India's COVID-19 stimulus package: Will it revive the economy?

There seems to be a strong argument that the singular focus of the stimulus package should have been a fiscal stimulus, which would have increased public spending in physical or human capital, raised money in the hands of residents by direct cash transfers and subsidies and provided safety nets like job guarantee and unemployment benefits, writes Partha Pratim Mitra for South Asia Monitor

Partha Pratim Mitra Jun 02, 2020
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The five tranche stimulus package announced by the central government can be viewed with one underlying indicator, which is to see to whom and where the money is going. When we apply this indicator, the thrust and the impact of both monetary and fiscal policies, in reviving the economy would become clearer.

What has been the focus of the five tranches - The first tranche focused extensively on supporting micro, small and medium enterprises (MSMEs) that have been worst hit by the lockdown. The second tranche focuses on migrant workers, small farmers, tribals, and street vendors. The agriculture sector was the focal point of the third tranche, while the fourth one, consisted of a set of reforms for the coal, minerals, defense production, civil aviation, power distribution, space, and atomic energy sectors.  The final tranche mainly allocated an additional Rs. 40,000 crore to the Mahatma Gandhi National Rural Employment (MGNREGA) budget estimate to ensure that migrants do not face unemployment and a viability gap funding of more than Rs 8,000 crore. 

There was also a new public sector policy that allows the involvement of private companies. In addition, new reforms in health sectors, including setting up of infectious diseases hospital blocks in all districts, reforms in online education, decriminalization of Companies Act defaults, enhancement of ease of doing business through IBC-related measures was also announced. The  central government also increased the borrowing limits of states from three percent to five percent for 2020-21, giving the states an extra resource of Rs 4.28 lakh crore. 

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Source:https://www.thehindu.com/news/resources/economic-stimulus-package-details-of-. May 17, 2020 

The design of the stimulus packages could be broadly divided into two categories (a) social policies and (b)credit/financial policies. Social policies include unemployment benefits, sick leave assistance, cash transfers, and vouchers/in-kind support; regulatory policies include price controls, employment, and trade restrictions; other policies include public investments and firm subsidies. Credit/financial policies include government guarantees, loans to businesses/households from government entities, forbearance (including deferral of payments and loan reprofiling), and easing of credit regulation; tax policies include tax cuts/waivers/deductions and extensions of payment deadlines; social policies include unemployment benefits, sick leave assistance, cash transfers, and vouchers/in-kind support. 

Global relief packages

Before we come to the Indian situation, let us briefly look at the global packages in response to the crisis. The countries studies are the US, China, Hong Kong, Japan, Germany, UK, France, Italy, Spain, Denmark, Brazil, Canada, Russia, South Korea, Indonesia, and Australia. Most countries had initiated packages March and April 2020, except Hong Kong and Japan which started taking steps in February 2020

The broad trend that emerges is that governments and central banks worldwide have initiated monetary and fiscal stimulus measures to counteract the disruption caused by the pandemic. The monetary stimulus measures broadly fall into three basic categories, interest rate cuts, loans, and asset purchases, and regulation changes, which facilitate infusion of liquidity, into their economies.

The fiscal measures saw some variations among countries. The  direct welfare benefits to people by most countries were in the form of wage support, unemployment allowance and  support to businesses to prevent wage cuts - the US, UK, France, Germany, Italy, Canada, Russia, Australia, Japan, South Korea, and Brazil. Some countries gave rent relief to businesses-Canada and Japan. Assistance was also given to specific industries which included tourism and small and medium industries, including what is known as job keeper payment every two weeks to employers to cover wages - like in Australia. Some countries gave child care subsidies - like in South Korea. Some gave charges for survivors of domestic abuse, sexual violence, and vulnerable children - in the UK.  Japan and Canada gave rent reliefs to businesses and residents. 

