Follow Us:
Wednesday, December 01, 2021

ExplainSpeaking: Why government’s Covid-19 relief package should come sooner rather than later

Coronavirus (COVID-19): In India, till now, it has been the RBI that has been at the forefront of shoring up the economy. But, central banks can only do so much.

Written by Udit Misra , Edited by Explained Desk | New Delhi |
May 4, 2020 9:23:47 am
Coronavirus, Coronavirus India, Coronavirus explained, India lockdown, India lockdown impact on economy, India lockdown impact om jobs, Coronavirus impact on economy, Coronavirus impact on indian economy, Coronavirus relief for business, express explained In Kolkata, during the Covid-19 outbreak. (Express Photo: Shashi Ghosh)

Dear Readers,

Last week, in a response to a question about the role of the Fed (the central bank in the US) in the current crisis in comparison to the 2008 Global Financial Crisis, Alan Blinder, who was the vice-chairman of the Federal Reserve in the 90s, said something quite striking. “In the earlier crisis, unemployment followed financial ruin. First, we got financial ruin, and then later we got a terrible recession. This time we got massive unemployment upfront, and the Fed is preventing financial ruin,” said Blinder while speaking to The Wall Street Journal on May 1.

It is important to pause and mull over this reversal of sequencing because it applies equally to what is happening in India. The lakhs of migrant workers who are out on the streets have already lost their jobs even though their firms may not have met with financial ruin just yet. But if things don’t change, financial ruin will surely follow and the job losses will become permanent. That’s because there is a limit to how long India can continue with a lockdown before an obvious health crisis is severely compounded by a crushing economic reversal.

Also central to this debate is the question of the government’s role in alleviating distress. In India, till now, it has been the RBI that has been at the forefront of shoring up the economy. But as Blinder also pointed out, central banks can only do so much. “When it comes to large dollar amounts, the Fed knows what to do. But I don’t think the Fed is the right institution for lending to small businesses. The Fed is good at wholesale lending, but not so much at retail. That’s another illustration of the fact that you can’t look at the Fed to do everything”.

In other words, there are limits to what a central bank can do in any economy, and when it is the smallest firms that are hit, a central bank — no matter what it tries — is a relatively weaker agent of change. Central banks can provide liquidity to the banks — and provide it at lower interest rates — but banks, across the world and in India, are justifiably wary of lending on. That is not to take into account the severe hit in demand for loans anyway. Moreover, there are many sectors of the Indian economy, such as the beleaguered MSMEs, that largely depend on informal sources for their funding. RBI’s actions barely reach them.

So as India starts Lockdown 3.0, albeit with some relaxations, the main question facing the economy is: When will the government announce a relief package? That’s because, with each passing week, the economy is moving from job losses of individuals to the financial ruin of firms.

Some have questioned whether the Indian government has the fiscal leeway to borrow more. Others have reminded that asking the RBI to print money, since there isn’t enough money in the markets to lend to the government, will lead to inflation.

In the pre-Covid-19 world, all these arguments made sense. But the Covid-19 pandemic has completely changed the dynamics of the economy.

Under the current circumstances, if all agents in the economy acted rationally, the economy would collapse. That’s because banks will find it reasonable to hold back lending, consumers will delay spending, investors will dither from investing, business owners will fire employees and cut costs in an effort to survive. But in doing so, all of them will push the economy into a deeper mess.

📢 Express Explained is now on Telegram. Click here to join our channel (@ieexplained) and stay updated with the latest

The government, however, is the only agent in the economy that can bypass the rules of rationality. It can spend (and thus create demand) when it wants to even if doesn’t have any money because it can create money at will by asking the RBI to print it. But if the government does not provide a safety net to smaller firms, especially those that were running fine before the Covid-19 induced lockdowns ruined them, then the economic distress will continue to deepen and likely become insurmountable in the future.

Here’s hoping that the government’s relief package is only a question of when, and not if.

Take care and stay safe,

Udit Misra

📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines

For all the latest Explained News, download Indian Express App.

  • Newsguard
  • The Indian Express website has been rated GREEN for its credibility and trustworthiness by Newsguard, a global service that rates news sources for their journalistic standards.
  • Newsguard
0 Comment(s) *
* The moderation of comments is automated and not cleared manually by