Cutting one’s coat according to the cloth one can be a useful dictum for setting policy priorities. Not all economies are bestowed with the unlimited resources of the US whose currency, the dollar, still enjoys the enviable status of being the global reserve currency. This affords the US the ultimate luxury to issue debt without a thought of its consequences on macroeconomic balances. India does not have such degrees of freedom.

Cognisant of its constraints and compulsions, the government adopted the twin mantra of relief and reform for shaping its stimulus package, as rolled out initially by the RBI and then in five successive phases by the Finance Minister. This has now been followed up another round of lowering both the repo and reverse repo rates, to bring these down to the lowest levels in recent times.

The first of the two strands of the comprehensive package has been to ensure that the human cost of the crisis is minimised, specially for those at the bottom of the pyramid; and the second, to convert this crisis into an opportunity by implementing bold structural reforms that have been pending for a while, as well as others that have been necessitated by the negative impact of the pandemic. Shaped by these two priorities, the stimulus is a carefully crafted, well-balanced yet bold package that will, in the coming days, achieve both objectives.

Demand reforms

It is widely recognised that the present crisis has seriously impacted both the supply and demand side of the economy. The stimulus package effectively addresses both these aspects. Several measures have been announced to lift the sagging demand in the economy. It is important to point out that total effective demand is made up of demand for consumption, investment, intermediate goods as also external demand. This has to be taken note of by those who consider only the cash in hand of consumers as the sole means for reversing the decline in aggregate demand in the economy.

It is indeed true that some measures to boost consumption demand will have to be taken to trigger economic revival and re-ignite the investment cycle. Therefore, additional credit lines without new collateral, provided to the MSMEs or to street vendors or to farmers (of ₹2 trillion) will also surely contribute to the strengthening of aggregate and also the consumption demand.

Measures announced for ramping up consumption demand directly included: ₹1.73 lakh crore for (announced in the first package) for improving the incomes and welfare of the most vulnerable, including the 20-crore female Jan Dhan account holders who will receive monies directly into their bank accounts; ₹50,000 additional incomes in the hands of those whose TDS and TCS were reduced by 25 per cent; ₹40, 000 crore additional allocation for MGNREGA, taking the outlay above ₹1 lakh crore, and which will provide jobs and succor to those returning to their villages from metros and cities; ₹30,000 crore for construction workers; ₹17,800 crore transferred to 12 crore farmers; and ₹13,000 crore transferred to States to finance the costs of running quarantine homes and shelters for migrant workers.

These measures will help boost consumption demand, which as pointed out above, is of course, the necessary condition for triggering a recovery in economic activity.

Supply-side measures

On the supply side, the government response has been four-fold. First, to ensure that nation’s food security as well as farmers’ incomes were not impaired. The government declared agriculture and all related activities as essential services immediately upon announcing the lockdown. This permitted the successful harvesting and efficient procurement of the critical rabi crop. Procurement operations pumped in ₹78,000 crore as new purchasing power in the hands of the farmers.

The second prong was to prevent the pressing cash/liquidity crunch from converting to insolvencies and bankruptcies. A moratorium was announced for all businesses for their debt servicing obligations to commercial banks initially for 90 days, which has now been extended to 180 days. MSMEs were given an additional credit line of ₹3 trillion without any fresh collateral, to further reinforce their access to credit. MSMEs can also avail of new equity from the ₹50,000 crore fund of funds. These measures will provide the needed succor to a large number of businesses, especially those in the services sectors like hospitality, entertainment, retail etc, which have suffered a near complete loss of revenues during the lockdown. It is worth pointing out that a large segment of businesses in these sectors belong to the MSME sector. For example, 93 per cent of all hotel rooms in the country are in MSME units.

A whopping ₹90,000-crore credit package has been extended to State electricity utilities to enable them to clear their dues to private sector power producers.

Production ecosystem

The third set of measures was directed to significantly improve the ecosystem for private producers and investors, both in agriculture and manufacturing. Farmers now have the much-needed freedom to choose their clients. Freed from the age-old tyranny of the Essential Commodities Act, traders and exporters of agro-products can maintain necessary stocks to meet export obligations.

With further liberalisation in the defense production sector, India will achieve higher self-reliance in this strategic sector and also emerge as an exporter. Private businesses can now operate in sectors hitherto monopolised or dominated by the PSEs.

Finally, in a measure that touches the lives and livelihoods of more than 50 lakh families, street vendors all over the country have been given a credit of ₹10,000 each for re-stocking. Thus, ‘the package’ has guaranteed the survival of existing production capacities and laid strong grounds for attracting fresh investment to bolster growth.

The size of the stimulus at ₹20.97 trillion is larger than the promise made by the Prime Minister in his address on May 12. At more than 10 per cent of the GDP, it compares favourably with packages announced by other emerging economies. Indian farmers will get the much-needed freedoms, flexibility and financial strength to propel India’s economic recovery in the post Covid-19 period. And buoyed by the stimulus, Indian firms will operate in an ecosystem that will help them become ‘glocal’, thereby helping Indian brands command a larger share in to global markets and participate successfully in global value chains.

The writer is Vice-Chairman,

NITI Aayog. Views are personal

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