Restarting the economy

The first tranche of the stimulus package focuses on liquidity

Prime Minister Narendra Modi’s address to the nation on Tuesday night made an eloquent case for what he called “self-reliance”, which raised some concern that in the midst of the crisis caused by the spread of Covid-19, India may be showing signs of turning towards an autarkic view of the economy. That concern was allayed by Finance Minister Nirmala Sitharaman a day later. Self-reliance, she insisted, was not about isolating India globally, but building an integrated India. The economic package the finance minister has begun to announce will hopefully live up to that assurance. It is good that the government is showing itself to be responsive and is seeking to undo the damage caused by the pandemic. 

While Wednesday’s package is worth Rs 5.96 trillion, it would have certainly been better if all measures were announced at one go, rather than intermittently. This would have let citizens, investors, and businesspeople know what they can expect once the decisions have been made and reduce the paralysing uncertainty that has set into the Indian economy. The measures announced by Ms Sitharaman on Wednesday were related largely to providing liquidity support to the various segments of the economy. Measures in the package were focused on micro, small, and medium enterprises (MSMEs) and non-banking financial companies, among others, making the best use of loan guarantees and the like. These will help in this climate of uncertainty.

Liquidity has been an issue for some of these sectors due to the general risk aversion in the system. There was a demand that the government should take some credit risk to restart that cycle. However, the degree to which the measures will help move the needle remains to be seen. Not all such interventions in the past have been successful. However, the bond markets will no doubt cheer the attempt to efficiently maximise the effect of scarce government revenue. On the other hand, economic actors looking for measures to support demand in the system are likely to be disappointed, though it is possible that such measures will be announced in the coming days. A proper assessment will be possible only then. 

Meanwhile, in the context of Ms Sitharaman’s statement that the government’s desire was not to isolate India, it is important to highlight that the sole aspect of Wednesday’s announcements that appeared to deal with global trade did not seem to support her claim. It was announced that global tenders for government procurement of less than Rs 200 crore would be ended. This has been done to help Indian businesses, particularly the MSMEs. But the losers include the taxpayer and consumers, who are denied the benefits of competition. Reform in government procurement was bought at a dear price in past decades, and should not be reversed permanently. It increases corruption and closes off foreign markets to Indian companies in turn. 

Overall, while the government has taken the hugely welcome first step, the fiscal implication of the overall plan is not yet clear. It is also likely that if some of the guarantees are invoked, the cost will not come in this fiscal year. The finance minister explicitly refused to be drawn into the fiscal implications, which will possibly be known after the entire package is announced. The package so far appears to aid in the basic survival of some enterprises. So the wait continues for the real measures that will facilitate a quantum jump.