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Business News/ Opinion / Columns/  Opinion | Let’s fatten the spending curve to flatten the corona curve
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Opinion | Let’s fatten the spending curve to flatten the corona curve

We must spend now to save lives rather than aim for future stability that may not even materialize

hoto: Aniruddha Chowdhury/MintPremium
hoto: Aniruddha Chowdhury/Mint

The Reserve Bank of India (RBI) has, in a departure from its customary reticence, chosen to indulge in a bit of metaphor-speak. Its April Monetary Policy Report, which refrains from providing the usual guidance, introduces a rather grim note: “Covid-19 hangs over the future, like a spectre."

As this dark shadow spreads its deathly pall across the country, some accepted wisdom and doctrines will need re-examining. As the name of this column suggests, this is a generalized state of disequilibrium, mankind’s greatest challenge in the past century. This gives rise to multiple moral dilemmas, generating as many policy conflicts. It also needs new working templates.

First, the balance of power between the Centre and states should be recast, especially in sharing the central tax pool and other non-tax revenues. States are on the front line of the fight against covid-19 and need maximum financing support. Their burden is enormous, especially because healthcare is a state subject, and shrinking public healthcare budgets have amplified the infrastructure deficit. States have already allocated 1.9 trillion to counter the pandemic and the battle’s only just begun.

Therefore, it might be necessary to rethink the contours of fiscal federalism. Many suggestions have already been made on how to transfer additional resources to states, all of which focus on the Centre raising resources and passing them to states. This became necessary after markets wrested a higher risk premium on state loans, ironically at a time when RBI has been reducing interest rates. The other option is for RBI to further relax and liberalize its loan rules for states. There is another suggestion which merits heeding: Kerala finance minister T.M. Thomas Isaac has proposed state bonds that the central bank can subscribe to at low coupon rates.

Second, another crucial state subject needs the Centre’s unstinted cooperation: agriculture. The lockdown of mandis is preventing farmers from transporting and selling their bumper rabi harvest crops. This needs urgent intervention because large-scale crop procurement is one way of providing income support to farmers. More importantly, broken supply chains need patching up so that the farm sector has access to all the necessary inputs (seeds, fertilizers and credit) for kharif sowing, which is only a few weeks away. Coordinating this, plus ensuring social distancing during agricultural operations, will be a formidable task, given the mass reverse migration of the past few weeks.

A third option exists in the form of a nuclear button lying unutilized in RBI’s armoury: the Bank Rate. The central bank should reactivate this dormant instrument. Under Section 49 of the RBI Act, it can rediscount bills of exchange or commercial paper at the Bank Rate, currently at 4.65%. RBI’s Trade Receivables Discounting System platform allows bills discounting only for micro, small and medium enterprises, but this crisis requires the payments systems to remain seamless for everybody. Questions will be asked why now when this facility wasn’t utilized even during the 2008 financial crisis, or any time in the past 10-15 years, but that’s missing the point: this is a vastly different crisis. Central banks are lenders of last resort; with credit lines gummed up, counter-party limits frozen and banks turning credit-averse, RBI can use the Bank Rate when defaults threaten to upend the financial system. Technically, it need not press the button but just create the perception of its availability, like a safety net.

Implementing any suite of solutions will require confronting some old dilemmas, including the re-surfacing of a variant of the utilitarianism school, which defines an ethical policy action as one that promises the greatest good for the greatest number of people. There’s an inherent structural dilemma when applied to the current crisis: who decides what is the “greatest good", or what constitutes the “greatest number of people", or who gets left behind and why?

Some economists seem oblivious to this dilemma while cautioning the government against overspending to counter the covid shock to the economy and livelihoods. Their logic is that excess government spending will lead to future economic instability: higher inflation, higher interest rates, reduced funds for private sector growth, and adverse exchange rate outcomes.

They are not wrong, if you’re willing to ignore the erroneous argument of “crowded out" private sector borrowings because private sector investment demand has remained static for more than eight quarters. But it raises the same old question: At a time when millions of lives are at stake, who does this policy help? Some people, a great number of people, or all people? A policy that asks the government to curtail present spending to ensure imagined—and uncertain—future economic stability works to save only some lives, not all lives.

The scale of the unfolding human tragedy has impelled many more voices to speak out in favour of unrestrained government spending. Former RBI governor C. Rangarajan, who ended automatic monetization of deficits in the 1990s, is now championing “all means possible", even if it means monetization of excess borrowings. He identifies healthcare and livelihood support as priority expenditure areas, followed by support to industry for the revival of fractured supply chains. We should pay attention to him.

Rajrishi Singhal is consulting editor of Mint. His Twitter handle is @rajrishisinghal

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Published: 12 Apr 2020, 10:46 PM IST
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