The twin mantra for the government’s stimulus in response to the unprecedented economic impact of COVID-19 has been to ensure that human cost of the crisis is minimised, especially for those at the bottom of the pyramid, and to convert this crisis into an opportunity by implementing bold structural reforms that will go beyond repairing the damage to the production capacities and enhance the overall supply response capabilities of the economy. The stimulus announced by Finance Minister Nirmala Sitharaman last week is a carefully-crafted, well-balanced and bold package that will, in the coming days, achieve both these objectives.
It is widely recognised that the present crisis is far worse than both the Asian financial crisis of the late Nineties as well as the global financial crisis of 2008-09. It has seriously impacted both the supply and demand side of the economy. The government’s response has been to effectively address both these aspects. On the supply side, the government response has been four-fold. First, to ensure that food security and farmers’ incomes are not impaired. The government declared agriculture and all related activities as essential services immediately upon announcing the lockdown. This permitted the successful harvesting and efficient procurement of the critical Rabi crop. It also implied pumping in Rs 78,000 crore as new purchasing power in the hands of the farmers.
The second prong was to effectively prevent the pressing cash/liquidity crunch from leading to insolvencies and bankruptcies. An immediate moratorium was announced on their debt servicing obligations to commercial banks. This measure was reinforced for MSMEs, for whom an additional credit line of Rs 3 trillion without any fresh collateral was extended. MSMEs could also avail of new equity from the Rs 50,000 crore fund of funds and take advantage of the subsidiary debt facility announced by the FM. These measures provided succour to a large number of businesses, especially those in the services sectors like hospitality, entertainment and retail. The Rs 90,000 crore credit package made available to state discoms should also be included in this set of measures as it will prevent bankruptcies of state electricity utilities and the power producers, which would have had disastrous results.
The third set of measures were directed to significantly improve the ecosystem for private producers, both in agriculture and manufacturing. Long-pending reforms to give farmers the much-needed freedom to choose their clients and for traders and exporters of agro-products to maintain necessary stocks have now been announced. Defence production and exports will get a new fillip with the liberalisation measures. Greater space will be given to private businesses in sectors in which public sector enterprises hitherto had either a monopoly or a predominant presence. Finally, in a measure that does not have a large fiscal footprint, but touches the lives and livelihoods of more than 50 lakh families, street vendors all over the country have been given a credit of Rs 10,000 each for re-stocking and use as working capital. Thus, “the package” has guaranteed the survival of existing production capacities and laid a strong foundation to enhance larger private sector participation by both domestic and foreign players.
Several measures have been announced to lift the sagging demand in the economy. Before detailing them, it is important to point out that aggregate demand is made up of consumption, investment and demand for intermediate goods. This has to be taken note of by those who consider only the cash-in-hand of consumers as the sole means for reversing the declining demand in the economy. Therefore, additional credit lines provided to MSMEs, vendors or farmers (Rs 2 trillion over and above the limits already provided under the KCC) will contribute to the strengthening of aggregate demand.
A significant number of measures were announced to hike consumption demand directly as well. Among these are: Rs 1.73 lakh crore for improving the incomes and welfare of the most vulnerable, including the 20 crore female Jan Dhan account holders who will receive monies directly into their bank accounts; Rs 50,000 additional incomes in the hands of those whose TDS and TCS were reduced by 25 per cent; Rs 40,000 crore additional allocation for MNREGA, which will provide jobs and succour to those returning to their villages from metros and cities; Rs 30,000 crore for construction workers; Rs 17,800 crore transferred to 12 crore farmers and Rs 13,000 crore transferred to states to finance the costs of running quarantine homes and shelters for migrant workers. These measures, which will directly benefit different categories of individuals, will surely raise the flagging demand — the necessary condition for triggering a fast-paced recovery in economic activity.
As the finance minister emphatically pointed out on Sunday, the size of the stimulus at Rs 20.97 trillion, totalled more than the promise made by the prime minister in his address on May 12. This is more than 10 per cent of GDP and compares very favourably with packages announced by other emerging economies. Combined with the significant number of bold structural reform measures, which hold the potential to make Indian firms attain global scales and competitiveness and give the much-needed freedoms, flexibility and financial strength to our beleaguered farmers, “the package” promises to promote India’s economic recovery in the post COVID-19 period.
This article first appeared in the print edition on May 21, 2020 under the title ‘Relief and reform’. The writer is vice chairman NITI Aayog. Views are personal