Mainstream Weekly

Home > 2020 > Government’s Package is Not What is Immediately Needed

Mainstream, VOL LVIII No 24, New Delhi, May 30, 2020

Government’s Package is Not What is Immediately Needed

Saturday 30 May 2020, by Arun Kumar

Indian Society is in a crisis is an understatement; it is in dire straits. Millions are migrating from cities to their villages in extreme conditions and many have died on the way. The health situation brought about by COVID-19 is not under control with the number of cases detected and numbers dying on the rise. Unemployment is acute and the economy is in a deep depression, something it has not witnessed ever before.

All this requires society, the collective, to pull itself up from the bootstraps. The government has to intervene massively in three areas — namely, give succor to the poor and the needy, take care of the health situation and prevent the economy from collapsing. Markets have largely become non-functional and cannot deliver on these fronts. All sections of society are now looking to the government to save them. But, who is the government trying to save and in whose favour is it intervening in the economy? The so called `relief package’ reveals the government’s intent.

PM’s Pronouncements

Prime Minister in his May 12, speech to the nation, announced an unprecedented Rs.20 lakh crore package and raised huge expectations among all sections that they would get some relief. He said that one needs to convert adversity into opportunity and suggested that India had to become more self-sufficient - `Atma Nirbhar Bharat’. He talked of the cottage, small and medium sector producers and of the workers farmers and the middle classes. He lauded local manufacturing and said that is what has saved us. It seemed his government would help strengthen all these marginalized sections and there would be retreat from globalization. The latter is a part of the global trend as nations are talking of reducing their dependence on imports and creating local supply chains.

 He announced that the Finance Minister would unveil the details of the package. The Finance Minister did just that in 5 detailed press conferences. She started by addressing the concerns of the MSME sector, then the migrant labour, next the farmers, after that the Structural Reforms and finally the miscellaneous issues. But she refused to answer critical issues of the extent of support for the poor and the critical issue of what is happening to its revenues.

At the end of the press conferences she gave the consolidated figures the total package as being Rs.20.97 lakh crore. From the budget, the amount of support to the various marginalized sections would be about 10%. The rest was all based on making credit available for a variety of purposes and the earlier RBI announcements on enhancing liquidity and lending and this is taken to amount to Rs.9 lakh crore. In some cases the government is the guarantor of the loans from banks but that is still not from the current budget.

So, the expected immediate relief to the three aspects of the crisis facing the nation were not the focus. The marginalized who are in desperate situation needed to be reassured that the country cares about them and that they would be given immediate succor and this could help end their frustration and alienation. This was the great opportunity to show that society is a `caring’ one but it has been missed.

The lesson from the ongoing pandemic is that there is a need for a strong and efficient public sector to deal with a national crisis. But the package proposes to dismantle the PSUs. In the future, if a calamity comes, the capacity of the government to provide succor will be further reduced. The PM talked of self-reliance but then where does the idea of attracting foreign capital fit in — is there a whiff of contradiction in the policy pronouncements?

It is a Package of Supply side Policy Changes

The FM did not lose the opportunity to argue that the good work of the government in the last 6 years has made it easier to deal with the present crisis. She argued that it is now easier to transfer money to the poor via the trinity of JAM.

The FM announced a number of policies like, change in the definitions of MSME, changes in APMC and Essential Commodities Act and changes in the IBC and companies act. Then there are changes pertaining to the PSEs and moves to privatize them on a fairly large scale. The government believes that all this will lead to more investment in the economy.

The package is largely based on supply side policies offering large concessions to businesses to revive their animal spirits to start investing. But when much of the economy is stalled, can there be supply side response? Further, how can activity resume if demand remains short and the package does not help increase it?

When the PM exhorted that adversity needs to be converted into opportunity he meant promote businesses. But that is not the immediate requirement. The more pressing requirement is to take care of the migrants and prevent hunger. How does the PM have faith in the private sector when in the medical field it more or less withdrew leaving the burden on the public sector? It is also well known that the private sector will not invest more when the economy is in decline. Only the public sector can invest in adverse circumstances. So, the supply side package will not spur greater investment or production.

