Unpacking the ‘Self-Reliant India’ Economic Stimulus
A policy-induced humanitarian crisis is unfolding before our eyes
It took the union finance ministry five days to provide the breakup of the 20 lakh crore economic package announced by the prime minister. Let us unpack it in less than five minutes.
First of all, the whole range of announcements fall woefully short of providing any meaningful relief to the crores of people who are suffering for no fault of their own.
Stories of unspeakable cruelty and tragedy with violent accidents, starvation deaths and being dismissed from jobs continue to be reported 50 days into the lockdown. With disturbances in production and exchange, supply chains have also been disrupted. Farmers have had to throw away their produce after being unable to sell it at remunerative prices.
The state seems to have no plan in place to provide immediate relief to the large majority of our population that needs it now.
Earlier announcements were made of transferring Rs 1,500 into Jan Dhan accounts, and provide an additional 5 kg of food for three months. There is no information about extension of these measures.
Despite the FM’s pronouncements and the eye-catching 20 lakh crore tag, this is not much of an economic stimulus. Only about 2 lakh crore rupees – about 1% of GDP – can be considered actual additional government expenditure. The rest of the package only makes credit available to different sectors.
It is not known yet whether this expenditure is in addition to the budgeted expenditure for the year 2020-21, which was Rs 30.42 lakh crore, or if it entails fund cuts elsewhere.
In an economic downturn, low income leads to low spending by consumers. Businesses are pessimistic about the future and wary of investing in it. Given the spread of Covid-19, the world economy is also in no position to buy our products.
The government can rectify the situation by providing a fiscal stimulus. Increased government spending will put more money in the hands of the masses, who will spend it to bring the economy back on track. For this, any government will need to spend over and above its budgeted expenditure, borrow beyond the revenues it has collected, and increase the fiscal deficit.
Policymakers argue they cannot spend more as revenues, which were already lower than expenditures, are likely to further collapse. This is a common fallacy. When the government borrows from the market and spends more, it injects demand into the economy, raising overall income and employment. As incomes rise in the economy, the government’s tax revenues also rise, and so do savings, thereby expanding the fiscal space.
Another argument is that higher incomes could lead to inflation. Currently, over 25% of the workforce is unemployed, businesses are performing well below capacity, 77 million tonnes of excess foodgrains lie idle and international food prices are falling. Fear of inflation is clearly unwarranted, and there is no reason to squeeze government expenditure on that account.
The government is trying to package the announcement as reforms to impress foreign capital. Which is also why it is trampling upon our labour laws. But given the economic freefall, private corporations are unlikely to line up to invest. After all, demand in the economy was already subdued before, and has shrunk even further with the lockdown.
In these circumstances, private investors may not be willing to make use of additional liquidity for new investments, making much of the announced measures ineffective. They would rather wait and watch, hoping for the economic situation to improve.
The government has found appreciation from some quarters for not giving workers any 'doles'. This is a complete travesty of humanitarian concerns as well as logic. Those in distress are hard-working people who brave systemic inequalities and eke out a living from hard human labour.
A transfer of Rs 7,000 per household to the poorest 80% of families for three months, along with the transfer of foodgrains and pulses, would be far more useful. It would cost only about 3% of GDP while according people dignity and the survival incomes they need, creating the demand that businesses desperately want.
Although not nearly enough to meet the additional demand for work when millions of migrants enter the rural labour markets, raising the MGNREGA allocation by 40,000 crores is a step in the right direction.
But mere allocation of funds will not be enough. The average days of employment provided per household is less than half the mandated 100 days. The number of workdays generated must increase significantly to bring some stability into distressed workers’ lives.
This must be accompanied by cash payments to meet immediate requirements, provision of food at the worksite, and extension of MGNREGA to urban areas.
Yet another case of starvation death of a tribal girl in Jharkhand was reported last week.
Special attention and resources need to be given to communities such as the Vulnerable Tribal Groups, the Musahar community and in areas that have a history of starvation deaths.
Despite its destructive impact, the lockdown has not been able to flatten the Covid-19 curve in most states. This raises apprehensions of a surge in cases as the lockdown is relaxed.
A policy-induced humanitarian crisis and a major public health crisis are unfolding before our eyes.
We need a real economic stimulus that provides immediate relief and brings the economy back on track, while protecting the lives of people. The current set of announcements are not nearly good enough.
(The writer is Assistant Professor, O P Jindal GLobal University, Sonepat)