Humbug or Realism: How resolute is Central Government in reviving the economy

By Praveen K Singh

New Delhi: The imposing stimulus package of Rs 20 lakh crore is the largest so far among developing countries, announced by the Central Government to revive the country’s economy, which has been severely hit by the lockdown. The announcement of massive package and then thread baring by the Finance Minister Nirmala Sitharaman in announcing new financial incentives on top of the previously announced packages for a combined stimulus of Rs 20 lakh crore (USD 260 billion).

But, now the solemn question is that is the government’s stimulus package at Rs 20 lakh crore, is a real one?

Economic experts believe that as the government makes the rolling out of measures in that direction there can or cannot be an actual revival in the already downward economy.

Some also believe that the boost address not just immediate relief for the lockdown- and pandemic-stricken economy but also reversal of the slowdown that had preceded Covid-19.

Again, the big question is – Can it be possible for the country to put forward reprieve to the nearly 6.4 crore production units, of which only about one crore are registered under the goods and services tax (GST) and, having kept these alive, offer them a life more vigorous than survival on a ventilator?

REASSURANCE TO MARKETS

On the international front, the steps taken are certainly impressive. The combined package works out to roughly 10 per cent of the GDP, making it among the most substantial in the world after the financial packages announced by the US, which is 13 per cent of its GDP, and by Japan, which is over 21 per cent of its GDP.

According to Associate Economic Affairs Officer, Economic Analysis and Policy Division, Department of Economic and Social Affairs (EAPD/UN DESA) Julian Slotman, India’s stimulus package is ‘impressive’ and ‘seems to be of a magnitude that will help to reassure markets and to boost domestic consumption. But at the same time when people are simply not able to spend, you cannot expect the economic growth to suddenly magically re-appear.’

Praising the government’s effort for implementing a strict lockdown while the number of COVID19 cases was relatively low, he said at some point it will be inevitable to gradually ease the restrictions but warned that could result in infections increasing in the country. “Fortunately in India, the Central Government acted very decisively in implementing the national lockdown” when the number of virus cases was relatively low and “it seems to have slowed the spread of the disease somewhat,” he said.

“The decisive containment measures are absolutely critically necessary and a strong lockdown is critical in India,” he said, adding that the duration of the lockdown has to also be economically feasible. It is putting tremendous pressure on the Indian economy and of course disproportionately hurting the people that are the most vulnerable and poor.” He said that in India, priority must be given to reduce uncertainty first so that people can eventually go out and spend again.

He urged the Indian government to exercise maximum caution in easing the lockdown, saying the country should “not hasten anything unnecessarily. There are ways to gradually lift restrictions,” he said.

Meanwhile, the UN on Wednesday slashed India’s projected GDP growth rate to 1.2 per cent in 2020-21 as the COVID19 pandemic ravages the global economy.

In the WESP report update, the UN DESA said that global GDP is forecast to contract sharply by 3.2 per cent as the COVID-19 pandemic paralyses the world, sharply restricting economic activities, increasing uncertainties and unleashing a recession unseen since the Great Depression.

“Cumulatively, the world economy is expected to lose nearly USD 8.5 trillion in output in 2020 and 2021, nearly wiping out the cumulative output gains of the previous four years,” an expert opines.

POLITICAL GIMMICK

Experts believe that the country can stage a relatively rapid recovery, not merely despite, but aided by, a floundering global economy. India runs a current account deficit and growth does not depend critically on exports. Energy, other commodities, machine goods, planes, ships, entire companies and technology can be fished out cheap from a world in a slump.

Capital will be cheap, too, if India can minimise the risk that accompanies its deployment in India. What India needs to realise this possibility into material reality is bold politics. The economics is straightforward enough. Without political courage, the stimulus would flow down the Ganga, joining human and industrial waste.

DISILLUSIONED INDUSTRY CHAMBERS

As some the office bearers of the industry chambers have welcomed the PM’s move in announcing the economic package, let us understand as how these chambers operate.

As we all are familiar with it how in today’s scenario commoners are busy in their struggle for bread and butter as the economic conditions have been like this for long time now.

