To ride out Great Lockdown, India needs an Emergency Basic Income
4 min read . Updated: 11 Apr 2020, 09:25 AM IST
PremiumCompared to several peers, India has been behind the curve in shaping an effective economic response to the covid-19 shock
As the novel coronavirus spreads across the world, it is becoming increasingly clear that a large part of the world will remain under lockdown for months to come. Any exit from the lockdown is likely to be partial and provisional.
Even countries such as Singapore and Japan, which seemed to have contained the pandemic in the early days, have introduced harsh lockdown measures over the past week to deal with a second wave of infections. In India, most state governments, including Kerala (which has had some success in containing new infections over the past couple of weeks), are not prepared to end the lockdown fully any time soon.
This poses a unique economic challenge. Unlike a normal slump, when policies can be tailored to finance and raise demand, here, the challenge is of keeping productive capacity intact, even as many firms and workers remain idle. Nobel Prize-winning economist Paul Krugman termed this the “coronacoma", the economic equivalent of a medically induced coma, “in which some brain functions are deliberately shut down to give the patient time to heal" ().
Using a similar analogy, International Monetary Fund’s chief economist, Gita Gopinath, argued for a “preservation of the economic system" while the “Great Lockdown" lasts.
As Krugman argued, the economic response to the crisis will have to include two parts: One, an immediate disaster relief component that ensures survival of both firms and workers who have been rendered idle. And, two, a stimulus component that aims to repair and restart production lines during the exit phase of the lockdown.
For a country like India, with a large informal sector and a weak social safety net, the first challenge is going to be much tougher than the second one. As the migrant exodus after the lockdown announcement showed, the sustainability of even a partial lockdown will depend on how well India meets the disaster relief challenge.
While the Union and state governments have announced some relief measures, they appear to be grossly inadequate to meet the challenge. Compared to most other countries, India’s relief-cum-stimulus measures so far appear puny.
Some commentators have argued that emerging markets, such as India, don’t have the luxury of offering generous relief, unlike developed markets. But data suggests considerable diversity in response within emerging markets. Thailand, whose per capita income (in purchasing power parity terms) is a little more than two times that of India, has announced a package that is 10 times bigger (as a share of its gross domestic product or GDP) than ours. Malaysia, whose per capita income is four times that of India, has announced a package that is 16 times bigger. Even poorer neighbour Pakistan has a much larger covid-19 response package (as share of its GDP) compared to India.
How does India launch a relief programme at scale without compromising macroeconomic fundamentals?
One approach could be to have a generous, but provisional aid programme, which is unconditional and universal. Think of it as a universal basic income, but one that is subject to a rollback when normalcy returns. We can call this an EBI (emergency basic income).
However, without resorting to some off-budget borrowings, it may not be possible for the Union government to fund such a programme.
Even if the government cuts back on some non-essential expenditures (establishment costs, for instance) and pools funds for certain welfare schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme for an EBI, it may still not be enough to fund a generous EBI, suggests an analysis of budget documents.
But extraordinary times call for extraordinary measures. Like other countries, India too could explore unconventional options, such as a special purpose vehicle, to fund this programme as long as the Great Lockdown lasts.
Such a programme with a fixed and transparent sunset clause (linked to new infections falling beyond a certain level, or economic growth rising above a certain threshold) can inspire the confidence of both ordinary citizens and bond markets, and help resolve the trade-off between lives and livelihoods that the country is now staring at. It would also be possible to ramp up or ramp down the quantum of aid at any place or time, depending on the stringency of lockdown measures.
Implementing EBI will be the harder challenge compared to funding it. Although almost everybody has a unique ID by now (Aadhaar), not everyone has a functional bank account or access to mobile or internet (for e-transfers).
The latest district-wise data on these parameters come from the National Family Health Survey for 2015-16. It showed that despite gains in access to bank accounts and mobile phones, there were still significant disparities across districts. Internet access was limited across most districts.
These numbers may have improved over the past few years but there would still be gaps in access to every corner of the country. Hence, EBI must also include an in-kind transfer component. The ratio of cash to in-kind transfers is something that is best left for states to decide. The Centre’s role should be to enable funding for this programme so that states can focus on fixing implementation glitches rather than having to worry about finances at a time when their resources are already stretched.
The costs of inaction are growing with every passing day.
This is the concluding part of a 10-part series on India’s budget priorities.
