The stimulus that wasn't

Finance Minister Nirmala Sitharaman strove hard over five days ending May 17 to present what was called a Rs 20-trillion stimulus to the coronavirus-hit economy, after Prime Minister Narendra Modi announced it on May 12.  It was at best a hastily sketched road map for a post-Covid de-globalised India and of a piece with her last Budget: A laboured hodgepodge of tried and often failed schemes.  But it certainly wasn’t a stimulus package as is commonly understood, nor did it add up to Rs 20 trillion as expenditure to the exchequer.

She paused, repeated herself and pointed to crowded graphics. E P Unny’s caption to his pocket cartoon in The Indian Express on May 14 was a pithy reaction.  It read, “Micro, small, medium… tedium.”  The stock market, speaking through what matters most, the pocket book, was even more explicit.  The Sensex opened 1,500 points higher on the morning of May 13, euphoric after Mr Modi’s announcement, but settled down to a 600-point rise by the end of the trading day, before the finance minister’s press conference.  It has tanked 2,000 points since then.

It would be a reasonable conjecture to term Mr Modi’s speech as a rushed response to criticisms of the delay in government’s economic response to the havoc following the pandemic and the long lockdown. Most newspapers, including this one, had carried on May 12 strongly-worded editorials and opinion pieces about the inexplicable wait for government action. So the stimulus message was tagged on to what was meant to be an exhortation to self-reliance, glossing over the near impossibility of merging the immediate requirement of relief for a huge population and a questionable strategy for the future trajectory of a large economy aspiring to superstardom.

The bulk of Ms Sitharaman’s proposals addressed supply problems, with only occasional and cursory references to demand, mostly as an afterthought. One of the two main components of the package was the micro, small and medium enterprises’ (MSME) investment and working capital requirements with a revised and enlarged definition of such enterprises.  Government guarantees to bank credit worth Rs 3 trillion and moratoriums were on offer. Experiences of the Mudra loans and the much-vaunted “loan-in-59-minutes” suggest that the credit actually availed of would be far smaller, due to the roadblocks caused by the fine print and conservative bankers and administrators. One oft-heard response of bankers compelled to offer collateral-free was: “You want a loan of Rs 1 crore?  No problem, just give us a fixed deposit of Rs 1 crore!”  The irony is not lost on hapless entrepreneurs, who would not take such schemes at face value!  The other main component was similar help to agriculture, with the addition of a small interest subvention.  The lending would be through banks and co-operative credit institutions; some of which is already underway.

The other parts comprised an interminable wish-list of reforms in all possible sectors, including defence production and space ventures, often heard before and staple of many a budget speech, but seldom carried to fruition.  All this sounded like a blueprint for renovating a house engulfed by flames, with no idea how to put them out. It also appeared to be guided by a desire to take maximum credit for value of the package with very little burden on the severely strained government resources.  Some generous estimates put the possible price tag at Rs 2 trillion, barely a tenth of what we were supposed to believe.

This brings us to the main criticism of this supposed stimulus: It does not explicitly reckon with the principal impact of the lockdown, which has been the virtual collapse of consumer demand for anything other than bare necessities. Garib kalyan yojana assistance addresses the food needs of the poorest, but reviving demand as a whole obviously requires putting money in consumers’ pockets, since discretionary spending has all but vanished.

The sharpest economist of the last 100 years, John Maynard Keynes, earned his entirely justifiable and well-earned claim to fame by helping pull out the economies of the western nations from a plight every bit as dire as what the world faces now, if not worse, the Great Depression of the 1930s.  He advised priming the pump through public consumption since private demand was hugely deficient.

That lesson holds today, nearly 90 years later. That is why most attempted stimuli, including that in the United States, have at their core giving money to consumers at large. And what does our package do?  It offers paltry sops to take home income (at most Rs 30 per month through reduced provident fund contributions) and a one to two percentage point cut in the tax deducted at source).  

Instead, suppose money was put in the hands of people, say around Rs 20,000 in the accounts of each of the 200 million poorest families in India in three or four instalments. That would be Rs 4 trillion, or 2 per cent of the GDP.  The actual additional amount would have been in fact lower, Rs 3.28 trillion or less, since 120 million farmer households are already assured of  Rs 6,000 each. The marginal propensity to consume being high among the poor, close to 0.9, the multiplier effect would result in a society-wide income of around Rs 200,000 for a Rs 20,000 stimulus. The venerable Azim Premji has compassionately and cogently suggested just such a plan (The Economic Times, May 16)

Such payments would have also meant a virtual initiation of universal basic income (UBI).  This writer firmly believes that UBI is an idea whose time has come in a world becoming increasingly more polarised between the haves and have-nots.  That would have been perhaps the single most potent reform the government could have undertaken.  That opportunity is now gone.  But not the problem.  I had titled my previous column on the subject “Waiting for Godot” (Business Standard, May 12).  A billion Indian Vladimirs and Estragons are still waiting.

The writer is an economist