India’s economic stimulus package, announced by Prime Minister Narendra Modi and later presented in detail by Finance Minister Nirmala Sitharaman, has been called a mix of ease of doing business, monetary support, fiscal support, along with reforms that are fundamental in nature. We have to wait and watch how well these reforms are implemented to understand their effect on the economy. So, what does the economic stimulus package mean for Indians? Is it good or bad?
The reforms have a far-reaching effect and cover a large range of ventures which have been talked about for the past few decades but no government has yet stepped up and taken a stance. But the package has also faced criticism. Bank of America analysts said that the Rs 20 lakh crore package with all its reforms and adjustments was more helpful in medium-to-long-term — over three years — than the short term needs. Industry leaders have also raised concerns and said that the package concentrates on the liquidity too much but does not address the more lingering problem faced by the Indian economy — demand. “Demand is going to play a very big part in an economic revival, and if we cannot kick-start demand I fear then we cannot have economic revival. I think we have lost a big opportunity,” Biocon chairperson Kiran Mazumdar Shaw told Reuters.
How to help businesses stay alive?
The major problem the policymakers faced while framing policy in a situation like this is the uncertainty, explained Chief Economic Advisor to the Finance Minister, Sanjeev Sanyal in an interview with The New Indian Express. One of the strategies to deal with such a circumstance is what the financial market calls the barbell policy. “It says that you hedge for the very worst and for the rest of it you respond step by step through feedback. We did exactly that in the health front. We now have a much better idea of the disease. We are doing something similar in the economic front as well. We had to make sure the poor had some food on their plate, they had some money sent through direct transfers. While this is not going to solve poverty it will sustain them. Next, we need to make sure the smaller businesses stay alive. Which is also very important. This is not reflection of demand,” he said.
The first thing the FM did, said Sanyal, was to defer all financial deadlines and made more food and support available to people who need it the most in a phased manner as part of the first few announcements that came from the finance ministry. But there has been no clarity on how many people have received the benefit of the Rs 1.7 lakh crore initial stimulus package or how it was made available to them. “We also ramped up on the NREGA side. We are not claiming that this will result in a dramatic expansion of the economy but we expect this to help us stay afloat as we open up the supply side. We have begun to open up the agriculture sector along with reforms and an unapologetic framework for privatisation. We will privatise sectors which are not strategic. Similarly, the labour laws have also seen reforms in states and the government of India has made 44 laws into just four. Meanwhile, the MSME and NBFC got the boost they needed,” he said.
What is of utmost importance?
In almost all the other countries, the stimulus measures have been focused majorly on making food and relief available to the most vulnerable and marginalised sections to help them endure the COVID-19 pandemic. In economically developed countries this was given in form of social security or social safety net while in countries like India, it was given out in the form of free ration through the extensive network of the PDS system and from various other government and non-government sources. The government also said that money transfer was done through Direct Benefit Transfer (DBT) making use of the Jan-Dhan accounts.
The decision to help MSMEs, even though criticised by some as a long-term measure which ill do little to help now, the government has said this will help the small businesses expand and in turn help the economy revive. The tourism and hospitality industry has been the most affected in the COVID crisis. But Sanyal said that a tax holiday will be of no help at all. “People are not going to hotels. A tax waiver at this point will be useless. Even a tax holiday for individuals will not be helpful as they will have to pay back the debt at one point,” he added. “The PM and the FM did not say that they will transfer Rs 20 lakh crore to people’s accounts. While there has been direct transfers, a major part of that has been spent for reforms,” said Sanyal.
The amendments made to the Essential Commodities Act and proposal for a Central law to govern agriculture marketing along with an investment of Rs 1 lakh crore in agricultural infrastructure, though long-term, is a positive move. This might take a long time to be effectively implemented, but this can be considered a step in the right direction and something the other governments should have done long back, experts said. This will help the farmers get better prices. Commercializing the mining sector, raising FDI limits for the defence sector, entry of private sector into the public sector bank territory are moves which will have long term positive impact on India’s competitiveness and aid in the optimisation of resources.
What are the benefits?
But not all sectors benefit from the stimulus package. While economists have repeatedly said that the healthcare sector needs the government’s attention — now, more than ever — there were no reforms mentioned for the sector in the recent reforms. There has been, though, an allocation of a total of Rs 15,000 crore. But India’s public spending on health still stands at a staggering 1.8 per cent of the country’s GDP in 2018. Other developing nations have, however, registered higher spending of 5 to 9 per cent.
While the supply-side gets quite a bit of importance in the package, the demand-side issues do not get addressed as much. Even though there is a need for both the supply and the demand to revive simultaneously, ignoring the demand side will only produce goods with no demand for it — given the proposals are executed properly. But then, there has been no such large scale giveaways by any country — rich or poor— and the Indian government may have taken notes from many such models and drafted its own response within obvious constraints. The fact that the income from the direct and indirect tax is dwindling dramatically due to the sudden halt of economic activities across the country and worldwide.