Home >Opinion >Columns >Opinion | Our crisis response cannot use the US stimulus as a benchmark

It is extraordinary how big crises make Keynesians out of all of us. From the Left to the Right, the chorus we hear today is spend, lend and bend every piece of economic wisdom received from the past to get us out of the covid-19 mess. When there is mass hysteria and economic fear, the line between good politics and good economics blurs to the point of irrelevance.

At any other time, a 1.7 trillion fiscal package to help the needy (0.8% of India’s gross domestic product, or GDP) and monetary easing measures to the tune of another 3.2% of GDP would be seen as substantial responses to deal with the covid-19 pandemic and a short-term economic collapse. Not today. Former finance minister P. Chidambaram thinks the package should be of the order of 5-6 trillion at least. Former Reserve Bank of India governor C. Rangarajan, an economic conservative, says monetization of the fiscal deficit is all right now. We should worry about the consequences later, maybe next year. Economist and columnist Swaminathan Anklesaria Aiyar has called the package announced last week by finance minister Nirmala Sitharaman “peanuts". He says it should be tripled (to 5.1 trillion), and if that is not enough, it should be raised five-fold to put money in the hands of the poor.

When everyone is shooting in the dark, no number makes sense. The yardstick to judge whether India’s fiscal and monetary responses are adequate seems to be the scale set by the US, where a $2.2 trillion package has been agreed upon by its Congress and President Donald Trump. That’s 10% of current US GDP. If we set that as our benchmark, our stimulus will not seem excessive even if we spend 20 trillion to bail out the Indian economy.

But here’s the rub. When economists implicitly compare India’s efforts with those of the US, a huge “safe haven" economy where the government can endlessly issue domestic currency at super-low interest rates to the whole world to finance its deficits, they are essentially setting us up for failure. It is all right to urge binge spending when covid-19’s economic side-effects loom so large, but India cannot blind itself to the reality that every binge is followed by a hangover.

The point is this: There is certainly scope for providing more stimulus to the economy and helping the poor, maybe up to 5-6 trillion, which would be roughly 2.5% of GDP, but there is no case for a blank-cheque approach. When everyone is urging you to spend recklessly, politicians will happily take that advice in the short run. But none of the economists now calling for bigger and bigger packages will be around to take the blame when the economic consequences of hyper-spending come home to roost.

Additionally, even when we have 5-6 trillion as a stimulus-and-relief target limit, we should be thinking about (1) using it to deliver a bigger bang for the buck, (2) reforming areas in dire need, and (3) thinking of ways to finance this deficit without resorting to endless printing of currency .

First, the spending areas. If India is going to spend such large sums in 2020-21, we might as well spend it in the right places. As mentioned in this column two weeks ago, the primary focus of spending should be on a rural employment guarantee-type urban jobs scheme, some universal basic income support to all non-taxpayers, and across-the-board cuts in the goods and services tax, so that we are down to just three simple rates (5, 15, and 25%) in one fell swoop. Since small businesses will be gasping for cash flows, the monetary accommodation that this will involve means banks and non-bank finance companies will need capital support. The fiscal costs of these projects could be anywhere in the range of 3-4 trillion, including the 1.7 lakh crore package already announced. The 1 trillion that remains matters most, and would be best spent on enhancing health and education infrastructure, two areas that India has always underinvested in.

This brings us to the morning-after effect, especially if even the 5 trillion spent is not enough to get the economy out of a ditch. Any additional spend needs to be backed by new revenue sources, and there cannot be a better source than black money, apart from accelerated privatization of public sector companies and assets (land, pipelines, roads).

India needs to issue multiple tranches of near-zero-cost covid-19 bonds aimed at illegal hoards of black money held in India or abroad. These bonds could be of multiple types. One could be a plain-vanilla, no-questions-asked, 10-year zero-coupon bond of 1 lakh sold at 1.3 lakh, which implies an in-built levy (for the laundry opportunity). Other bonds, such as perpetual rupee-denominated instruments carrying 1-2% interest, and 20- or 30-year paper carrying 0.1% interest, can be offered to any person ready to invest through inward remittances of dollars or funds obtained through domestic sources.

The government must stop seeing black money merely as a moral issue. Much of its accumulation is related to our high-cost electoral system, and a perverse system of incentives in the past which made evasion a better option than paying taxes. The Centre has a historic opportunity to correct both.

R. Jagannathan is editorial director, ‘Swarajya’ magazine

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