Spend, borrow, monetize

Before I go forward, I wish to draw attention to the economic situation of India when Covid-19 hit the country. We had witnessed seven successive quarters of declining GDP growth. It was unprecedented. On March 11, WHO declared COVID-19 as a pandemic. Our attention was turned away from the dire economic situation. Now, the government will blame the pandemic, although the truth is that the origin of the economic crisis was the government’s misguided policies.

The initial decision to lockdown was unavoidable because, in March, the only known antidote to the rapid spread of the virus was ‘social distancing’, which meant a lockdown. In the absence of an alternative strategy, the government went from one lockdown to another. Each successive lockdown has yielded diminishing returns. Besides, it has spawned a humanitarian crisis of gargantuan proportions.

Post Lockdown 1.0, every decision of the government has proved questionable in terms of the outcomes. At the first opportunity — on the eve of Lockdown 3.0 — the Prime Minister withdrew from national TV and cleverly passed the buck to the state governments.

But the control of the economy is not in the hands of the state governments. The Central government is now like an imperial power. All authority has been taken over by the PMO. The states have been left to beg the Centre for funds, including their legitimate and constitutional entitlements. The ostensible ‘help’ extended — liquidity to discoms, higher borrowing limit — are so loaded with riders that no state government would be able to fulfill the pre-conditions and avail of the money in the current fiscal year.

The Dreaded ‘R’ word

Which leads to invoking the dreaded ‘R’ word — Recession. India has not suffered negative GDP growth in the last 40 years. That distinction could go to the Modi government, which will blame the pandemic, but the original sinner was the Modi government. It is not necessary to recall the numerous sins of omission and commission since that fateful day on November 8, 2016 (D for Demonetisation day).

In fighting the pandemic, Prime Minister Modi adopted the path followed by China, Italy, Spain, France and Britain. First, a lockdown. Then testing, tracing, isolating and treating the infected persons. Additions were made to the medical and health infrastructure. The results of these measures are mixed. We have a state like Sikkim with zero cases and a state like Maharashtra that accounts for 35 per cent of all infections. It is clear that the virus does not have a defined path and its spread depends on many yet-unknown factors.

Yet Mr Modi refuses to follow the path adopted by most countries to counter the economic consequences of the pandemic. The model advocated by almost all economists is fiscal stimulus. That means only one thing: spend more. The Expenditure Budget for 2020-21 estimated the expenditure at Rs 30,42,230 crore. Whether it would have been enough in a slowing down economy is a moot question, but there is no doubt it would not be enough when the economy is hurtling toward negative territory.

We need a new Budget. The assumptions made on February 1 are no longer relevant. The government must present a New Budget on June 1, 2020. The total expenditure must be in the order of Rs 40,00,000 crore. The present sources of revenue (tax, non-tax, capital receipts) may be expected to yield only Rs 18,00,000 crore. For the rest, we must borrow. The borrowing will go up from the BE of Rs 7,96,337 crore to Rs 22,00,000 crore.

A Last Chance

If, as the year progresses, the borrowing/fiscal deficit reaches a level that is uncomfortable — in the sense there are other consequences — we must not hesitate to monetize part of the fiscal deficit, that is print money. Many countries did that in 2008/2009 and saved their economies from a deep and prolonged recession.

The alternative is too horrendous to contemplate. A recession will mean greater unemployment (it is already at 24 per cent), a longer wait for job-seeking youth, lower wages and incomes, less consumption, more morbidity and more poverty.

The defining image of India in 2020 will be the migrant worker, a hard working person supporting oneself and one’s family and just above the poverty line, who, reduced to being without work/job, without cash, without a shelter and without food, was forced to trudge hundreds of kilometres, sometimes with children, desperate to go back to his ‘home’, even if it meant reaching home only to die.

The Modi government has one last chance. It must get off its horse named ‘Ostrich’ and Spend, Borrow and Monetize. Otherwise, the people will never forget or forgive the Modi government for setting India’s economy back by at least a decade.