From time to time some of India’s most respected CEOs say “the only thing we ask of the government is to leave us alone and let us grow”, whereas often they turn to the government to bail them out even in normal times. The irony is inescapable. While pleading for less or no government, corporate India wants to always privatise profits and socialise losses. So, when a Jet Airways crumbles, or a Yes Bank implodes (for reasons other than business risk), everyone goes running to the government seeking bailouts. Now, it is natural that with a legitimate contraction in economic activity due to the COVID-19 pandemic (and deep uncertainty), which is an endogenous shock, everyone wants a good stimulus.
But what will constitute a “good stimulus”? The poor must be supported, but what is the best way to do it? Indeed, who should get what, when should they get it, and how? The Reserve Bank of India can print notes, no questions asked, but this is not without serious consequences and the trade-offs need to be understood.
Supply-side shutdown
First and foremost, there is this rampant belief that a fiscal stimulus package has to follow the timeline set by the media or by consultants, which won’t happen. No one appears to understand that you cannot ‘stimulate’ an economy during a supply-side lockdown and that there are ‘announcement effects’ — both good and bad — that go with the stimulus. It is like trying to jump-start a dead engine when you also have a flat tyre! So, any ‘good stimulus’ can only come into effect post lockdown and extensive consultations are on with everyone for that.
Second, everyone, when talking about the stimulus, conveniently forgets that government revenues too will be seriously hit. This will be anywhere from 2-3% of GDP (given that disinvestment target itself is 1% of GDP and the realisation is likely to be close to zero in the current financial year). So, the effective fiscal deficit is going to be somewhere around 7.5 % (if you take into account all the off-balance sheet borrowings). So, while everyone is talking of how the U.S. government has set aside $2 trillion for bailouts or 9% of its GDP, no one is ready to face the trade-off that India’s starting point is going to be at around 7.5% of GDP fiscal deficit (net of savings due to both, cuts and deferred expenditure), and then how much more can we afford on top of that? On top of this is all the ‘merit expenditure’ on health and direct income support to the poor. Can we still formulate a stimulus package comprising 10% of GDP, to be footed by the Central government alone?
It may be worthwhile to bear in mind that from 1947 to 1997, the Central government always routinely monetised its deficit, without leading to high rates of inflation, much less hyperinflation. The Fiscal Responsibility and Budget Management (FRBM) limits are hardly a grand success and routinely all governments have broken the barrier. Other countries with huge debt-to-GDP ratios like Japan (>200%) and U.S. (125%) get away with barely a rap on the knuckles but India is pulled up for minor slippages on a 70% debt-GDP ratio.
Third, some prominent commentators have argued extremely fallaciously, that bailouts should be based on need and not affordability. Given the data above, can one forget about affordability and print money with all the attendant side effects? Which economist will go and face the electorate, if the currency plunges, inflation rages and rating agencies downgrade us to junk? Shouldn’t there be a more nuanced approach to what constitutes a ‘good’ stimulus?
Giving grant to States
Fourth, indeed there is a lot of liquidity in the economy, but limited credit is flowing due to anaemic lending. Thus, another mantra being espoused is that bank managers should be incentivised to lend and the government should indemnify loans given during this period. This could well lead to bogus companies springing up overnight to grab the stimulus in collusion with banks. It remains to be seen what fiscal support tools the government will use that can ensure that credit flows to various sectors. The government owes about ₹1 lakh crore on tax refunds and also had promised to make up for any difference to the States, if the GST did not grow by 14% per annum. This is the time for it to transfer this to the States as a grant, for one year, to offset the revenue loss to States. Fifth, there is talk of going to the International Monetary Fund (IMF). Do we really need the IMF’s conditionality-led bailout when there is no foreign exchange crisis for financing rupee expenditure? What about the perceived global stigma of doing so? Won’t the conditionality-led cure be worse than the disease?
Also read | What can India do to overcome the global slowdown?
Only a fool confuses fate with destiny. Fate is what happens to us. Destiny is what we make in spite of our fate. India’s destiny appears relatively safe, if we cast the mind’s eye around the globe. Lifting the lockdown will be the first step towards a good stimulus and one does need to un-handcuff a billion people to save their lives too.
Srivatsa Krishna is an IAS officer. Views are personal
