Size matters. Or does it? It dep­ends on which side of the fence you are on. Ask the government, and it contends that it has unleashed a cocktail-combination of highly-effective economic drugs to ensure immediate and efficient recovery. Talk to the opposition, and it claims that the grandiose policy package is a case of too little, too late. The fact is that none of them stand on firm ground because this is the worst crisis in a century. None of us have seen something like this before; hopefully, none of us will in the future.

One of the points of contention is the quantum of money that the policy makers say that they have injected to kick-start the economy—Rs 2,000,000 crore, the fifth largest among all the nations. The second point of debate is the mix. Is it a judicious blend that has enough stimuli to drive up the knocked-out supply of goods and services, and pull back consumption that’s down in the dumps? Finally, there is the question of timing—is this the right time to push through big-bang reforms down the dying system’s throat?

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Contradictions prevail. The government opened the pipeline to help businesses to access capital easily. This works only if the banks are willing to part with money, and the borrowers are ready to use it. The Centre hiked the expenditure on income schemes like MNREGA. States forced workers to accept conditions that include lower pays without bonuses and overtime. This is in a situation of overwhelming unemployment. Reforms yield desired results during boom times; they lead to more pain during crises.

Is Size of Stimuli Suspect?

One has to remember that the COVID-19 crisis is more expansive, vast, and unknown than the previous ones. “It is deadlier and more unpredictable. The hit to growth (across economies, including India) will be higher,” feels Dharmakriti Joshi, chief economist, CRISIL. Pronab Sen, programme director, IGC India Programme, adds, “India has lost 8 per cent of her GDP, compared to a year ago.” At best, the country’s growth may be 2-3 per cent in 2020, at worst zero or negative. Like other nations, India is caught in a vicious economic whirlpool.

“I haven’t heard anyone say Wow! When somebody says we’re going to put Rs 20 lakh crore, I would like to believe that at least some part of it would be real and effective but I haven’t heard from even those who have a better comprehension.“

Rajiv Bajaj, MD & CEO, Bajaj Auto

Therefore, what was required was a response as large as the predicted imp­act. Instead, according to Sen, what we got was something that only addressed “roughly half” of the exp­ected downturn. He explains that a fair amount of (economic) damage will be left within the system. Sebastian Morris of IIM-A is more specific. The actual expenditure env­isaged by the government is Rs 92,000 crore, of which Rs 54,000 crore will boost private consumption, and the rest will contribute to public investment and spending.

To understand the contentions of Sen and Morris, one needs to differentiate between, and dissect, the two main components of the package. A portion of it is to indirectly help businesses—for example, through loans without collateral to enable them to res­­­tart operations. This is supply-side economics. It has no consequences on demand. People who have lost jobs or seen their salaries contract don’t have the money to buy. It was, thus, imperative to put money in their hands. And this hasn’t been countered adequately.

For the government, it was a tricky manoeuvre, a delicate balancing-act given the constraints. The paralysis in economic activity for 1-2 months implies that its revenues will take a huge hit. Given the fact that it hiked the fiscal deficit in the last Budget to cope with the then ongoing slowdown provides little elbow-room to spend higher amounts, and allow the deficit to go out of hand. The government cannot borrow endlessly, or print more notes. These can lead to both predictable and unintended outcomes.

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One of them is the fear of a downgrade, both of the nation’s credit rating, as well as those of the Indian companies. Since the Financial Crisis of 2008, when the global rating agencies were severely criticised for failure to predict it, these institutions have become nervous. They are willing to downgrade any country at the first signs of trouble. The medium term implications of a lower rating can be a ruthless and ongoing negative effect on the economy. India cannot afford to take such risks at this juncture.

Photograph by Jitender Gupta

Sparks to Spur Supply

“The additional borrowing and additional expenditure (over and above the expenditure budget of Rs 30,42,230 crore) will be the true measure of the fiscal stimulus.”

P. Chidambaram, Former finance minister

A large chunk of the revival package­—some say a glaring majority of it—is to benefit companies, especially the small and medium (MSMEs) ones. It seems that the government feels that if it gives enough indirect incentives to such units, they can be propelled into action, and pull the economy out of the present malaise. Such benefits include easy loans, tremendous flexibility in labour laws—Uttar Pradesh suspended all of them, except three—ease of doing business, prompt payments, and potential orders.

