A Missed Opportunity

By Anindya Sengupta

        So, this was another 1991 moment for India. And when after a long wait, the Prime Minister of India himself announced a larger-than-expected Rs 20 lakh crore (10% of GDP) package, it excited all of us. But instead of a grand vision of reform what we got was just another dose of incrementalism – mostly a promise of bank loans, some loan guarantee, re-packaged budget proposals and on-going schemes.

What we got:

• RBI providing huge liquidity, but banks (for obvious reasons) not willing/able to lend
• Banks (already saddled with NPA of 9 lakh crores) to provide huge loans to industries and consumers (who have recently been granted moratorium as they are unable to service their existing loans)
• guaranteed loans to MSMEs and some to farmers (be prepared for another round of loan waivers)
•  90000 crore package to rescue Power Discoms - second major package in 5 years, even before the Covid crisis, their dues had surpassed pre-UDAY level - we cannot make progress here unless we ensure that the power is priced properly and everyone pays for what they use.
• some more privatization (during this deep recession, who will buy and at what price?) and other incremental reforms

(Please see the details here -https://www.financialexpress.com/economy/breakup-of-the-rs-20-lakh-crore-economic-stimulus-package-by-fm-sitharaman/1961843/ )

Most analysts concluded that the fiscal side of the package is just around 1% of GDP. (https://timesofindia.indiatimes.com/business/india-business/govts-eco-package-only-1-of-gdp-say-analysts/articleshow/75837840.cms)

It has been argued that given our low tax to GDP ratio etc, India’s fiscal package cannot be compared with the developed countries. True, but even in comparison with the other Emerging Markets (average of 3.7% of GDP), India’s package is too small. Why it matters? Because a fiscal package is more like emergency medical care (a monetary package, on the other hand, is like food supplements, would help to restore your health).

What would be the net result of the package announced so far (along with global recession, raising tariff walls and corporate tax cuts) - banks in deeper mess, no real protection for small business or jobs and further expansion of big business.

What could have been done?

Universal Basic Income – Given the deep recession, record level of unemployment and complete demand collapse, the best way to help is to provide direct cash transfer. Most developed countries are doing it now. State governments, closely connected with the ground realities, are shifting towards cash transfer (instead of two existing methods of poverty alleviation – giving subsidy and Plan schemes for systematic improvements). It should be truly universal, meaning we should not try to exclude people on the basis of any narrow criteria. Depending upon the monthly amount, it may cost the exchequer 6 to 8% of GDP. Food and FMCG consumption will receive a major boost.  And most importantly, this will help a very large population to afford basic necessities of life.

Payroll Support – Germany and most European countries have some form of payroll support. During recession, government pays a major part of employee salaries and as a result, companies do not cut jobs (or cuts very few). The U.K. has announced that the government will cover 80% of the salaries of unemployed workers for at least three months. Now even the USA, which saw a massive job loss recently, has announced payroll support. Protecting jobs is important because jobs gives you confidence. And as Keynes said, jobs are the best guarantee for demand revival. India, in any case, has very few jobs in the organized sector and every organized sector job actually helps to sustain 4 jobs in unorganized sectors. Thus we must try to protect as many jobs as possible. Typically industries ask for lower rate of loans and taxes or complete tax holiday as the managements are more concerned with profit but saving jobs is actually more important for the economy.  

Tax Holiday for Small Business – There are 7 crore MSMEs in the country, employing some 12 crore people. Most of them are too small to get any bank loan. In fact 84% of total MSME credit in the country comes from self-financing or from informal sources. They have suffered too huge blows since 2016 – demonetization and introduction of GST. UBI and Payroll Support would hold up their demands. A tax holiday for small businesses – say up to annual turnover of Rs 100 crore for the next three years, would help them most. For those with access to bank credit, they need a loan restructuring, so that they pay less interest on existing loans.

Investment in Public Health - Economist Karthik Muralidharan has persuasively argued that India should seriously consider an estimated public health expenditure of Rs 75000 crore for one year to test (5% of the total population), trace and isolate 1-3% of infected cases. 

(https://www.hindustantimes.com/opinion/sound-public-health-policy-need-of-hour/story-srLUKQXQXCQjEDpePYcTzN.html )

Along with this, the Finance Minister could have announced a scheme for immediate upgradation of all district hospitals (the most effective level of public health system) with the pre-condition that the state governments would hire the required number of doctors and health workers. At a cost of Rs 10 crore per hospital for 700 odd districts, it would have meant a total outgo of hardly Rs 7500 but would have made a huge difference.

And to finance this, we need serious expenditure reform – to remove most subsidies, to get rid of this vicious cycles of endless Schemes, Special Funds and associated bureaucracy and corruption. Central government itself has around 1000 Plan Schemes (and every state government at least 100 more), all in the name of the poor and marginalized. In government documents, effectiveness of these schemes are measured every year. Today, through heart-rending visuals from all over the country, we are watching an actual impact assessment of these schemes.

    The package proposed here would have protected majority of jobs, small businesses, helped to create at least one layer of functional healthcare and more than anything else, would have helped millions to buy food and bare necessities. This would have provided much needed demand in the economy. And of course some hope. Hope that helps us to live and look forward to tomorrow.