Ever since COVID-19 forcefully entered the world in February 2020, speculation has mounted that it will change policies and lives, possibly forever. At least one COVID case has been observed in over 200 countries — if ever there was a pandemic, we are looking at it. Countries have been forced to take extraordinary steps to counter this inhuman invasion. The economic steps are oriented towards getting the economies to avoid a meltdown and India has not been an exception. On May 12, Prime Minister Narendra Modi gave a call for a self-reliant India movement with five pillars — economy, infrastructure, system, vibrant demography and demand. Subsequently, and spanning a week, the prime minister-finance minister duo unleashed a set of stimulus measures for the immediate short-term, and for the medium-term, a set of long-pending reforms in agriculture, labour and industry.
The conversation in India has revolved around the size of the fiscal package — for a change, practically everyone is arguing that we have more fiscal space and the government (especially according to the critics) is being heartless by not spending more. But this is a mistaken view, not grounded in the reality of the IMF’s data. As part of a data and information response to the COVID-19 pandemic, the IMF has started publishing a policy tracker (IMF-PT) which reports on the fiscal and monetary policy stance and responses for 193 countries.
According to the IMF-PT, the fiscal component of the Indian package is estimated to be at least 3.5 per cent of GDP as expenditure for poor households, migrant workers and agriculture. There is an additional 0.5 per cent of GDP for states to spend unconditionally, bringing the fiscal package excluding loans to businesses to at least 4 per cent of GDP. The support for businesses (MSMEs) is estimated to be 2.7 per cent of GDP. Of this, at least 2 per cent of GDP is in the form of 100 per cent credit guarantees and equity infusion.
Among major developing economies, only Brazil (8 per cent of GDP) and Peru (7 per cent of GDP) have a fiscal stimulus higher than the 5 per cent level for India. The Brazil estimate includes about 3 per cent of GDP as working capital loans to businesses and households. The fiscal support level for some important emerging economies is — China 2.5 per cent of GDP and Indonesia 3.5 per cent.
While comparing the fiscal stimulus packages across countries, it is important to understand that such packages are in the nature of additional spending and tax reliefs which can work directly through aggregate demand or indirectly by mitigating risk and enhancing access to funds (if they are in the nature of credit guarantees to financial institutions and non-financial enterprises). A large number of fiscal stimulus packages announced by different countries contain credit guarantees to financial institutions, SMEs, and agriculture. Hence, it is difficult to segregate fiscal stimulus into its pure and impure components.
To put into perspective, the average of all fiscal measures in the G24 developing economies is equal to 3.6 per cent. No matter how the calculation is done, India is a positive fiscal stimulus outlier; by IMF-PT calculations, the stimulus is close to the largest among major emerging market economies.
The rich nations are spending more — they can afford to. Japan announced what may be the upper limit to the expansion — 21.1 per cent of GDP. However, this does include large elements of loans and credit guarantees. Through a combination of several fiscal measures (tax deferrals, credit guarantees, etc.) the US has pledged close to 13 per cent of GDP. The European Union, on average, has pledged 4 per cent of GDP. The average for advanced countries is around 6 per cent of GDP.
Notwithstanding the absolutely and comparatively large fiscal package, a perusal of most Indian newspapers and critics paints a different picture than that contained in IMF-PT. Several experts have contended that the fiscal stimulus is very low. As proof, it is stated that the fiscal deficit will expand by 0.8-1.0 per cent of GDP; hence, the stimulus is very low! In contrast, most economists, and international organisations, recognise that fiscal stimulus consists of both the pure and impure and includes three broad items — a direct “above-the-line” component, a “below-the-line” component and guarantees of various forms (primarily credit). The choice of using only one component of the fiscal stimulus is selective, and highly inappropriate.
It was not so long ago that the critics were arguing that the government, and the Reserve Bank of India were being heartless and clueless, by not addressing the MSME problem. This problem is now being addressed via 100 per cent credit guarantees and fund infusion, and yet is being ignored by the critics.
It is also the case that the monetary policy change in India is quite significant and the transformational impact of this monetary stimulus is not being recognised. As a long-time proponent of internationally competitive monetary policy, that is, real interest rates comparable to those prevalent in competitor economies, the change brought about by the RBI under the leadership of Governor Shaktikanta Das is truly welcome. The repo rate now stands at 4 per cent, with inflation well contained. This is substantially a much different, and much improved RBI response than that what occurred in 2008-09. At that time, as a monetary counter to the financial crisis, the RBI reduced the repo rate by 425 basis points to 4.75 per cent. This was done over seven months and the prevailing CPI inflation rate was 10 per cent.
India has the pole position in another dimension of its response. It has announced several economic reforms as a part of the stimulus package. These are long-awaited — freeing up of the labour market, allowing farmers to sell their produce and land to who they choose, removal of archaic laws like the Essential Commodities Act, with the promise of more to come. This is not an empty promise — the Centre will advance another 1.5 per cent of GDP to states to expand spending. This advance will be conditional on them for undertaking long-pending reforms. The Indian fiscal package is reformist, well-disciplined and provides focused support; and if needed, there is still room for additional measures.
Besides India, fundamental economic reforms have not been part of the COVID-19 policy response. Some distance away from India is Indonesia, with a stated permanent reduction of the corporate income tax rate from 25 per cent to 22 per cent in 2020-21 and 20 per cent starting in 2022.
There is an old saying about India and investment: “Many a woman has been found six-feet under because she bet on India doing the right thing”. However, this time it is really different and a large wager is merited. Prime Minister Modi has used the crisis to re-orient India towards its long-awaited destiny.
The writer is executive director IMF representing India, Sri Lanka, Bangladesh and Bhutan. Views are personal
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