Size matters. Or does it? It depÂends on which side of the fence you are on. Ask the government, and it contends that it has unleashed a cocktail-combination of highly-effective economic drugs to ensure immediate and efficient recovery. Talk to the opposition, and it claims that the grandiose policy package is a case of too little, too late. The fact is that none of them stand on firm ground because this is the worst crisis in a century. None of us have seen something like this before; hopefully, none of us will in the future.
One of the points of contention is the quantum of money that the policy makers say that they have injected to kick-start the economy바카라Rs 2,000,000 crore, the fifth largest among all the nations. The second point of debate is the mix. Is it a judicious blend that has enough stimuli to drive up the knocked-out supply of goods and services, and pull back consumption that바카라s down in the dumps? Finally, there is the question of timing바카라is this the right time to push through big-bang reforms down the dying system바카라s throat?
Contradictions prevail. The government opened the pipeline to help businesses to access capital easily. This works only if the banks are willing to part with money, and the borrowers are ready to use it. The Centre hiked the expenditure on income schemes like MNREGA. States forced workers to accept conditions that include lower pays without bonuses and overtime. This is in a situation of overwhelming unemployment. Reforms yield desired results during boom times; they lead to more pain during crises.
Is Size of Stimuli Suspect?
One has to remember that the COVID-19 crisis is more expansive, vast, and unknown than the previous ones. 바카라It is deadlier and more unpredictable. The hit to growth (across economies, including India) will be higher,바카라 feels Dharmakriti Joshi, chief economist, CRISIL. Pronab Sen, programme director, IGC India Programme, adds, 바카라India has lost 8 per cent of her GDP, compared to a year ago.바카라 At best, the country바카라s growth may be 2-3 per cent in 2020, at worst zero or negative. Like other nations, India is caught in a vicious economic whirlpool.
Therefore, what was required was a response as large as the predicted impÂact. Instead, according to Sen, what we got was something that only addressed 바카라roughly half바카라 of the expÂected downturn. He explains that a fair amount of (economic) damage will be left within the system. Sebastian Morris of IIM-A is more specific. The actual expenditure envÂisaged by the government is Rs 92,000 crore, of which Rs 54,000 crore will boost private consumption, and the rest will contribute to public investment and spending.
To understand the contentions of Sen and Morris, one needs to differentiate between, and dissect, the two main components of the package. A portion of it is to indirectly help businesses바카라for example, through loans without collateral to enable them to resÂÂÂtart operations. This is supply-side economics. It has no consequences on demand. People who have lost jobs or seen their salaries contract don바카라t have the money to buy. It was, thus, imperative to put money in their hands. And this hasn바카라t been countered adequately.
For the government, it was a tricky manoeuvre, a delicate balancing-act given the constraints. The paralysis in economic activity for 1-2 months implies that its revenues will take a huge hit. Given the fact that it hiked the fiscal deficit in the last Budget to cope with the then ongoing slowdown provides little elbow-room to spend higher amounts, and allow the deficit to go out of hand. The government cannot borrow endlessly, or print more notes. These can lead to both predictable and unintended outcomes.
One of them is the fear of a downgrade, both of the nation바카라s credit rating, as well as those of the Indian companies. Since the Financial Crisis of 2008, when the global rating agencies were severely criticised for failure to predict it, these institutions have become nervous. They are willing to downgrade any country at the first signs of trouble. The medium term implications of a lower rating can be a ruthless and ongoing negative effect on the economy. India cannot afford to take such risks at this juncture.
Sparks to Spur Supply
A large chunk of the revival packageÂ바카라some say a glaring majority of it바카라is to benefit companies, especially the small and medium (MSMEs) ones. It seems that the government feels that if it gives enough indirect incentives to such units, they can be propelled into action, and pull the economy out of the present malaise. Such benefits include easy loans, tremendous flexibility in labour laws바카라Uttar Pradesh suspended all of them, except three바카라ease of doing business, prompt payments, and potential orders.
