Opinion | 20 Ts to fund 4 Ls, and the grumble about its source4 min read . Updated: 19 May 2020, 09:46 PM IST
There are many plus points in the package, but there is disappointment about reforms
We’ve gone from asking for a 10% of GDP covid-19 relief government plan to a grumble about the announced ₹20 trillion package (which is 10% of GDP) being just 1% of GDP, because the fiscal (what the government spends out of its annual budget) spend is only ₹2 trillion. We seem to care about where the money is coming from and not where it is going and what it is going to do.
A basic question first: why does the government need to spend its way out of this crisis? The covid-induced lockdown has caused both a demand and a supply side shock to the system. This situation needs an external entity—the government—to give lifelines of both income, cheap foodstuffs and credit (through its bank—the central bank) to people who most need them. How much should it spend and for what? Countries like the US, some parts of the EU and Japan announced spends of around 10% of GDP and are using the money for direct cash transfers to a workforce that has been furloughed or is out of work, to open liquidity windows, to buy bonds from corporates directly by the central banks and for existing unemployment benefits that have soared. The developed countries that have the good historical fortune of owning global reserve currencies—that the rest of the world buys to store value—are simply printing currency (it’s also called monetizing their debt) to fund their deficits.
Last week, when Prime Minister Narendra Modi announced a ₹20 trillion four L reform and stimulus package that would be focused on liquidity, land, labour and laws, it raised expectations of 1991-type big-bang reforms and a huge liquidity push. What came finally was a limited fiscal push, some reform and plenty of policy tinkering. But there are many plus points in the package. One, it has kept the Indian situation of a $2,000 per capita income economy in mind and has not blindly replicated what economies with $40,000-60,000 of per capita income can do in terms of having the resources and resilience to deal with the issue. Two, it has been conservative on spending and has discarded the print-your-way-out road. It is estimated that with the current spends, the combined fiscal deficit of states and the Centre will be 10-12% of GDP. Higher deficit levels open the doors for macroeconomic instability and inflation in the future. Printing away the deficit will expose a non-reserve currency like the rupee to very high rates of inflation. Also, we don’t know how long the crisis will last—do we shock and awe with all the firepower at the start of the battle or do we keep the powder dry while using some now?
Three, the limited firepower has been used to target those who most need it. The Indian situation is different for another reason—the domestic saving rate (though falling over the past few years) is still at about 17% of GDP (down from over 20% just a few years ago). This means there is resilience in the non-poor Indian household to withstand an income shock for a few months, if not more, unlike the average over-leveraged American household, for instance. But India also has about 300 million poor on the brink of starvation and poverty in the absence of their daily wages, micro businesses and informal jobs. The government has correctly aimed almost 60% of the direct fiscal spend of ₹2 trillion through the ₹73,000 crore PMGKP and the ₹40,000 crore MNREGA at the poor. It seems to matter to a section of opinion makers how much the government is spending out of its budget and not what the entire package will do. The covid crisis is far from over and we have years ahead of dealing with it. It will be harmful to use the entire firepower at one go and then have a big financial crisis in a few years.
However, there is palpable disappointment about the reforms part with the PM raising expectations of a big bazooka reform blitz and his headline-managing ₹20 trillion announcement last week. Other than far-reaching reforms in a few areas such as freeing the agriculture produce markets, it has been more of a policy response than reform. The art of managing expectations has clearly been lost by the government. The PM pitched the hopes sky-high making it look like a 1991 moment. The announcements have fallen short of the giant leap of policy thought needed today. The tightrope that good policy needs to walk is having effective road rules that encourage smooth flow of traffic with enough checks in place to catch the errant driver. Described in traffic terms, today’s rules of doing business would cause a gridlock due to the paperwork, the rent seeking and the rampant misuse of bureaucratic powers to fine, arrest and punish people just trying to get to work and back. That clear-headed policy rulebook is still missing in the grand plan of 4 Ls using 20 Ts announced by PM Modi.
Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation