A day before India stepped into the second phase of easing the lockdown (Unlock Two), Prime Minister Narendra Modi, via his sixth televised address to the nation since the beginning of the pandemic predicament in India, highlighted the increased instances of “carelessness,” as a cause for concern.
He said that compared to other countries, India is in a “very stable situation” and lauded his government for the “timely decisions and measures” it took. He also announced that the Pradhan Mantri Garib Kalyan Yojana (PMGKY) would be extended by another five months, and that the implementation process of the One-Nation-One-Ration-Card scheme was on.
India’s fight against COVID-19 got underway with Modi announcing a ‘Janata Curfew’, from 7 am to 9 pm, on March 22. Two days later, at 8 pm on March 24, he announced a lockdown, giving the country and its 1.3 billion people all of four hours to get ready. This evoked memories of the demonetisation announcement.
The evident lack of planning in getting into lockdown in such a large country meant that it ended up needing three more extensions. This has already taken its toll on the Indian economy, which has almost ground to a standstill, and economic challenges are staring at the nation.
While most countries announced easing off lockdowns after managing to flatten the curve, India has chosen to do this at a time when the infection rates are climbing faster than ever before and have yet to peak! The country entered ‘Unlock One’ on June 8. In fact, at the time of writing, India has the fourth-highest confirmed cases of the coronavirus infection.
Thus, the new challenge seems to be to “live with the virus” when the country confronts the uncertainties emanating from its exit strategy (or lack of it). It is in this context that we should look at the political imperative of the COVID-19 policy response and assess how effective it is in standing up to the challenges faced by the nation.
On May 12, the prime minister announced a “mega” stimulus package of Rs 20 lakh crore, which is 10% of the country’s GDP. This was a long-awaited announcement for a nation whose economy was already on a significant slowdown and staring at an impending recession, teetering from the impact of the massive blow the pandemic had dealt on it. During the announcement, made on national television, Modi pitched for working towards an “atmanirbhar Bharat” by being “vocal for local” through measures taken under what he called the four Ls (land, law, liquidity and labour).
He did, though, mention that the Rs 20 lakh crore figure included the various liquidity measures announced by the RBI in February, March and April, and the earlier “fiscal package” announced on March 27. This major announcement led to an understandable spike in the markets, with the NIFTY going up by almost 200 points (Table 1). But as details of the package started to be revealed by finance minister Nirmala Sitharaman over the ensuing week, the enthusiasm that had built up started palpably dissipating, with the NIFTY index ending at a low of 8,823 on the May 8 (from a high of 9,384 on May 13). This does serve as an indicator of the sentiments of the public and the business community at large.
|Table 1: NIFTY Indices May 12 through 18|
|May 12, 2020||9,196.55||-0.46%|
|May 13, 2020||9,383.55||2.03%|
|May 14, 2020||9,142.75||-2.57%|
|May 15, 2020||9,136.85||-0.06%|
|May 18, 2020||8,823.25||-3.43%|
The highlight of the Prime Minister’s address to the nation on the 30th of June was the announcement of the extension of Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) to provide free ration for over 80 crore people) by five more months, till the end of November 2020. This, he said, would cost the government 90,000 crores.
Let us break this down and have a look at how much of a boost India’s entire COVID response package gives our economy and how helpful it would be in stimulating demand in an economy that seems to be seriously ill.
The various liquidity measures announced over February, March and April by the RBI amounts to Rs 8.02 lakh crore. The government’s first stimulus package announcement (made by Sitharaman on March 27) was one of Rs 1.93 lakh crore. The RBI’s announcement of slightly over Rs 8 lakh crore constitute of liquidity boosting and credit-related measures like cuts in interest rates and a special liquidity facility for mutual funds. The earlier package announced on March 27 (of Rs 1.93 lakh crore) was made up of Rs 1.70 lakh crore to distribute free foodgrains, and direct transfer of cash via Jan Dhan Accounts to farmers, women and the elderly (from Rs 500 to Rs 2000 under different categories), distribution of free gas cylinders, and 85% of train fares of migrant labourers returning home, as part of the PMGKY, a healthcare package of Rs 15,000 crore to build on health infrastructure, and the revenue loss sustained due to various tax concessions was factored in at Rs 7.8 thousand crore.
The finance minister declared a further Rs 11.03 lakh crore post the Modi’s announcement on May 12 through a series of announcements over the week that followed (Rs 5.95 lakh crore on day one, Rs 3.10 lakh crore on day two, Rs 1.50 lakh crore on day three, and 48,100 crores combined on day four and five), pushing the total package amount to Rs 20.97 lakh crore (Table 2).
|Table 2: Atmanirbhar Package Breakup|
|Components||Amount (in Rs crore)|
|Measures announced by RBI||8,01,603|
|March 27 Package – including PMGKY||1,92,800|
|Post-May 12 Announcements|
|Days 4 and 5||48,100|
|Extension of PMGKAY (via PM’s announcement on June 30)||90,000|
Source: Government Reforms and Enablers – Atmanirbhar Bharat/Prime Minister’s Televised Address on June 30
At a time when the economy is reeling from the effects of not just the pandemic, but those of a haphazardly implemented and protracted lockdown, infusion of spending power into the economy, many felt, would be the only way to help it recoup.
