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The Rs 20-Lakh-Crore Stimulus Package: Mammoth Package, Miniscule Stimulus

The Coronavirus outbreak that was first reported in Wuhan, China on 31 December, 2019 has severely impacted the Indian Economy. The COVID-19 pandemic spread to the Indian economy at a time when it was already vulnerable, under the impact of a downturn in household spending&private investment and credit crunch. The International Monetary Fund (IMF) has predicted that our economic growth would slow to 1.9% in fiscal 2020-21, the slowest pace in three decades. In Aril 2020, Moody’s Investors Service forecasted zero growth for India in the year, down from an estimated 4.8% in 2019-20. In the words of Wipro Chairman, Azim Premji, we are still in the early stages of tackling the pandemic and the economic damage and the ensuing humanitarian crisis are immense.

In line with the recommendations of various experts, Prime Minister Narendra Modi in his address to the nation on May 12 announced a special economic stimulus package worth Rs 20 lakh crore to help revive the economy. This economic stimulus is part of PM Modi’s vision of self-reliant Indiain the wake of the economic bloodbath caused by COVID-19. The details of the economic stimulus package were unveiled by the Finance Minister.  The overall economic stimulus package of Rs 20, 97,053 crore, includes earlier stimulus measures like the Rs. 1.7 lakh crore Pradhan MatriGarib Kalyan Package and Rs 8.01 lakh crore of liquidity injection by the Reserve Bank of India in February, March and April this year.

According to Fitch Solutions the package, worth about 10 per cent of India’s GDP, and fifth-largest COVID-19 bailout package among major economies, in terms of spending as share of GDP, fails to address immediate concerns of the economy. The actual fiscal impact of the additional stimulus is only about 1 per cent of GDP as opposed to the claim of 10 per cent.  Fifty percent of the economic stimulus package covers fiscal measures that had previously been announced and also includes the estimated economic impact of monetary stimulus from the Reserve Bank of India (RBI).  Of all the new stimulus measures, announced by the Finance Minister, only pension fund support, temporary tax cuts, farm infrastructure upgrades, free food provision for migrant workers, funds to safeguard rural employment and an emergency fund for post-harvest activities can be truly quantified as a fiscal stimulus. Many of the other measures such as regulatory changes and vague reform plans only target medium-term supply-side issues but fail to address immediate demand-side issues. Though PM Modi’s proposed stimulus package is fifth-largest among G-20 economies in terms of spending as a percentage of GDP, it would tie with Hong Kong at the 19th place, as per data compiled by economist Ceyhun Elgin in the COVID-19 Economic Stimulus Index (CESI). Japan leads the list by spending 21.1 per cent of GDP, followed by the United States (13.3 per cent), and Australia (10.8 per cent). Is this the time to initiate large scale economic reforms or address the immediate demand-side issues?

Keynesian macroeconomics argues that the solution to a recession is expansionary fiscal policy that shifts the aggregate demand curve to the right. Expansionary fiscal policy consists of tax cuts or increases in government spending designed to stimulate aggregate demand and move the economy out of recession.  A detailed analysis of the economic stimulus package reveals that it is contrary to the Keynesian macroeconomics solution of fiscal expansion that can spur consumption and demand.   Global securities research firm Sanford Bernstein has termed the economic revival package as a “lost opportunity” echoing growing concern about whether it would help revive the economy.  The Bernstein report calls the package aimless and is critical of the several generic announcements that should ideally have been part of a normal economic agenda.  Barclay’s Chief India Economist Rahul Bajoria estimates the actual fiscal impact of Rs 20-Lakh-Crore stimulus package to be Rs 1.50 lakh crore or only 0.75 per cent of the GDP. According to Bajoria, the largest allocation from an actual fiscal impact perspective is the Rs 40,000 crore towards employment guarantee programme, Rs 30,000 crore in special liquidity scheme, Rs 20,000 crore on the fisheries sector and Rs 500 crore allocations to the bee keeping sector.

The economic stimulus package has left a lot of people high and dry. The government can argue that the term loans will be given and working capital loans will be provided by banks through the package so that companies can use these to pay wages, buy raw material and spur institutional demand. The government needs to understand that measures to infuse liquidity acts on the supply side. What is the use of stimulating demand on the supply side when the need is to spur demand? Rural and urban consumption has fallen according to every survey and every review. Rather than putting money in the hands of the people and stimulating demand, the government is focussed on packaging its economic stimulus as a differentiated policy to induce multiplier effect and empowering people.

Though the industry has been appreciative of the government’s positive reform efforts, industry leaders like Chairman of Wipro Limited, Azim Premji and Chairman TVS Group, Venu Srinivasan have sought have sought for extended income support. Azim Premji has asked for Rs 7000 to be paid to the poor for three months, while TVS boss Venu Srinivasan has suggested monthly assistance of atleast Rs 5000. They have also suggested for release of minimum wages for 25 days per month to all poor urban residents for the period of the lockdown and at least for two months month following the end of the lockdown. The Noble Laureate, Abhijit Banerjee while talking to Congress leader Rahul Gandhi through video-conferencing, suggested direct cash transfer to the bottom 60 per cent population to help revive demand.The former finance Minister, P.Chidambaram citing a research by the University of Chicago and University of British Columbia, states that 89% people had zero weekly income during the lockdown. He has also asked for extend ‘income support’ to 13 crore poorest households by transferring Rs 7,500 or Rs 5,000 to each of the 13 crore households.

India is fighting Covid-19 on the health front and our farmers, migrant labourers, shopkeepers, salaried classes and small & medium industries are fighting it out on the economic front. The country is facing unprecedented economic crisis. While PM Modi’s economic stimulus package is commendable in terms of realizing long term reforms economic agenda, it fails in providing immediate fiscal relief and addressing immediate consumption and demand concerns.  The government needs to balance its long term economic reforms agenda with immediate cash relief to help revive demand. The government is duty bound to serve and support its people now, else it shall become a case of ‘mammoth package and minuscule stimulus’.

BY: Dhananjay Singh, Assistant Professor, IMT Hyderabad

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