The International Monetary Fund (IMF) with $1 trillion in available resources, extended support to vulnerable countries through various lending facilities. How have the direct support measures work specifically in some countries? Indonesia is providing tax cuts to the highly impacted tourism sector and to local manufacturers; Spain has extended eligibility for unemployment benefits and exempted affected firms that maintain employment from social contributions; Japan has enhanced subsidies to firms that maintain employment while simultaneously operations are scaled-down; Denmark announced subsidizing  heavily impacted firms, paying 75 percent of wages for workers facing layoffs; the United Kingdom  announced 80 percent payment of  workers’ who proceeded on leave, monthly salary up to a ceiling; Russia introduced tax deferrals (excluding value-added taxes) for companies negatively affected by COVID-19; and Korea introduced wage subsidies for small merchants and increased allowances for home care and job seekers. 

Similarly, Germany and France have eased and expanded firms’ access to subsidized short-time work programs to preserve jobs and workers’ incomes. It must, however, be mentioned that direct income support, which facilitated money to go directly to the affected citizens including wage support to business was not very significant as a proportion of the total stimulus package.

US debate 

We shall look at the debate in the US briefly on the social issues of the rescue package for this is the area where most rescue packages have been evaluated. The debate in the US  revolved around a few broad issues. In the socio-economic background when the virus struck, the US had far greater wealth and income inequality than any other advanced nations, and far larger coverage gaps in health and social insurance—from paid leave to unemployment insurance and those inequalities were starker for black and brown Americans.

Some other important issues are : 

Funding state and local governments
Keeping workers in jobs with a paycheck guarantee program that sends money straight to firms to support their workers; and 
Providing broader-based liquidity and debt relief for individuals and households

COVID-19 has had a negative effect on workers. The only mitigating factor is the Affordable Care Act, which will allow many, though by no means sufficient, all of the newly uninsured to find alternative coverage. The pandemic has left many in the US unable to put sufficient food on the table. Families with children under 12 have especially been hard hit. According to one recent survey, 41 percent of these families are already unable to afford enough to eat.  

Stimulus or relief?

Looking at India's stimulus package, we need to see if it is an economic stimulus or a relief package and which one of the two is needed immediately for the country. Looking at it from the perspective of an economic package, it consists of monetary measures announced  on March 27 and April 17, 2020, and additional liquidity of ₹ 5–₹ 6 lakh crore provided by the RBI’s credit-easing decisions as a  part  of the ₹ 20 lakh crore plus package, which also, included  the earlier relief of ₹ 1.7 lakh crore announced by the government on 27 March 2020. The additional liquidity would be available only through bank lending.

If one looks at the stimulus as a relief package, the direct expenditures of the government, which is urgently required during a national disaster like the COVID-19, there is a general concern about the efficacy of the stimulus package announced in the five tranches between May 13 and 17, 2020, to create conditions for the economy to revive. It was not a fiscal stimulus that was expected of the government that would have immediately revived the demand in the economy through increased consumption of the poor and the revival of the supply chains thereby creating jobs which have been lost due to the lockdown. For instance, the package declared for the MSMEs are essentially liquidity easing measures, such as ₹ 3 lakh crore collateral-free automatic loans for business, including MSMEs, ₹ 20,000 crore subordinate debt for MSMEs, ₹ 50,000 crore equity infusion through MSME Fund of Funds, among others. These measures could best be described as a situation of  taking the horse to the water but whether it would drink is another question.

It is true that the government has multi-fold challenges to consider, be it managing the pandemic,  reviving the economy, allocating financial resources towards mitigating these two forceful but opposite trends. and planning an economic revival in the post lockdown scenario.  At this point, there seems to be a strong argument that the singular focus of the stimulus package should have been a fiscal stimulus, which would have increased public spending in physical or human capital, raised money in the hands of residents by direct cash transfers and subsidies and provided safety nets like job guarantee and unemployment benefits. Despite being about10 percent of the gross domestic product, the Atmanirbhar Bharat Abhiyan has not shown that singular focus. 

(The writer is a retired Indian Economic Service officer who worked in the labour ministry. The views expressed are personal. He can be contacted at ppmitra56@gmail.com)
 

References -

No Stimulus in Economic Stimulus Package Atmanirbhar Bharat Abhiyan falls short of being either a relief or a fiscal package, Vol 55,Issue No22,23 May,2020. Retrieved from: https://www.epw.in/

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