In the new set of relief measures announced by the Finance Minister , job creation has moved to the forefront. This shows that the government has finally accepted that the unemployment rates are very high, a fact it has so far been suppressing or dismissing. This is a welcome change given its usual ostrich-like behaviour when it comes to hard economic facts. But recognising a problem is only the first step towards solving it. What hasn’t changed, to our dismay, is the government’s core belief in ‘minimum government’, which ties its hands when it comes to fiscal measures even in such harsh economic conditions, created to a great extent by its own lack of governance during the COVID-induced lockdown . As a result of that lockdown, Indians got both a COVID-19-induced health crisis and, in an attempt to control it, a severe economic crisis.
The ball is in the people’s court
If you look at these relief measures, announced in three tranches — Atmanirbhar 1.0, 2.0 and 3.0 — what the government seems to be saying to the people and businesses is: ‘if you do this, we will award you with this and this’. The ball is being put in the court of those who are suffering instead of the government taking the responsibility of steering the economy out of this turmoil. Take Atmanirbhar 1.0, for example. Out of the ₹20.9 lakh crore package, ₹17.9 lakh crore worth of measures were below-the-line ones, such as credit guarantees and liquidity easing. Things are not very different in the other two tranches as well. These measures are made on the assumption that they will induce the business sector to start the virtuous cycle of investment and induce households to increase consumption despite evidence to the contrary.
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Corporate investment is limited by sales and/or credit. While drying up of either sales or credit can bring about a decline in investment, a revival in investment requires a revival of both. This is a very important lesson for a policymaker. The fact that sales are low means factories are running below capacity. If the existing equipment is not being fully utilised, why would businesses add further to capacity just because the cost of loans has declined or the access to credit has been eased? While this is, in general, true for both big businesses as well as MSMEs, for the latter, sales/profits are even more binding as a constraint because the pockets of MSMEs do not run as deep as those of the big fish. So, however detailed the credit package may be for MSMEs, in times of deep economic crises, they will not deliver as they will be wary of taking more loans.
As for the households, if there is a cloud of doubt over future incomes (or dwindling current income), they would not be inclined to take more consumer or housing loans just because credit is easily available at lower rates of interest. If I am not sure of a regular salary in the immediate (or even distant) future, which affects my capacity to pay EMIs on these loans, however low they may be, I won’t take the risk of taking a loan.
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Moreover, even if there were takers for these loans, if the banks are burdened with bad loans as a result of past decisions, they may be wary of releasing credit. In order to increase their margins to cover for these losses, the banks, since early 2019, data from the Reserve Bank of India confirm, have chosen not to pass on the fall in the policy rate to the consumers in which case the very premise of a fall in the cost of loans is violated.
The data suggest something more. On the one hand, banks are functioning well below their capacity in terms of extending credit. On the other, despite a fall in investment, there is consistent growth in the corporate sector’s current assets, a proxy for their liquidity position, which means the sector is not short on liquidity.
Such credit lines, guarantees or the low cost of loans, therefore, hardly have an effect on reviving demand in the economy. These actors can at best play a supporting role, not the lead one. What does this mean for the magnitude of the stimulus? Neither do these numbers show up in the government’s books (which is by design) nor in the business or household balance sheets. It means these figures just stay on paper. They are something for the government to brag about. Unfortunately, this seems to be the preoccupation of this government instead of really engaging with the economy and trying to find real solutions.
The demands
If none of this is working, what can? A lot has been written about this, so I will just summarise the demands here. The foremost demand, from which others follow, is that FRBM should be kept in abeyance, both for the Centre and the States, and the government should inject a fiscal stimulus of at least ₹10 lakh crore and borrow to finance it or, if required, monetise the deficit. This stimulus could comprise, among other things, free ration and other essentials like oil, soap and cooking gas for a period of six months; cash transfer till employment opportunities are back; and an urban employment guarantee law. Given that this pandemic has exposed the precarious health sector, we can spend our way out of this crisis by building a robust public health infrastructure on the principle of public provisioning instead of walking down the insurance route which has spectacularly failed in the U.S. This has also opened an opportunity to think about climate change. There cannot be a better time than this for a green deal, which addresses both the demand and supply side of emissions as well as acts as the much-needed fiscal stimulus which has long-term implications. A comprehensive green deal can be planned, partly financed by the government and partly by carbon tax, which not only changes the energy mix of the economy but also makes the poor and the marginalised a part of a sustainable development process.
This crisis has provided us with an opportunity to rethink our health, economic and climate policies. We can choose to act on these or walk down the beaten path. Whatever we choose, it will be good to remember that the future generations will never forgive us for losing an opportunity to fundamentally change course.
Rohit Azad teaches at Jawaharlal Nehru University, New Delhi