For instance, only an Indian company can now bid for procurement tenders up to Rs 200 crore each issued by public sector firms. This can lead to more business for the MSMEs. However, the definition of an Indian company is unclear. Will it include purely “desi’ entrepreneurs with majority Indian stakes, or also foreign MNCs that have set up fully-owned and majority-owned Indian subsidiaries? Similarly, the package included an assurance of prompt payments of pending dues to ease cash-flows of the MSMEs.

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Experts question the efficacy of the loan windows given to the MSMEs. “The stimulus is largely through credit guarantee scheme of Rs 300,000 crore. This is contingent liability, and there is no infusion of money. This does not ensure the desired multiplier effect, as is the case with direct investment (transfer),” explains Vikas Srivastava of IIM-K. One isn’t sure if the banks, plagued with bad loans and write-offs, will offer credit. There is a concern that firms may use the money foolishly, resulting in more bad loans in the future.

“About half of the package covers fiscal measures that had previously been announced and also include the estimated economic impact of monetary stimulus from the RBI.”

Credit Rating Fitch Solutions

Subhash Garg, the former central finance secretary, estimates that the government promised to provide such loans to 4.5 million MSMEs. The figure is only a small percentage of 75 million units in this sector. Politics, crony capitalism, and favouritism may play a role in the disbursement of the funds. Instead of firms, which are in a position to turn around and become profitable, the money may go to those that use it inefficiently, or siphon it off. In a crisis like this one, there may be no checks and balances.

To ease labour shortages, especially due to reverse migration of workers from the uncertainty of their urban workplaces to the security and safety of villages, several states drastically changed their laws. These measures will provide flexibility to factory owners to hire-and-fire workers, hike working hours by 50 per cent, and limit expenses under many heads. The states feel that these will increase foreign investment, and incentivise ent­repreneurs to open their shutters, and enhance production.

Clearly, the flip side is that the new guidelines, or the lack of them, will accelerate reverse migration, and dissuade workers, especially the migrants, to come back. They may rather seek employment in areas closer to their homes, or opt for inc­ome-generating schemes like MNREGA, whose budget was recently hiked by the Centre as a part of its rec­overy package. If this happens, it will derail the economy for a longer period. Instead of a V-shape upturn, one may witness a dreaded U-shape one.

Photograph by Apoorva Salkade

Cures to Catapult Consumption

“The stage is set to rebuild industry and economy. Listening to the measures gave us confidence, our government is ready and will lead from the front.”

Sangita Reddy, FICCI President

Given the nature of the COVID-19 crisis, the dire need of the hour was to push demand. The loss of millions of jobs, and salary reductions implied that the government had to put more money in the pockets of both urban and rural consumers. This could be in the form of direct money transfer to the poor, aid in the form of free and cheap food items, lower across-the-board taxes to hike disposable incomes, and a fillip to welfare schemes that generate incomes. The Centre has done all this. Economists feel it hasn’t done enough.

Expenditure on MNREGA, which was reduced in this year’s Budget, was recently hiked by Rs 40,000 crore. In addition, the poor and migrant workers were promised additional allocation of free grains and pulses to prevent starvation. Economists think that one of key problems with MNREGA was the delays in payments. If they persist, the higher allocation will lose its relevance because the people need the money now, rather than a month or two later. The free monthly ration is inadequate to feed a typical family.

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The problem lies with the meagre transfer of cash into the bank accounts of the suffering sections. “There is a very small fiscal component (in the package) that is directly contributed from the central exchequer. The fiscal (direct) stimulus is much less than what was given during the 2008 crisis,” says D.K. Srivastava, chief policy advisor, EY India. Individuals and companies received no major tax concessions, except a delay in postponement of taxes, and a reduction in tax deducted at source, which is a temporary relief.

“MSMEs are India’s backbone. Liquidity and credit guarantees for banks and NBFCs will help remove hesitation in lending. Friction-free implementation can slowly convert adversity to advantage.”

Kunal Bahl, Co-founder and CEO of Snapdeal

Let’s take a look at what was done for the farm sector. Y. K. Alagh, a ren­owned economist, points out that most decisions related to the older schemes and policies, like the farmer producer organisation. “They will lead to more benefits only if the government puts money into them. Neither is there real funding for such schemes, nor is it under a rule-based system,” he adds. In effect, in the recent past, there were huge mismatches between budget allocations for agriculture, and actual annual spending.  

