Opinion | Has the government been much too cautious in providing relief?4 min read . Updated: 19 May 2020, 12:22 AM IST
It has tried to pull off a high-wire balancing act by initiating reforms while keeping expenses in check
Justice Learned Hand is reported to have said once, one does not always have to side with the majority opinion because, by sheer definition, there are many others to voice it. Why am I recalling it now? India’s government has finished announcing its much-awaited economic revival package. Most commentaries take the view that it has not provided adequate support. You can read an alternative perspective here.
The government has tried to do a high-wire balancing act. The conclusion that it has done too little is not entirely true, since the full arithmetic is subject to assumptions, especially with the 100% guarantee for micro, small and medium enterprise (MSME) loans. If the guarantee were to be offered by Credit Guarantee Trusts, they would need to be capitalized, and that would be an explicit commitment. That apart, it is true that the Centre has erred on the side of caution. But no one should be fully certain that it has therefore made a big mistake. We simply do not know.
We express, often loosely, the view that politicians and bureaucrats do not think beyond the short-term, and that they lack long-term vision. That may be true, but it is also true that they work against tremendous odds, especially in situations like this. Second, if they can be wrong, so can we.
In the Indian context, I remember reading a commentary about how the Golden Quadrilateral project would be a disaster. It was a spectacular success. I remember reading, and I wrote too, that Resurgent India Bonds, issued in 1998 or thereabout, would be a failure as they were subject to exchange- and interest-rate risks. As it turned out, the government came out smelling of roses.
In the case of the covid economic package, ironically, the government has displayed vision, kept the medium to long term in view and has used the crisis to usher in some long-pending and much needed reforms, instead of focusing too hard on short-term palliatives.
One, the redefinition of criteria for MSMEs to include the book value of investment (now enhanced) and sales turnover removes a disincentive for their growth. This is transformational and its impact could last decades.
Two, farmers are being empowered to sell their produce to whomsoever they want at market prices. This empowerment is true farmer emancipation. As a consequence, down the road, the government may be able to remove the dysfunctional and often counterproductive supply of free electricity to farmers and end the exemption of farm income from income tax. That would truly integrate the Indian farming community into the economic mainstream.
In the context of immediate support to the economy, the government has conserved some firepower, just in case the pandemic does not go away in six months or so. This is prudent. Also, let us take a moment to imagine a counterfactual. If the Centre had splurged and the Reserve Bank of India (RBI) had to finance its spending, the bond market might have reacted badly, and the rise in bond yields may have negated much of the stimulus. Which analyst can offer a guarantee that it would not have?
Both the Union and state governments now have the option of increasing their borrowings by 2% of gross domestic product (GDP) each . In total, this provision adds up to about 4% of India’s GDP of around ₹210 trillion. Technically, some may not count this as a stimulus because the enhanced borrowing limits of states might just be sufficient to compensate for their lost revenues. But, that is a quibble, because if these lost revenues are not replaced, they would have to curb their spending. Now, to the extent that they avail of additional borrowings, governments would not have to crimp expenditure that boosts economic activity.
It is also important to bear in mind that some short-term measures that other countries have announced have had unintended negative consequences. In the US, the unemployment benefits announced in the wake of the pandemic are seen to be incentivizing the jobless to stay jobless. Many are making more than what they made when they were employed (Many Americans Are Getting More Money From Unemployment Than They Were From Their Jobs, 15 May 2020, fivethirtyeight.com). That will have serious consequences for productivity, output and inflation in the years ahead.
Now that India has announced its covid package, the focus of governance should be on its immediate implementation. Instructions should be clearly worded, progress should be monitored, and reports issued to the public. That would enhance policy and governance credibility and boost sentiment, which in itself could act as a stimulus.
Amid such uncertainty, neither the government nor commentators can be sure that they got it right. Lots of luck and external factors need to go their way for any of them to say “I told you so" a few years down the line.
In 1909, four years after the Wright Brothers had successfully tested their flying contraption, the Washington Post wrote: “There will never be such a thing as commercial aerial freighters. Freight will continue to drag its slow weight across the patient earth." The first cargo plane took off five months later.
V. Anantha Nageswaran is member of the Economic Advisory Council to the Prime Minister. These are the author’s personal views.