For instance, only an Indian company can now bid for procurement tenders up to Rs 200 crore each issued by public sector firms. This can lead to more business for the MSMEs. However, the definition of an Indian company is unclear. Will it include purely 바카라desi바카라 entrepreneurs with majority Indian stakes, or also foreign MNCs that have set up fully-owned and majority-owned Indian subsidiaries? Similarly, the package included an assurance of prompt payments of pending dues to ease cash-flows of the MSMEs.
Experts question the efficacy of the loan windows given to the MSMEs. 바카라The stimulus is largely through credit guarantee scheme of Rs 300,000 crore. This is contingent liability, and there is no infusion of money. This does not ensure the desired multiplier effect, as is the case with direct investment (transfer),바카라 explains Vikas Srivastava of IIM-L. One isn바카라t sure if the banks, plagued with bad loans and write-offs, will offer credit. There is a concern that firms may use the money foolishly, resulting in more bad loans in the future.
Subhash Garg, the former central finance secretary, estimates that the government promised to provide such loans to 4.5 million MSMEs. The figure is only a small percentage of 75 million units in this sector. Politics, crony capitalism, and favouritism may play a role in the disbursement of the funds. Instead of firms, which are in a position to turn around and become profitable, the money may go to those that use it inefficiently, or siphon it off. In a crisis like this one, there may be no checks and balances.
To ease labour shortages, especially due to reverse migration of workers from the uncertainty of their urban workplaces to the security and safety of villages, several states drastically changed their laws. These measures will provide flexibility to factory owners to hire-and-fire workers, hike working hours by 50 per cent, and limit expenses under many heads. The states feel that these will increase foreign investment, and incentivise entÂrepreneurs to open their shutters, and enhance production.
Clearly, the flip side is that the new guidelines, or the lack of them, will accelerate reverse migration, and dissuade workers, especially the migrants, to come back. They may rather seek employment in areas closer to their homes, or opt for incÂome-generating schemes like MNREGA, whose budget was recently hiked by the Centre as a part of its recÂovery package. If this happens, it will derail the economy for a longer period. Instead of a V-shape upturn, one may witness a dreaded U-shape one.
Cures to Catapult Consumption
Given the nature of the COVID-19 crisis, the dire need of the hour was to push demand. The loss of millions of jobs, and salary reductions implied that the government had to put more money in the pockets of both urban and rural consumers. This could be in the form of direct money transfer to the poor, aid in the form of free and cheap food items, lower across-the-board taxes to hike disposable incomes, and a fillip to welfare schemes that generate incomes. The Centre has done all this. Economists feel it hasn바카라t done enough.
Expenditure on MNREGA, which was reduced in this year바카라s Budget, was recently hiked by Rs 40,000 crore. In addition, the poor and migrant workers were promised additional allocation of free grains and pulses to prevent starvation. Economists think that one of key problems with MNREGA was the delays in payments. If they persist, the higher allocation will lose its relevance because the people need the money now, rather than a month or two later. The free monthly ration is inadequate to feed a typical family.
ALSO READ: 2008 Isn바카라t = To 2020
The problem lies with the meagre transfer of cash into the bank accounts of the suffering sections. 바카라There is a very small fiscal component (in the package) that is directly contributed from the central exchequer. The fiscal (direct) stimulus is much less than what was given during the 2008 crisis,바카라 says D.K. Srivastava, chief policy advisor, EY India. Individuals and companies received no major tax concessions, except a delay in postponement of taxes, and a reduction in tax deducted at source, which is a temporary relief.
Let바카라s take a look at what was done for the farm sector. Y. K. Alagh, a renÂowned economist, points out that most decisions related to the older schemes and policies, like the farmer producer organisation. 바카라They will lead to more benefits only if the government puts money into them. Neither is there real funding for such schemes, nor is it under a rule-based system,바카라 he adds. In effect, in the recent past, there were huge mismatches between budget allocations for agriculture, and actual annual spending. Â
One of the ways to do so was to give more leeway to the states to hike their expenditure. While the Centre has relÂied on the states to initiate pro-actÂive steps, it was done without giving them the required resources. Although the states were allowed to borrow more, it was to a limited extÂent, and one isn바카라t sure how the amount will be utilised, says Joshi. Sen contends that the states 바카라front-ended their borrowings바카라, which will lead to a crunch later on. The Centre needs to be the chief financier so that the states can deliver.