Contrary to this notion, the government chose to remain on the path it took with the initial package, by focusing almost entirely on liquidity measures. There are many who feel that the government should have learned from the RBI’s failure the first time around—the rate cuts did not produce the desired effect, and without any major increase in borrowers, even with the substantial decrease in lending rates, commercial banks chose to park their monies with the central bank using its reverse repo window (which went up from Rs 3 lakh crore on March 27 to Rs 8.40 lakh crores by the end of April).
The government, though, chose to go one step further with the second tranche of the stimulus package. Liquidity measures accounted for the bulk of the Rs 11.03 lakh crore announced by Sitharaman over the week following Modi’s announcement on May 12, with just a minute fraction being actual infusion of money into the economy to boost spending power. This amounts to just Rs 66,250 crores, and it includes the advance tax refunds and provident fund rebates – which, by the way, amount to Rs 62,750 crores. Even the remaining amount of Rs 3,500 crores does not reach the hands of the needy as direct cash transfer either but instead accounts for the allocations of cereals and grams for families.
It should be mentioned here that the extension of the PMGKAY until the end of November comes as much needed relief for the poor.
After the prime minister announced the Atmanirbhar Bharat, expectations were understandably huge, but even a cursory glance at the devil in the details would reveal a completely different picture than the projected 10%-of-the-GDP chimera! The actual fiscal cost for the government would work up to Rs 1 lakh crore or thereabouts.
The reactions were rather scathing. Analysts at the global research firm AB Bernstein felt that “the need to announce measures that add up to this top down number made the entire package aimless”, and that overall, they saw it as a “lost opportunity.” Rahul Bajoria, chief India economist at Barclay’s said that based on their “calculations and assumptions”, the “fiscal impact on the budget will be only Rs 1.5 lakh crore (0.75% of GDP)”.
The government seems to have taken a cue from mega relief packages announced across the world, notably the US, Canada and the UK, and played a calculated number game. Krishnamurthy Subramanian, the chief economic advisor, had earlier assessed some of these packages and said that the actual fiscal impact of the package announced by the UK (which was projected as 15% of the GDP) was only 3.7% of the GDP. Similarly, the actual fiscal package announced by the US would actually amount to 6% of the GDP, and not 10% as projected, he had said.
The Indian government too, likewise, has evidently hesitated in adopting direct methods of spending money and has relied heavily on financial institutions. To be fair, with tax collections never going beyond government expenditure and selling assets not being an immediate option at this hour of need, the only plausible alternative in front of the government would have been direct monetisation of deficit, which seems to be a route the government is fairly reluctant to take the moment.
Unemployment rates in India were at a 40-year high even before the start of the pandemic and the economy was showing a serious downward trend, so much so that a stimulus package was needed even before COVID-19 hit! The impact of the pandemic on an economy that was already on crutches has been devastating. A massive number of people have lost their means of livelihoods. By various estimates, anywhere between 82%-94% of the workforce in India is employed in the unorganised sector. There have been huge cuts in salaries across the board and, if the sales of automobiles and consumer durables are anything to go by, even by the most conservative estimates, you are looking at a loss of maybe more than 80% of the demand in the economy. It is in this context that the stimulus package needs to be looked at.
The government seems to be concerned, and maybe rightly so, about the fiscal deficit rising. But these are extraordinary times, and one cannot help but wonder if that is the right strategy, because if revenue falls due to demand caving in, would not there be a massive rise in fiscal deficit anyway, even without the government spending anything?
There are many who believe that the government would ultimately be forced to look at the direct monetisation of deficit option in the not too distant future. In such uncertain times, it remains to be seen if there is a push in taking loans (even if it is collateral free). As we saw, there were few takers for the RBI’s rate cuts (which is part of the package) and banks chose to park staggeringly huge amounts with the RBI under the reverse repo window (in spite of the interest rates being slashed to 3.75%).
In a country where more than 80% of its population works in the unorganised sector, and where millions depend solely on their daily wages for sustenance, the impact of COVID19 and the consequent lockdown has been brutally severe. The plight of the hapless migrant labourers should have served us as a grim reminder that even a deadly virus can be no match for hunger.
As haphazardly as it was implemented, the lockdown has been lifted at a time when India is still tottering from the impact of the pandemic, with the numbers of infections and deaths showing no signs of coming down. With the economy gasping for breath, and almost every rating agency (Fitch, S&P, Moody’s, IMF, and the World Bank), downgrading India’s growth rate projections, how much of demand this ostentatious package is able to stimulate and how effective it is going to be in mitigating the hardships and pain of the average Indian remains to be seen.
Harikrishnan S. is an independent political observer and analyst.