One of the ways to do so was to give more leeway to the states to hike their expenditure. While the Centre has rel­ied on the states to initiate pro-act­ive steps, it was done without giving them the required resources. Although the states were allowed to borrow more, it was to a limited ext­ent, and one isn’t sure how the amount will be utilised, says Joshi. Sen contends that the states “front-ended their borrowings”, which will lead to a crunch later on. The Centre needs to be the chief financier so that the states can deliver.

Reluctant Reforms and Reformers

Reforms are best done when the economy is in a good shape. Unfortunately, in India, as in other countries, they are pursued during extreme crises. In 1991, they were kicked off by a balance-of-payment emergency. In the early 2000s, they were forced by US sanctions due to India’s nuclear tests in 1998. Today, COVID-19 has encouraged the regime to announce long-delayed structural reforms. Morris says that while the policies are in the “right direction”, they will not work “due to heightened global and domestic uncertainty”.

“This is the size of support required, given the state of the economy…It is important this 10% be truly in addition to the already committed government expenditure and interventions, and is not a reclassification.”

Azim Premji, Founder, Wipro

Theoretically, the moves to allow farmers to “sell their produce freely” through deregulation of the trade in several commodities, is laudable. But these may benefit the farmers over the next few years. In the short run, they are unable to trade, says Alagh. He adds that the trade channels are “clogged” and there is “lack of clarity” about freight movement. The Centre and states don’t have the plans to prevent the hijacking of the freer distribution routes by rich famers, middlemen, and large companies.

Instead of the big bang reforms, which could have come later once the economy perked up a bit, there was a need to introduce smaller changes and alterations to tackle the immediate needs. For example, local and regional economic linkages should have received priority. One of the major problems of partial lockdown today, and the division of the country into red, orange and green zones, is the mess they have created in India Inc. Business are unable to cope with the confusion among the authorities. “My factory is in the green zone, distributors are in the orange one, and warehouses are in the red zone. I am ess­entially immobilised. I cannot commence operations,” complains a leading Delhi-based businessman. The situation is the same for scores of others. In addition, the factories may be in the green zones, but the labour has to come from red and orange ones. Clearly, there was a need to look at the opening up of the lockdown in a more comprehensive manner from the business point of view.

Going forward, suggests EY’s Srivastava, the government needs to learn its lessons. This may be an opportune time to locate new industries in specific, well-thought-out rural-urban corridors so that businesses can use locally-available resources like labour, and logistics. The overall industrial policy has to be re-examined in this context. COVID-19 has impacted us in myriad ways that were both unexpected and unbelievable. It’s high time that the nation moves ahead in ways that can lead to growth, and protect the economy from similar crises at a later date. The future, as they say, is here.


The Growth Stimulus

Total Package

  • Rs 2,000,000 crore, or 10% of GDP, announced in five tranches, which included earlier reliefs of nearly Rs 900,000 crore

First Tranche

  • Almost Rs 600,000 crore of emergency credit facilities for business; subordinate debt  for stressed MSMEs; partial guarantee and special liquidity schemes; cut in PF rates

Second Tranche

  • Rs 310,000 crore that included free food grain to migrant workers for two months, credit facility for street vendors, more credit through Kisan Credit Cards, emergency working capital, and interest subvention of Mudra Shishu Loan

Third Tranche

  • Rs 150,000 crore for farm and food processing activities, and infrastructure to improve trading in products of animal husbandry, fisheries, and bee-keeping

Fourth & Fifth Tranche

  • Rs 48,100 crore to fund viability gap, additional Rs 40,000 crore to boost rural employment
  • Reforms included higher FDI  limits in defence, entry of private players in space sector, change in definition of MSMEs to hike their investment limits, guidelines for ease of doing business, reduction in tax deducted at source, and sale of public sector units


Corona in Wonderland # 1

“What in the world is happening?

Ah, that’s a great puzzle.” In today’s world, everyone is mystified by what hit us, and how. Worse, no one knows the way out.

Corona in Wonderland #2

“If you want to get somewhere else, you must run at least twice fast as that.”

It doesn’t matter if the stimulus size is Rs 2,000,000 crore. We need another Rs 800,000 crore in direct spending.

Corona in Wonderland # 3

“I don’t think….” “Then you should not talk.”

You cannot think that strict labour laws will get workers to produce more. And talk about higher MNREGA spending to keep them in villages.

Corona in Wonderland # 4

“It’s no use going back to yesterday, because I was a different person then.”

One cannot compare 2008 with 2020. Those were different times with different heads of states, and state of the economy

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