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Saturday, July 31, 2021

A stimulus package must stimulate the economy, not paralyse it

Himanta Biswa Sarma writes: Critics must realise that handing out freebies will not spur economic growth. Undoing supply-side constraints for micro, small and medium businesses is the only way to ensure growth and income.

Written by Himanta Biswa Sarma |
Updated: July 16, 2021 8:06:46 am
Prime Minister Narendra Modi

It was rather amusing to see Jairam Ramesh, P Chidambaram and UPA-era economists attempting to play down the economic relief package announced by the Finance Minister last month.

Yes, there is a stark difference between the nature of the economic stimulus packages announced by the Modi government in response to the 2020 pandemic and the one announced by the UPA government in response to the 2008-2009 global financial crisis. While the situations are not identical, there is one similarity — an external event leading to a domestic economic crisis.

The Modi model of economic stimulus has two big components, amongst others. The first is the distribution of free foodgrains to benefit 80 crore people. The second is the expansion of the credit line and loan guarantee schemes to support funding activities up to Rs 5.6 lakh crore since May 2020. The core philosophy of the Modi model is achieving atmanirbharta (self-reliance), wherein the government creates genuine economic activity by guaranteeing credit supply to those businesses who are willing to weather the economic crisis and, at the same time, protect the most vulnerable from hunger.

On the contrary, the UPA stimulus packages between 2008 and 2013 were largely based on recklessly expanding government expenditure by reducing its income and increasing its borrowing. The Congress stimulus doctrine was inspired by the concept of aadhinta (dependency), wherein the government creates the illusion of economic activity by borrowing from others without making any provision to repay.

As conceded by both Chidambaram and Raghuram Rajan, such policies ended up increasing inflation rather than stimulating the economy — which eventually cost the Congress the 2014 elections. This isn’t my assessment but that of Chidambaram just after the 2014 elections.

Therefore, I was taken aback when he, his party, his party’s former president and the economists nurtured by his party collectively characterised the Modi government’s stimulus package as a “hoax”.

An economic stimulus, as the name suggests, should stimulate the real economy. And the lifeline of any economy is credit. The cycle of growth and prosperity can only kickstart if small businesses can access funds to purchase raw materials and pay salaries. The pandemic hit businesses because their sources of income dried up and banks became reluctant to support them. FM Nirmala Sitharaman, through the Emergency Credit Line Guarantee Scheme, has prevented an economic paralysis and reassured small business owners that the Modi government has full faith in their ability to bounce back.

More than 1.1 crore small and medium business have availed of this scheme and are confidently marching out of the Covid-induced economic crisis. The network effect of supporting 1.1 crore small and medium businesses is humongous.

How is any of this a hoax?

Extending credit lines and loan guarantees is the most effective way of channelising funds to businesses via the formal banking system. Unlike UPA’s dole and freebie culture, the potential of leakages through such stimulus packages is minimal.

Another key difference between the Modi model and the UPA model is that the former has adopted the approach of targeted subsidy and support, mainly for small and medium-sized businesses, whereas the Congress stimulus primarily restructured the loans of big businesses, thus fracturing the economy on two counts.

First, these otherwise bad loans became green and got doses of further credit. Most of the money from stimulus packages never came back to the lenders.

Second, it did not percolate down to small businesses and ordinary people. The Congress’s model was designed to benefit a handful of big corporates and pushed India into an acute banking crisis, which manifested as bank frauds and high NPAs.

Therefore the allegation that the Modi model addresses supply-side issues and not income-side issues is wrong. Targeted supply of credit to small businesses will lead to incomes for crores of people. Without genuine economic activity how will one create income?

Also, the UPA intellectuals have got the fundamentals wrong. The absolute value of a stimulus package is no indicator of its effectiveness. The ability of the package to make a real change in the economy is dependent on its structure, not its size.

If the absolute value of a stimulus actually matters, then the 2008 stimulus should have resulted in higher growth in subsequent years. Instead, the fiscal deficit, which was 2.5 per cent in 2008, crossed 6 per cent in one year. GDP growth, which was 8 per cent in 2008 fell to 4.7 per cent in May 2014. And consumer inflation spiked from 7 per cent to 12 per cent between 2008 and 2013.

Doesn’t data show that the Congress model was actually a hoax ?

The UPA government threw the vulnerable from the frying pan into the fire through poorly-designed stimulus packages, whose real intention was to rescue big corporations. It is time to thoroughly examine if the stimulus was undertaken to help the economy or the coffers of some vested interest groups.

I extend my compliments to the Finance Minister for not surrendering to misguided demands from the same culprits who wanted a re-run of UPA’s half-baked policies.

Had Congress leaders been less obsessed with Western theories and read Indian economic theories, particularly Kautilya’s Arthashastra, they would have realised their mistake. As Kautilya said “vaibhavanpam abharanam” (wear ornaments as per your financial capacity). Kautaliya actively advocated a preference to lend for productive activities rather than consumption-related activities.

Therefore, the eminent thinkers in the Congress must realise that handing out freebies will not boost consumption and spending recklessly will not spur economic growth. Undoing supply-side constraints for micro, small and medium businesses is the only way to ensure growth and income.

This column first appeared in the print edition on July 16, 2021 under the title ‘Support, don’t paralyse’. The writer is the Chief Minister of Assam.

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