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Tuesday, May 26, 2020

The macros of PM Modi’s Rs 20 trillion package: A new deal plus bold reform

The comprehensive package, which includes the earlier announcements made by the government and the RBI, amounts to 10 per cent of the GDP and is easily the largest package among emerging markets.

Published: May 13, 2020 12:41:39 pm
non-performing assets, NPAs of banks, banks bad loans, corna pandemic, economic slowdown, RBI, coronavirus, coronavirus news, covid 19 tracker, Indian express The uniqueness of the package is that going beyond relief and stimulus, it paints a vision document to transform the country to a self-reliant economic powerhouse. (Representative image)

Written by Dr. V K Vijayakumar

With a firm resolve ‘not to waste this crisis’, PM Modi announced a big bazooka Rs 20 trillion package, which aims at not just bringing relief to the suffering, but focuses on transforming the economy and the nation from crisis to hope and strength. The comprehensive package, which includes the earlier announcements made by the government and the RBI, amounts to 10 per cent of the GDP and is easily the largest package among emerging markets. According to the IMF, the emerging market average package, so far, has been only 2.5 per cent of the GDP.

The details of the package, which is expected to bring relief to the poor, MSMEs, middle class and sectors in crisis are to be announced by the finance minister in the coming days. The uniqueness of the package is that going beyond relief and stimulus, it paints a vision document to transform the country to a self-reliant economic powerhouse.

Going vocal about local should not degenerate into sterile autarky

It is important to ensure that going ‘vocal about local’ should not degenerate into the autarkic policies of the past. ‘Atmanirbhar Bharat’ policy, obsessed with local, stands the danger of becoming a misfit in the globally integrated market system. In the globally integrated world, self-reliance should mean the ability to pay for imports rather than self-defeating self-sufficiency. India emerged as the pharmacy of the world, exporting drugs worth $20.5 billion to 170 countries in FY2020, and India’s IT industry became a $180 billion powerhouse, by exploiting the opportunities in the global markets. Therefore, we have to be careful about going vocal about local. It might work as a short-term strategy to capitalise from the emotional backlash against China; but it is unlikely to yield substantial gains in the long run.

Bold reforms likely

The focus of the package – land, labour, liquidity, laws – makes eminent sense. An inevitable outcome of Covid-19 would be the shifting of some supply chains away from China for geographical diversification. Countries like Vietnam and Bangladesh are exploiting this opportunity by making necessary changes in laws relating to land and labour. India with the largest pool of human resources, which no other country can match, should focus on these reforms. This crisis is the opportunity to bring in reforms in these areas.

The package is likely to be two pronged: fiscal measures like more cash transfer to the needy and liquidity assistance to MSMEs in crisis. The first priority of the government would be the poor, and rightly so. The liquidity support to MSMEs is likely to be directed through credit guarantees for working capital. Also, there is likely to be relief measures for sectors in distress like aviation and hospitality.

Wanted: A road map for fiscal consolidation

Even though the package looks huge, the real expenditure is likely to be far less. The government has announced additional borrowing of only Rs 4.2 lakh crores. So, a substantial part of the package is likely to be credit guarantees. Anyway, a major expansion of the fiscal deficit (Public Sector Borrowing Requirement touching 12 per cent of GDP) is inevitable. Therefore, it is hugely important that the government should come up with a roadmap for fiscal consolidation too, to reassure the rating agencies.

 

Dr. V K Vijayakumar is Chief Investment Strategist at Geojit Financial Services. Views expressed are his own.

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