A whole range of announcements are a repeat of the announcements in the past budgets like, help for fisheries and milk production or aircraft maintenance or for potatoes, onions and tomatoes. Clearly, these are long and medium run issues otherwise they would have got implemented earlier. Consider, when the airlines industry is in a deep crisis and unlikely to take off for quite some time, why talk of creating a hub for maintenance in India. It is also unclear why a package to deal with the immediate crisis announced policies regarding space and atomic energy. Why spend energy on these matters when there is need for singular focus on the immediate crisis.

Changes suggested in agriculture do not give any immediate succor to the small and medium farmers who are facing a deep crisis. They are too small to be able to delink from the arthias and market their produce on their own. Further, can marketing of produce take place without any regulation of trade? Yes, there were problems with mandis but that does not mean that regulation is not needed. The traders and the corporates wanting to enter agriculture trade will exploit the situation even more. Further, can small and marginal farmers sign contracts for selling their produce when the uncertainty in Indian agriculture is large and when they are tied to the traders who advance loans to them. Is this preparation for the entry of large e-commerce firms and corporates into agricultural marketing? Again, are these steps needed now when a far bigger crisis faces the nation?

Further Marginalizing Labour

Labour which has been increasingly marginalized is getting further alienated since they have not been taken care of during the crisis by either the state or the employers. Most have not been paid their past wages or the wages due during the lockdown. They have been summarily fired from work. Their families have had to bear untold hardships like, going hungry and trudging in the heat. To rub salt on the wounds, many state governments are changing labour laws through ordinance so that the working conditions are deteriorating. Thus, the chances that labour will return to cities once the lockdown is eased are slim. Businesses in cities will then face critical shortage of skilled workers who cannot be easily replaced by others and they will find it difficult to resume operations even if they wanted to and demand could somehow resurface.

The labour law changes are increasing hours of work, etc. These steps will widen disparities and lead to further fall in demand and that will make it difficult for businesses to restart work soon. Businesses can also not start at full capacity because of the need for physical distancing. So, in factories fewer workers can work at any time. They will have to work in several shifts.

In the services sector the problem will be more acute since physical distancing becomes more difficult like, in the case of travel, tourism, restaurants, hotels, repair and maintenance. Thus, even if the businesses want to start at full capacity they will not be able to do so. Given the low capacity utilization, even investment will not take and that will bring down growth.

In brief, production, consumption and investment will remain down for quite some time. Rather than solve this tricky issue, the government is furthering its agenda of privatization on the pretext of dealing with the economic crisis brought on by the pandemic. Since the opposition is decimated at present the ruling party has found this to be the most opportune moment to push its agenda. So, why was there talk of a stimulus to the economy?

Futility of a Stimulus to Businesses during Lockdown

What is a stimulus for an economy? These are government policies that immediately lead to a positive impact on growth of the economy. In the present circumstances where the GDP had plummeted by 75% during lockdown, a stimulus is sorely needed. On its own the economy would take years to recover from the shock it has had.

The shock consisting of both disruption of supply and precipitous fall in demand has not happened in any economy in recent times. Worse, it has come at the same time in all the large economies of the world. So, it is not that some countries can help the others in trouble. Trade and travel are massively down and will remain so for some time, aggravating the internal crisis in each of the countries.

No wonder, across the globe, governments are intervening via spending huge sums of money and the central banks are releasing unheard of dollops of money in the economy. Yet, the economies are tanking.

Three issues arise. First, how effective can a stimulus be in a situation of a lock down? Second, how much of a stimulus is needed? And, third, how would the stimulus be financed?

