Hyman Minsky, whose centenary was celebrated a year ago, consistently argued that in a capitalist economy “stability was destabilising”. In other words, instability would almost inevitably follow from long periods of normal functioning in such an economy. This has been a latent concern over the last decade, with the global economy trying to emerge from the shadows of an economic recession.

Many commentators, including those from the United Nations agencies and the International Monetary Fund, were almost unanimous in suggesting that most major economies never regained the robustness of the pre-crisis phase. Such fact-checks were drowned in the high-pitched support from market-fundamentalists for whom the market could seldom go wrong, and even if it did, it would self-correct.

But the self-correcting nature of the market was a mirage, as has been borne out by the excessive overvaluation of financial assets, to which even Warren Buffet had alluded some months ago. Thus, the global economy was increasingly moving towards a “Minsky moment”, from where a collapse looked inevitable. Covid-19 was a mere trigger that caused the unravelling of global markets.

Global measures

The response of most governments to the pandemic indicates that they were aware of the fallibility of their economies. They are producing the largest-ever economic stimulus packages to shore up businesses.

It makes perfect economic sense for these governments to step-up and support their economies. In times such as the one prevailing now, consumption is severely hit, which has, in turn, adversely affected investment. With the global economy in a state of collapse, exports have declined. This implies that from among the variables influencing national income, government expenditure is the only one that can be leveraged in times such as these, and all major economies are doing precisely this.

The US has led the way by adopting the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27. Several other countries, including the members of the European Union and Japan, have also announced stimulus packages.

The CARES Act proposes injection of $2.2 trillion, or about 10 per cent of the country’s GDP. The size of this stimulus package dwarfs the $831-billion American Recovery and Reinvestment Act of 2009 (ARRA), which was introduced to bail out the US economy from the depths of economic recession.

Individuals would be largest group of beneficiaries from the stimulus package, with about $560 billion authorised for them. Of this, $300 billion are cash transfers and the rest, will go toward extra unemployment payments for those filing for doles. Cash transfers would be provided for a family of four earning less than $1,50,000 and individuals earning less than $75,000. These thresholds are not remotely related to the poverty line, which, for a family of four was set at $26,200 for 2020. This implies that a significant number of individuals, and not necessarily those in abject poverty, would benefit from the economic stimulus package.

The big corporations are the other major beneficiaries. The CARES Act commits $500 billion to provide loans and loan guarantees, and other investments. Small businesses, those with 500 or less employees, can receive loans up to $10 million from the $350 billion allocated to them. Any portion of the loan that they receive can be forgiven if it is used to maintain payroll, keep workers on the books or pay for rent, mortgage and existing debt, provided workers stay employed through the end of June.

Strengthening of public health and education is the other important component of the CARES Act. Public health gets additional funding, and this would encourage the country’s healthcare system as it struggles to check Covid-19 from spreading rapidly.

Germany has surpassed all other European countries in providing the largest stimulus package totalling €1.1 trillion, which is almost a third of its GDP. The €600-billion “economic stabilisation fund” offers €400 billion of guarantees for companies’ debts, €100 billion to lend directly to or buy stake in troubled firms, and €100 billion to fund state investment bank KfW.

The French President has promised unlimited budgetary support for companies and employees, including an “exceptional and massive” mechanism to pay workers temporarily laid off by businesses that are adversely affected by the crisis. The government has pledged €300 billion of state guarantees for bank loans to businesses and a €45-billion package for the small businesses, adding up to over 14 per cent of the country’s GDP. The European economies would have the benefit of additional support from the European Commission and the European Central Bank.

The latest in this list of countries providing stimulus to support their economies is Japan, which has pledged $990 billion, or about 19 per cent of its GDP.

India in distress

Given these trends, it is somewhat surprising that the Government of India has not yet announced a significant economic stimulus package. The only initiative thus far is the ₹1.7-lakh crore package announced by the Finance Minister under Pradhan Mantri Garib Kalyan Yojana on March 26. Not all of this amount is “new money”, but even if it was, this package is just 0.7 per cent of the country’s GDP.

How does one explain this tendency of the government to largely buck the global trend? One possible explanation is the presence of fiscal conservatives advising the government who would be against breaching the Lakshman rekha of fiscal deficit given by the FRBM. Over the past several months, the sluggishness in the Indian economy demanded a more aggressive use of fiscal policy, but the government continued to repose faith in monetary policy, with the RBI continually lowering the interest rates in order to “attract” investors. Strangely, even now, the RBI seems to believe that increasing liquidity in the system is the way forward, and hence its recent decision to decrease the repo rate.

With the unprecedented economic distress being witnessed in the country, the worst in the post-independence era, the government must urgently announce a substantial stimulus package having two clear objectives: one, addressing the plight of the working class, which has lost its dignity having been forced on to the streets in the aftermath of the lockdown; and two, providing meaningful support to an already distressed agriculture, which now faces the additional burden of reverse migration.

Those at the bottom of the pyramid need substantially more than the ₹500 that the Finance Minister had promised in her package.

Further, the government agencies must be prepared to procure the rabi harvest in much larger quantities, since private markets have all but collapsed due to the lockdown.

Moreover, the government could take a cue or two from its counterparts in countries that have announced the stimulus packages and identify the sectors which are the lifelines of the economy, like small businesses and transport. These sectors need significant hand-holding for them to help get the economy back on track, above all by giving back the workers their jobs. Finally, this is possibly the moment for strengthening the beleaguered public health system. There is no gain-saying that the government’s ability to assist the hundreds of millions whose lives and livelihoods would be the true test of democracy in this country.

The writer is Professor, Centre for Economic Studies and Planning, JNU