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India Resists Stimulus Model of the Developed Economies

COVID-19 forced the government of India to impose a lockdown which meant that most economic activities except the “essential” ones would cease. The impact on employment, in particular, has been profound. Questions also emerged on the post-Covid demand scenario and survival of firms (especially small ones). Therefore, with an eye on both sides of the pandemic, the Finance Minister announced a Rs 1.7 trillion (US $22 bn) economic package on 26th March aimed at supporting the most vulnerable economic groups and was a combination of modest cash transfers and free cereals and pulses for 800 million people for a period of three months. Additionally, it targeted the provident fund contributors in the organised sector whose monthly pay was less than Rs 15,000. The aim was to save the most vulnerable from starvation and help those at the bottom rung of the organised sector from defaulting in their provident fund contributions due to Covid-19.

Other world economies including Australia also announced large packages aimed largely at stimulating demand, helping businesses retain some of the workforce. The obvious fallout was that for the year 2020 fiscal rectitude would require relaxation. For India, the matter was slightly complicated. While some commentators argued for a similar package, others advocated restraint pointing out that as long as the lockdown continued, such packages would be ineffective and also the world financial markets would disfavour such policies which could lead to a flight of capital from India.

In contrast, Prime Minister Narendra Modi announced that the crisis created by the pandemic is an opportunity to transform the Indian economy into a selfreliant one (Atmanirbhar Bharat) and outlined the broad contours of the US $ 220 bn (10% of the GDP) package, the details which were left to the finance ministry to roll out. The focus of the first component was on MSMEs, NBFCs and liquidity. The second, focused on migrants, the street vendors, affordable housing and micro-credit. The third, catered to agriculture, fisheries and animal husbandry sectors. The fourth on mining (coal), power reform, airports, PSE restructuring and foreign direct investment (FDI) limits. And the fifth on rural employment guarantee schemes and insolvency postponement etc.

The self-reliant package takes into cognisance supply chains of India’s global trade and economic stability have been disrupted and needed an inclusive strategy where MSMEs and the informal sector replaced India’s new supply chain aided by institutions and very importantly the supply of credit from both conventional sources as well as new institutions. Agriculture too experienced its 1991 moment India has avoided sector-specific packages that generally create distortions or give widespread tax concessions that are rarely passed on to consumers (the start of liberalization) in the sense that farmers became free to sell their produce to anyone and the interstate barriers removed making India a single agricultural market. This aimed at a more efficient and dynamic agricultural sector with better supply chains, cold storage leading to price stability and higher agriculture incomes. Power reforms too, the basis of any robust industrial growth received attention in these announcements. The government has also been mindful of a social safety net in the Indian context and has focussed on rural employment guarantee schemes.

The bulk of the package were in the form of enhanced credit, with guarantees by the government considering reluctance of banks to advance credit—lifeline of most business enterprises. The government assumed the role of an enabler both in terms of laws that free up the economy especially for the marginalised segment, along with credit guarantees. It also committed to spending money for migrant labour and investing in rural infrastructure and development to stimulate economic growth.

Quite rightly, what the government has avoided is creating an artificial demand in a situation where because of the lockdown, supply would not be forthcoming. In this context it has rejected the economic stimulus model adopted by many developed economies. India has avoided sector-specific packages that generally create distortions or give widespread tax concessions that are rarely passed on to consumers.

The idea is to revive India’s growth story with agriculture initially as the driver, followed by the MSMEs before the rest of the economy joins in to take advantage of an India whose freer laws make it easy to do business and transform the Indian economy.

The authors is based at the Department of Economics, University of Jammu. The views expressed are personal.