Most industry chambers are driven by two-three key business tycoons who work with government to make most of policy benefits by regularly influencing for policy reforms and building up of industry friendly policy norms. On the contrary, they act as cheerleader for the government. Government uses them also and it’s symbiotic relation.

Now, how government helps their cronies. They tweak policies. And how is that done? Once some businessman suggests a policy change, government cannot instantly oblige.

The government first completes all formalities and procedures to ensure on paper nobody finds fault. So, the government asks its cronies to get the proposal routed through an industry chamber. This way, favours are legitimised. In a corresponding manner, public opinion is created through media. The latest example is UP government’s junking of labour laws. According to IT veteran and illustrious industrialist Narayan Murthy, he propounded about people putting more hours of work. Industry bodies in a parallel way pitched for it and then the policy decision was taken. So, industry chamber would rarely go against government. In private, most business people will say note-ban and faulty GST continue to hurt them but most of industry bodies would call it independent India’s biggest reforms.

AT A SNAIL PACE

Earlier India’s economic growth forecasted to slowdown to 1.2 per cent in the current fiscal, a further deterioration from the already slowed growth of 4.1 per cent in 2019. India, which grew at 6.8 per cent in fiscal year 2018, is forecast to recover and clock a 5.5 per cent growth rate in 2021. The Economic Survey, released a day before Finance Minister Nirmala Sitharaman on February 1, had projected a GDP growth of 6-6.5 per cent, up from 5 per cent estimate for 2019-20. “The national lockdown in India, for example, is expected to depress economic growth to just 1.2 per cent, much lower than the already disappointing growth in 2019,” the report said.

Despite the considerably slowed growth rate of 1.2 per cent, India is still the second fastest-growing major economy in the world after China.

According to estimates in the report, India and China are the only two economies in the world that are not projected to shrink in 2020 even though their growth rates slow down considerably. While India could clock a 1.2 per cent GDP growth, China is estimated to record a 1.7 per cent growth rate.

All other economies in the world, including the US (-4.8 per cent), Japan (-4.2 per cent), European Union (-5.5 per cent) and the United Kingdom (-5.4 per cent) are projected to shrink this year.

REBUILDING THE ECONOMY

According to Reserve Band of India Director S Gurumurthy, a strong case for one-time restructuring of loans to enable banks to lend to businesses hit by the crisis due to coronavirus outbreak.

The swadeshi ideologue also favoured monetisation of deficit by the Reserve Bank saying it was a better option than overseas funds.

The banks got into trouble by overlending money during 2004-2009 and now they are getting the economy into trouble by not lending money, he said, attributing the problem to wrong prudential norms.

Gurumurthy further says that out of Rs 11 lakh crore of deposits, the banks have deployed as much as Rs 6 lakh crore in Reserve Bank of India (RBI).

“The banks got in trouble by overlending money in 2004 to 2009 and they are getting into trouble by not lending the money. When economy needs the money; bank has money; bank does not lend the money because of the wrong prudential norms we are following,” says Gurumurthy.

He points out that 80 per cent of borrowers have been disqualified to borrow and the banks are unable to lend.

“I think the RBI and the government should (sit) together and work out a model by which all the people who have been declared as NPA, provided their companies, their businesses are viable, they should be having one-time restructuring plan without which the way we want to come out of COVID-19, we will not be able to out easily”.

Gurumurthy further explains that the world is going on a protective mode in the wake of the COVID-19 shock. “I am happy that some people like Dr C Rangarajan (former RBI Governor) and others are now saying that we should monetise our deficit. This is very important because the nation standing on its own strength will create money to manage its issues rather than expecting some money will come from outside to pay this out,” he says.

Recently, former RBI Governor Raghuram Rajan has also suggested that the government should go in for monetisation and higher fiscal deficit in a ‘measured’ way to protect the health of the economy in these abnormal times.

Monetisation, which is loosely referred to the printing of currency by the Reserve Bank, need not be a constraint on government spending, Rajan had said in a blog, adding, “a government should be concerned about protecting the health of the economy and should spend what is needed.”

The time will prove that the Central Government’s efforts are really a concrete one or just a farce. Let the economy takes it shape based on its natural progression and government’s stimulus packages in this hard times of Coved19, the global pandemic.