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A file photo of FM Nirmala Sitharaman
A file photo of FM Nirmala Sitharaman

Opinion | The question of whether India's economic stimulus is adequate

Supply-side measures could be just as effective in boosting consumer demand as direct fiscal expenditure might have been

economic stimulus, Nirmala Sitharaman, fiscal stimulus, consumer demand, Shramik trains, Shramik passengers, Garib Kalyan package, Jan Dhan, indian economy, State disaster relief funding

The Union government has been accused of excessive fiscal conservatism by critics who see the fiscal stimulus as not boosting consumer demand sufficiently. That charge has to be assessed separately from the slow response to the desperate exodus of migrant workers from urban India. If the Shramik trains had been started two months earlier, during the first lockdown, disease transmission would have been more effectively contained. Today, there are estimates that one in four Shramik passengers is testing covid positive (I hope they are wrong). Two months ago, it would have been close to zero. If only the process had begun in March.

The fiscal conservatism charge arises because out of the 20.97 trillion aggregated across the Garib Kalyan package on 26 March and the five daily tranches announced over 13-17 May, the direct fiscal expenditure adds up to 2.14 trillion (a low estimate; it might be a touch more). I am staying with absolutes for now, because the gross domestic product (GDP) denominator will have to be settled (more on that below).

The Garib Kalyan package carried the highest “fiscal content", with two avenues of cash transfer and one in kind. There was 1,500 over three months to 204 million women holding Jan Dhan bank accounts; and an upfront transfer of 1,000 to 30 million recipients of old age, widow and disability pensions. There was also a front-loading (not an additionality) of the first instalment ( 2,000) due to 87 million farmers under the PM Kisan Yojana. The last, in particular, played a key role in ensuring completion of the rabi harvest followed by buoyant kharif sowing, both of which will help stem the fall in GDP growth this year.

In kind, there was the free matching additionality to foodgrain entitlements under the public distribution system (PDS), with a small supplement of free pulses, benefiting 800 million individuals, also for three months; and the free cooking gas under the Ujwala scheme, benefiting 83 million households.

Garib Kalyan also raised the daily wage under the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) to a little over 200 per day, with a potential reach to roughly 136 million job-card holding households. The corresponding enhancement of the budgetary provision for MNREGA by 40,000 crore was announced in the fifth tranche on 17 May. These transfer provisions were non-trivial in depth and coverage.

There was, however, a clear rural tilt to the Garib Kalyan provisions. Although there are urban Jan Dhan and social security beneficiaries, and roughly 178 million PDS recipients in the urban sector, many poor urban households get excluded for not satisfying documentary requirements. In any case, the free grain would not have helped pay the rent falling due at the end of March. Many single migrants would in the normal course have returned home by bus or train at this time of the year. All of them, families and single, were given no alternative but to begin a long walk home. The later waves of the exodus taking place now are of better skilled labourers, who were able to tide over March rent, but could not hold out much longer.

Back to the adequacy of the fiscal stimulus. It is wrong to imagine that direct fiscal expenditure is better at boosting consumer demand than supply-side restoration through credit flows of 3 trillion, collateral-free and guaranteed, for medium, small and micro enterprises, which carry no immediate fiscal outlay, but could later on. Both types of stimulus generate incomes from which consumer demand will flow.

The second criticism has been the absence of adequate fiscal assistance to states. Here again, states have been dealt a somewhat better hand than alleged. State disaster relief funding has been front-loaded, and tax devolution payments have been generously paid as per budget estimates of revenue (which will, of course, be adjusted down to actual receipts before the year closes). States have also been allowed to borrow an additional two percentage points of gross state domestic product, with conditions.

These conditions could have been configured in a better way for an immediate supply-side impact. Remember that we are clinging desperately to the supply resilience of agriculture to reduce the negative impact of the lockdown on GDP this year. In the whole commendable effort of Garib Kalyan to shore up farmer incomes and enable rabi-harvesting and kharif-sowing, there was a lamentable lack of attention to the marketing problem. The focus was on grain procurement, with no thought to producers of vegetables and other perishables. It was only state governments that could have arranged for the trucking of those vegetables to consumption centres and managed the elaborate links in that process.

An earmarked transfer to states just to enable marketing operations for perishable crops would have prevented the present unfolding disaster, of farmers dumping their crops, even as high prices reign in urban vegetable markets.

Finally, on the GDP denominator for converting the fiscal stimulus to a percentage figure. We continue to use 2 trillion as a marker of 1% of GDP, which optimistically assumes inflation will raise nominal GDP in 2020-21 to rough equivalence with that last year. By this measure, the additional borrowing intention declared by the Union government, to reach a total of 12 trillion, would raise the fiscal deficit to 6% of GDP. With state government borrowings added, it could add up to 10%. More than that may not be advisable at this juncture.

Indira Rajaraman is an economist

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