During normal times, businesses don’t like a stimulus since it enlarges the role of the government but presently they have no option but to ask for it since they are in trouble. Usually they don’t like the fiscal deficit to increase but now they are asking for it. If the deficit in the budget is to be kept down, the currently planned expenditures would have to be cut, but then there would be no stimulus. The conservative economists argue that international agencies and capital will punish India for allowing the fiscal deficit to rise. But presently when all governments are allowing their fiscal deficit to increase, India cannot be singled out and punished by global finance (which is itself in a crisis).

By a stimulus, businessmen mean that money be given to their businesses to cover the huge losses they are incurring. They don’t want more money given to workers and farmers to revive demand, even though that is what is needed. During lockdown, both sales and production stopped so that their revenue has drastically fallen but they have to meet fixed costs and pay interest on their loans. If they have reserves they can meet these costs for a little while but losses are continuing to mount.

During lockdown, offering loans to businesses cannot restart the closed factories or offices. Government has offered a moratorium on repayment of loans and interest to businesses and this will give them breathing space and they will not immediately collapse. But, the repayment will keep mounting and the day of reckoning is being postponed. The lenders who do not receive interest income while they continue to pay interest to their depositors will come under increasing pressure and could fail. How will the RBI and the government give them adjustment?

In brief, economic activity cannot restart with the package announced. Only businesses can be helped to stay afloat for a short while. If the lockdown is brief, of which there is little sign, businesses may restart, but they will incur heavy losses. Banks will face a problem due to postponement of interest payment and will have to be supported by the RBI and the government.

Needed an immediate Survival Package

The sharp decline in economic activity means, government’s revenue collections will fall drastically. This will raise the already high fiscal deficit further. Even if the government cuts back on all inessential expenditures like, travel, meetings and so on, the deficit will be high.

Assuming that the GDP in a lockdown in India has gone down to 25% and it rises steadily to its pre pandemic level over the next 12 months, the average size of GDP over the year would be 35% less than last year. So, revenue collection for government would be down by more than 35% since essentials pay little tax and that is what will be mostly produced and consumed. The governments collect about 16% of GDP as taxes. This will fall be at least 50% given the fall in GDP and it may be around 8% of the lower GDP.

With such a dramatic fall in revenue, the government will not have funds to spend even after cutting out all the inessential items and cutting back salaries of the employees, etc. Further, just to support the population at the extreme poverty line of $1.9 per day per capita, the expenditure required would be Rs.72 lakh crore, if the dollar is taken to be at Rs.75. This would be 55.5% of the decreased GDP of the year. This would have to be given as a universal basic income. But if this sum is given to only those who have lost employment (50% of the population including the family members) and at half the extreme poverty line, then Rs.18 lakh crore would be needed.

The situation is almost impossible given the decline in government’s revenues and increased expenditure requirements of a survival package. Actually, nothing would be left for a stimulus to businesses which are already shut and which in any case are closed due to lockdown as well as shortage of demand. Stimulus would help only when businesses start to work again.

The real crunch is that the poor have lost work and need money to buy essentials to survive. The current income support to the poor granted on March 27 is grossly inadequate and much more would be required. Thus, whatever resources can be garnered by the government should be spent on maintaining life of the marginalized people at a basic level. This along with the expenditures on the medical emergency and maintaining basic administration would be the only thing that the government would have money for. So, the issue is not how to prevent societal collapse.

In brief, the situation is different from what China faced a few months back when it alone was affected. The global economy presently faces vastly reduced economic activity due to the lockdown and not the usual business cycle downturn. So, using standard fiscal spend to boost demand will not work when businesses are shut. The limited resources the government has should be used to help sustain life at a basic level and that will require a larger relief package for the poor. The implication is that instead of talking about all manner of policies and a stimulus the governments should focus entirely on a large survival package.

Author of Indian Economy since Independence: Persisting Colonial Disruption.’ Vision Books.

Prof. Arun Kumar is Malcolm Adiseshiah Chair Professor, Institute of Social Sciences

Notice: A national lockdown underway in India due to the Corona Virus crisis. Our print edition is interrupted & only an online edition is appearing.