Indians yet to be born might look back at India’s strategy against Covid-19 and ask if we got the size and mix of our “drone drops” right, so to speak. Broadly, we need one set of actions to snuff out the virus through anti-epidemic measures, and another set to aid people and businesses with food and money via economic tools to sustain livelihoods. Right now, our resources are scarce, challenges steep and allocations short. Healthcare is crying out for vastly more than a snap grant of ₹15,000 crore. The government’s ₹1.7 trillion relief package for our 800 million poor is a balm too thinly spread. The Prime Minister’s donation fund will not add much. And our central bank’s ₹3.7 trillion-plus effort to flush credit around might not reach where it’s needed most to save jobs and small enterprises. India is under a full lockdown. With supply choked and demand gagged, the economy’s corona seizure could spell misery for months after the curbs are eased. Overall output is expected to shrink for at least a quarter. As for 2020-21, even a mild expansion would require us to quell the viral outbreak and contain its financial ravages. Clearly, we must go for broke. But the big spikey question is: How do we get the money for it?
The gulf between what the government earns and what it spends is already rather wide. Fiat money is a creation of the state, though, and can technically be printed and dropped around by a drone—or helicopter. This image of cash dispersal was made famous by a former chief of the US Federal Reserve who issued an apology on its behalf for not easing the flow of cash during the Great Depression. Today, it lends itself to the proposition that a government should spend well beyond its usual revenues and borrowings if it must. The central bank just has to create a lot of extra money and lend it to the Centre. Since estimates suggest India might need a fiscal stimulus of nearly 5% of gross domestic product (the US has gone for 10%), why not try the idea out? One answer is that if it’s overdone, it risks inflationary havoc ahead. In the West, money thrown about tends to inflate asset values, chiefly. But here, drone drops must cover mostly those who will shop rather than invest. Our economy is low on both income and capacity, and so an excessive surge of rupees could possibly send retail prices haywire, lower the currency’s value and even warp markets before inflation is finally tamed.
A big relief package, however, could yet be funded in more judicious ways. For a start, the Union budget for next year could be refocused on resolving the Covid crisis. Funds assigned for other purposes should be diverted to the health sector. Meanwhile, several hard-hit sectors of business would need major bailouts, not just aviation and hospitality. Plus, direct transfers of cash ought to be enlarged and extended to every adult, with no questions asked (and the well-off urged to opt out). To pay for all this, an earlier plan to issue sovereign bonds abroad in dollars and euros should be revived and upscaled hugely, even if a weaker rupee over time threatens to offset the low rates of interest paid on these. If that does not suffice, then the rest of the fiscal gap could be monetized as a last resort. This would be a gamble, no doubt, as inflation could prove costly later. But the odds of India’s success will only lengthen as more time is lost. Whatever has to be done must be done fast.
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