India needs a ₹10 tn stimulus to tide over a contraction in GDP: Arvind Subramanian

Former chief economic adviser Arvind Subramanian on Tuesday said India should plan for “substantially negative economic growth” this fiscal due to the coronavirus crisis and that the government should tap various sources to finance a ₹10 trillion stimulus.

Speaking at the Indian Express e-Adda from the US, Subramanian said distribution of food and cash are the two key tools India should be using to help people tide over the crisis.

Subramanian, currently senior fellow at the Peterson Institute for International Economics and a visiting lecturer in public policy at Harvard University’s Kennedy School of Government, said at the videoconference that low food and fuel prices and India’s currency reserve have allowed policymakers to be bold in rolling out a stimulus package without fearing a spike in inflation.

“Prudence demands that we should plan for negative, substantially negative, economic growth rate this financial year. The scale of hardship is enormous. On the magnitude of stimulus, something like 5% of GDP, which today is about ₹10 lakh crore, is what we need to find for this year,” said Subramanian. The suggestion of a ₹10 trillion stimulus package was first made by Mint in an editorial on 29 March.

Subramanian explained his suggestion that “policymaking should allow for the possibility that growth will be substantially negative this year” was not a forecast, but what prudent economic management should be prepared for. The possibility of a substantial contraction is based on the fact that even before the pandemic gripped the world, India’s economy was decelerating and also on the growth projections for advanced countries that implemented similar lockdown policies like India but have adopted larger fiscal stimulus measures.

With the economy coming to a standstill due to the national lockdown imposed to contain the spread of the virus, India has witnessed an exodus of migrant workers from cities to their home states not seen in recent history. The loss of livelihoods is expected to impact demand for goods and services after the lockdown is gradually lifted, hampering central and state government revenues, limiting their ability to offer a big stimulus.

Subramanian said India should tap multiple sources including savings from spending cuts to deal with the crisis.