Reluctant Reforms and Reformers
Reforms are best done when the economy is in a good shape. Unfortunately, in India, as in other countries, they are pursued during extreme crises. In 1991, they were kicked off by a balance-of-payment emergency. In the early 2000s, they were forced by US sanctions due to India바카라s nuclear tests in 1998. Today, COVID-19 has encouraged the regime to announce long-delayed structural reforms. Morris says that while the policies are in the 바카라right direction바카라, they will not work 바카라due to heightened global and domestic uncertainty바카라.
Theoretically, the moves to allow farmers to 바카라sell their produce freely바카라 through deregulation of the trade in several commodities, is laudable. But these may benefit the farmers over the next few years. In the short run, they are unable to trade, says Alagh. He adds that the trade channels are 바카라clogged바카라 and there is 바카라lack of clarity바카라 about freight movement. The Centre and states don바카라t have the plans to prevent the hijacking of the freer distribution routes by rich famers, middlemen, and large companies.
Instead of the big bang reforms, which could have come later once the economy perked up a bit, there was a need to introduce smaller changes and alterations to tackle the immediate needs. For example, local and regional economic linkages should have received priority. One of the major problems of partial lockdown today, and the division of the country into red, orange and green zones, is the mess they have created in India Inc. Business are unable to cope with the confusion among the authorities. 바카라My factory is in the green zone, distributors are in the orange one, and warehouses are in the red zone. I am essÂentially immobilised. I cannot commence operations,바카라 complains a leading Delhi-based businessman. The situation is the same for scores of others. In addition, the factories may be in the green zones, but the labour has to come from red and orange ones. Clearly, there was a need to look at the opening up of the lockdown in a more comprehensive manner from the business point of view.
Going forward, suggests EY바카라s Srivastava, the government needs to learn its lessons. This may be an opportune time to locate new industries in specific, well-thought-out rural-urban corridors so that businesses can use locally-available resources like labour, and logistics. The overall industrial policy has to be re-examined in this context. COVID-19 has impacted us in myriad ways that were both unexpected and unbelievable. It바카라s high time that the nation moves ahead in ways that can lead to growth, and protect the economy from similar crises at a later date. The future, as they say, is here.
***
The Growth Stimulus
Total Package
- Rs 2,000,000 crore, or 10% of GDP, announced in five tranches, which included earlier reliefs of nearly Rs 900,000 crore
First Tranche
- Almost Rs 600,000 crore of emergency credit facilities for business; subordinate debt for stressed MSMEs; partial guarantee and special liquidity schemes; cut in PF rates
Second Tranche
- Rs 310,000 crore that included free food grain to migrant workers for two months, credit facility for street vendors, more credit through Kisan Credit Cards, emergency working capital, and interest subvention of Mudra Shishu Loan
Third Tranche
- Rs 150,000 crore for farm and food processing activities, and infrastructure to improve trading in products of animal husbandry, fisheries, and bee-keeping
Fourth & Fifth Tranche
- Rs 48,100 crore to fund viability gap, additional Rs 40,000 crore to boost rural employment
- Reforms included higher FDIÂ limits in defence, entry of private players in space sector, change in definition of MSMEs to hike their investment limits, guidelines for ease of doing business, reduction in tax deducted at source, and sale of public sector units
***
Corona in Wonderland # 1
바카라What in the world is happening?
Ah, that바카라s a great puzzle.바카라 In today바카라s world, everyone is mystified by what hit us, and how. Worse, no one knows the way out.
Corona in Wonderland #2
바카라If you want to get somewhere else, you must run at least twice fast as that.바카라
It doesn바카라t matter if the stimulus size is Rs 2,000,000 crore. We need another Rs 800,000 crore in direct spending.
Corona in Wonderland # 3
바카라I don바카라t think....바카라 바카라Then you should not talk.바카라
You cannot think that strict labour laws will get workers to produce more. And talk about higher MNREGA spending to keep them in villages.
Corona in Wonderland # 4
바카라It바카라s no use going back to yesterday, because I was a different person then.바카라
One cannot compare 2008 with 2020. Those were different times with different heads of states, and state of the economy
