s announcements that was worthy of commendation. Arguably one of the most defining reform proposals was centred on the agriculture sector. The proposals unveiled in this space have the potential to be a game changer to the extent that they unshackle farmers from excessive dependence on patronage from a State whose capacity is limited (and diminishing) and aligns their interest more closely with those of a rather more rewarding marketplace. Likewise, the promised dilution of the Essential Commodities Act, a piece of legislation that has long outlived its utility, should incentivise private investments in warehouses and facilitate economies of scale, and provide a cushion against seasonal volatility in the prices of agricultural produce. Taken together, these proposals, if implemented with the same earnestness of stated intent, can be truly transformative.

And yet, the few such merit-worthy proposals in the ‘stimulus package’ were lost in an avalanche of policy pronouncements and administrative tweaks (masquerading as ‘reforms’) owing to a peculiar affliction that at times renders this administration singularly tone-deaf. It is symptomatic of an excessive preoccupation with minutiae that are a bureaucrat’s delight, and it causes it to miss out on the big picture.

The failure to provide a big-enough fiscal stimulus to revive the Covid-19-afflicted economy perhaps has its roots in the concern that a country with such straitened finances cannot risk going over the top. Concern has also been expressed in conservative economic quarters that opening the fiscal tap full tilt could cause inflation to flare up. Such textbook considerations are not entirely without basis. But they do not apply in the real world, with an economy that is expected, by some estimates, to shrink by 5 per cent in FY2021. That represents the sharpest-ever recession that India has faced. And even if such a contraction occurs only over the short term, the perils of inaction — and even of insufficient action — will prolong the agony for far longer than might otherwise have been the case.

If there is one lesson that India can learn from the experiences of other economic geographies, it is that in periods of severe contraction, abiding by a misplaced sense of fiscal rectitude as a concession to conservative philosophies or for fear of a sovereign ratings downgrade will render the recession even more acute. With revenue collections diminished, policymakers will then have even less by way of firepower to fight a problem that, through inaction, would have become bigger.

Some commentators have advanced the case that the Modi government’s perceived withholding of the full might of its fiscal capacity in order to revive the economy may have been born of a compulsion to conserve firepower for a time when things get worse. That is arguably the most charitable explanation that one may proffer, even though its merit is diminished by the real-world consideration that a stitch in time saves nine.

Others have made the point that by focussing on medium- to long-term reforms, rather than on providing short-term palliatives, the government is being visionary in its outlook. And that this preferred course is a validation of the merit of teaching a man to fish rather than giving him a piscine handout. Even at their best, these represent a perverse understanding of today’s reality. It may be true that a crisis such as we are facing may present the best opportunity to push for meaningful but politically unpopular reforms. But to resort to virtue signalling experiments when so many lives and livelihoods are at stake is doubly cruel.

The beard is well and truly afire. Far more economical will it be to extinguish it — here and now.


Venky Vembu is Associate Editor, BusinessLine;


Published on May 22, 2020

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