A Diwali package to go with our revival spirit
2 min read 13 Nov 2020, 02:20 PM ISTThe final contours of India’s Atmanirbhar programme now appear in place. It bears only a slight Keynesian imprint and relief efforts have been combined with long-range policy shifts
PremiumThe government’s keenly-awaited third round of stimulus under its Atmanirbhar Bharat rubric took the form of a Diwali package two days before the festival. On Thursday, finance minister Nirmala Sitharaman announced a slew of measures aimed at stimulating our economy, which can now technically be said to be in a recession. By the central bank’s latest estimate, output contracted 8.6% in the second quarter of 2020-21, following an almost 24% shrinkage in the first. The current quarter was expected to catch up with last year’s level, but there was no getting away from the need of a fiscal boost. By way of spending, the Centre set aside extra funds to the tune of over ₹1 trillion for urban housing, fertilizer subsidies, rural employment and other initiatives. It revived an earlier provident-fund subsidy, giving it a two-year run, offered a few new tax concessions, and also expanded its backing of collateral-free loans, a scheme that made its debut in May, to cover 26 covid-stressed sectors identified by the K.V. Kamath panel for relief (plus healthcare). This programme was extended till 31 March, with its eligibility cap lifted and repayment period stretched to five years. With Wednesday’s extension of a production-linked incentive (PLI) scheme to 10 “champion" sectors also taken into account, it became harder to argue that the government was neglecting the heavy lifting needed for India to exit its economic rut.
As the Centre had made clear, its earlier packages were aimed mostly at distress relief, and thus had measures for the poor and small enterprises. For the latter, credit offerings were the chief form of aid, and given that it involved taking on contingent liabilities without an immediate outgo, it helped keep a lid on our national coffers. For aggregate demand to pick up, though, what was needed was a burst of spending that could send money rippling around the country. This was best done once corona curbs were eased and the economy embarked on a revival path, the Centre argued. That moment was judged to have arrived, it would seem. The latest package did have a tilt in that direction, especially in its housing sector outlay, but most of it still seemed likely to make its multiplier effect felt only with a lag. The urgency, though, may no longer be as acute as it was. If the central bank’s optimism on a possible return to growth this quarter achieves validity, then pressure on the government to spend more would ease, and it could claim some credit for not letting our fiscal deficit spin too far out of control.
Signals of a limited recovery have been in evidence, lately, and global analysts have reduced their estimates of the economic damage suffered by India this year. On a low base, next year’s growth could even look impressive. Yet, it might be many years before we can fully assess the Centre’s response to our covid crisis. Major reforms have been carried out in agriculture, for example, the impact of which may take long to show. Moreover, India’s new industrial promotion policy, with the PLI scheme as its highlight, is a five-year programme aimed at turning India into a global manufacturing hub. Its incentives, to be awarded on the basis of incremental sales linked to investments, have been welcomed by India Inc. It is not free of long-term risks. If market forces get distorted by it, capital could end up misallocated and our overall economic efficiency could dip. For now, though, we can look forward to the beginning of the end of one of our economy’s worst ever phases.
