Is the Government’s Stimulus Package Adequate to Endure the Pandemic?

We often take lessons from history to solve problems. This pandemic is unique and, has made several people ponder over the awaiting future. Now, the questions nagging in everyone’s minds is how to resolve the repercussions caused by the pandemic economically and socially. The Great Depression and 2008 economic collapse were due to a demand crisis while the supply glut drove the 1970s US Recession. Considering this, the pandemic is different as the economy is affected by both supply and demand simultaneously.

Consequent to the pandemic, the government announced the 20.97 lakh crore package, 10.5 per cent of the GDP concentrated on food grains provision to the migrants, rental accommodation, and monthly transfers Rs. 500 to their Jan Dhan accounts. On the other hand, the Finance Ministry implemented a special liquidity scheme that grants government-guaranteed loans for NBFCs, MFIs and HFCs. To this effect, nearly 3.5 lakh crores were sanctioned. However, amidst suspended economic activities, payments of fixed costs and stocked up goods, businesses at large retreated without buying in the situation. With no borrowers availing the loans, the banks by May, parked about 7.5 lakh crore of unutilized funds with RBI at 3.35 per cent. Since public sector banks are predominate in the Indian banking system, loans moratoria and piling NPAs are expected to deteriorate the banking industry once the bad loans are officially documented.

With the majority of low and middle-income classes in India, people are spending only on the necessities to barely sustain the livelihood. So, with extensive lockdown and mounting cases, the demand for other economic activities slowed down abruptly. The reduced discretionary consumptions, on one hand, and labourers shortage, transport restriction and, factory shutdowns on the other, led to supply disruptions across the country. We know that supply and demand are the two forces that drive economic activities. Without sufficient income buffer, people cannot demand substantially as the circular flow of income is damaged. So, the government’s monthly provision of rice and pulses alone is less likely to accelerate demand in the economy. What could have been done?

We must note that the economy is encountering severe demand constraint and not much of the supply shocks since the government has implemented significant programs from the supply side. As per the Keynesian Economics, we need to stir up the aggregate demand to kickstart the economy. There are three apt ways to stimulate economic activity. Firstly, the government can bring widespread cash transfers into effect for at least 6 to 9 months, enabling people to undertake considerable consumption barring essentials. Apart from cash transfers affording the poor, it serves as wage support to the employees with income cuts. The government’s one time benefits costing rupees 500 is hardly used for subsistence. Hence, cash transfers are imperative in restoring economic activity. However, considering the weak fiscs, tax cuts could be the alternative. Tax cuts across the country, in both direct and indirect segment, could turn the economy as it would leave the people with substantial portions of income at their disposal. With falling GST collections in this lockdown, it is highly improbable as it lessens the revenue source for the government. Lastly, the government can extensively rely on public spending. That, about 5 to 8 lakh crores can be allocated to infrastructure building especially health care, education, and transport as it leads to a revival of allied industries like steel and cement factories. Subsequently, it could resurrect other sectors through the ripple effect. However, the economic package did no justice to the health sector though they are confronting the brunt of this pandemic.

Why not allocate more funds and offer cash transfers to the people?

Shrinking revenue and the alarming threat of the implosive deficits at 9 per cent is restricting the government from accommodating funds efficiently to fight the pandemic. Though the economic package was an exclusive bundle, it was not designed to support a source of relief or income. The government must rethink about the benefits as food grain provision alone cannot feed the people. T.T. Ram Mohan, an IIM professor, has commented about government opting for monetisation of debts, as the fiscal deficits could be 7 per cent of the GDP this year. There’s often a debate around whether monetisation can be implemented as it could lead to inflation in the economy. Unlike, the modern monetary theory of funding the government through fiat currency, the Central Banks instead purchase treasury bills, or it could credit the treasury through electronic accounting entry. Either way gives access to resources for the government and, thus, increase the base money in the economy. Therefore, monetisation could maximise the actual output without increasing the money supply.

Inflationary pressures around the corner if RBI begins printing notes?

Rabobank has predicted that inflation could be averaged at 12 per cent in 2021 if RBI finances the second round of stimulus through printing notes. With RBI’s excess cash of Rs 8 lakh crore in the banking system, RBI decided to induce banks to absorb the government’s bonds to mandate efficient liquidity. This drains into the government’s purse and, hence, can finance new programs. By, following the monetisation through treasury bill purchases, RBI could reduce the inflationary pressures for the second stimulus package. If the government could utilize these funds for cash transfers, it will rejuvenate the dry economic activity in the country. However, both the government and RBI has not declared the use of this 8 lakh crore which is $108 billion.

Keynesians have not promoted freebies and, the same applies to the present Government. Nevertheless, the programs established by the government is the opposite, for instance, the monthly food grain provision. The special liquidity scheme and the economic stimulus proved vain as it was not stimulating the demand. The government targeted 8 crore migrants to render the basic facilities via Jan Dhan transfers, but how many possess the accounts is still a question in this turmoil. Raghuram Rajan said that a distressing economy in a pandemic requires a relief rather than the usual Keynesian stimulus to surpass this situation. The relief helps to retain and protect the capital stock of the industries. Hence, the relief buffer is required to be transferred not only to the households but also to all the business activities, as this could help the economy to survive the demand slump when the lockdown is lifted.

References:

The Economic Times

Business Today

The Hindu: https://www.thehindu.com/opinion/lead/whos-afraid-of-monetisation-of-the-deficit/article31782093.ece

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By - Bharathi Jayaraman (aqf18bharathi@mse.ac.in)