Opinion | Our fiscal dose needs to be adequate for the task

As the country begins a phased withdrawal from its lockdown, extended for a fortnight with a maze of rules designed to ease curbs in various zones colour-coded by corona risk, it is time to accept that the odds of averting a covid contraction of the economy this year have also lengthened. We are in for the long haul, major uncertainty clouds the outlook, risks are hard to price, and our recovery in output will be slow. Given the intricacy of production networks and the complex easing of restrictions, one cannot count on a smooth run ahead. In such circumstances, the first sliding curve that the Centre should arrest and reverse is overall spending—by taking the onus onto itself. The need for fiscal stimulus is denied by very few, but suggestions have been aired to cap its size at ₹4.5 trillion, including what’s already declared. While there is no doubt that the government is strapped for cash, having overstretched itself before this crisis, India needs to go by what the situation warrants, rather than what our coffers “allow” this year. This would mean raising the funds and injecting the minimal dose needed for the job—at least twice that cap, by realistic estimates. An insufficient injection could leave us in a prolonged slump, from which recovery would be even harder to achieve.

In an interview with Mint, former deputy governor of the Reserve Bank of India Rakesh Mohan, an economist who has long had the economy’s pulse, emphasized the value of acting before it was too late. If we impart a stimulus worth 5% of gross domestic product (GDP)—or about ₹10 trillion—at this juncture, in his view, it would shorten the duration of the crisis and reduce the need for greater fiscal measures later. “Time is of the essence,” he said. Various industry associations have also made appeals for fiscal action. For businesses, the lockdown has meant choked inflows of cash, even as bills on wages and various overheads continue to be paid. Labour-law inflexibility has meant that workers must stay on the rolls, while power-load and other charges mount even though assembly lines are paralysed. Without compensation, the red ink of losses at the operational level of businesses could come to swamp India’s entire financial system. Despite bits of the bankruptcy code held in abeyance, the battered finances of firms could set off a tidal wave of insolvency.

What explains the Centre’s apparent ambivalence over a big-bang stimulus? That credit rating agencies based overseas might respond with a downgrade of our sovereign debt cannot be a credible deterrent. For one, it is not for analysts at such firms to determine a country’s policy. For another, if timely fiscal intervention stops an economic crash, then it would support India’s ability to repay loans in the future. Our debt burden may shoot up in the process of gathering funds for a fiscal booster shot, but not unmanageably so if it spurs a revival. Mohan cites India’s growth potential as a cause for optimism on this front. Expand the economy fast enough, and it lightens the national debt as a fraction of GDP. What some sceptics fear is that if reforms do not accompany the effort, and the State withdraws neither its extra spending nor its statist controls once the crisis is over, all of it will end badly. This anxiety does need to be allayed. Statism must not invade a market that was partially freed just three decades go. But right now, Keynesian state intervention is justified.