Economic disruption caused by the corona crisis stems from both-demand side and supply side. So, the stimulus package announced was expected to address the issues on both sides. This article breaks downs the various elements of the package in demand-side as well as supply-side measures. We also know aggregate demand is not just consumption demand. So, this fact was also considered while deciding the demand-side measures.

Twin mantra of stimulus package

• 1) To ensure that human cost of the crisis is minimised, especially for those at the bottom of the pyramid.
• 2) To convert this crisis into an opportunity by implementing bold structural reforms.
• Such reforms will go beyond repairing the damage to the production capacities and enhance the overall supply response capabilities of the economy.

Impact on demand side as well as supply side

• The present crisis is far worse than both the Asian financial crisis of the late Nineties as well as the global financial crisis of 2008-09.
• It has seriously impacted both the supply and demand side of the economy.
• The government’s response has been to effectively address both these aspects.

Government’s four-fold response to address supply-side problems

1. Ensuring food security

• To ensure that the government declared agriculture and all related activities as essential services.
• This permitted the successful harvesting and efficient procurement of the critical Rabi crop.
• It also implied pumping in Rs 78,000 crore as new purchasing power in the hands of the farmers.

2. Preventing cash/liquidity crunch

• Preventing the pressing cash/liquidity crunch was necessary to avoid insolvencies and bankruptcies.
• An immediate moratorium was announced on their debt servicing obligations to commercial banks.
• This measure was reinforced for MSMEs, for whom an additional credit line of Rs 3 trillion without any fresh collateral was extended.
• MSMEs could also avail of new equity from the Rs 50,000 crore fund of funds and take advantage of the subsidiary debt facility announced by the FM.
• These measures provided succour to a large number of businesses, especially those in the services sectors like hospitality, entertainment and retail.
• The Rs 90,000 crore credit package made available to state discoms should also be included in this set of measures.
• It will prevent bankruptcies of state electricity utilities and the power producers, which would have had disastrous results.

3. Reforms in agriculture and manufacturing sector

• The third set of measures were directed to significantly improve the ecosystem for private producers, both in agriculture and manufacturing.
• Long-pending reforms to give farmers the much-needed freedom to choose their clients and for traders and exporters of agro-products to maintain necessary stocks have now been announced.
• Defence production and exports will get a new fillip with the liberalisation measures.
• Greater space will be given to private businesses in sectors in which public sector enterprises hitherto had either a monopoly or a predominant presence.

4. Credit to street vendors

• Finally, this is a measure that does not have a large fiscal footprint, but touches the lives and livelihoods of more than 50 lakh families.
• Under which street vendors all over the country have been given a credit of Rs 10,000 each for re-stocking and use as working capital.

Understanding the aggregate demand

•  It is important to point out that aggregate demand is made up of- i) consumption, ii) investment iii) demand for intermediate goods.
• So,  the cash-in-hand of consumers is not the only means for reversing the declining demand in the economy.
• Therefore, additional credit lines provided to MSMEs, vendors or farmers will contribute to the strengthening of aggregate demand.

Government’s response to address demand-side problems

• A significant number of measures were announced to hike consumption demand directly as well.
• Among these are:
• Rs 1.73 lakh crore for improving the incomes and welfare of the most vulnerable, including the 20 crore female Jan Dhan account holders who will receive monies directly into their bank accounts.
• Rs 50,000 additional incomes in the hands of those whose TDS and TCS were reduced by 25 per cent.
• Rs 40,000 crore additional allocation for MNREGA, which will provide jobs and succour to those returning to their villages from metros and cities.
• Rs 30,000 crore for construction workers.
• Rs 17,800 crore transferred to 12 crore farmers and Rs 13,000 crore transferred to states to finance the costs of running quarantine homes and shelters for migrant workers.
• These measures, which will directly benefit different categories of individuals, will surely raise the flagging demand — the necessary condition for triggering a fast-paced recovery in economic activity.

Consider the question “The stimulus package announced by the government in the wake of pandemic sought to address both the demand side as well as supply-side problems. Examine the various components of package and other reforms announced in the economy.”

Conclusion

Combined with the significant number of bold structural reform measures, which hold the potential to make Indian firms attain global scales and competitiveness and give the much-needed freedoms, flexibility and financial strength to our beleaguered farmers, “the package” promises to promote India’s economic recovery in the post-COVID-19 period.

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The article broadly discusses the impact of the pandemic on the Indian economy. While the package has been declared to alleviate the economic pain, the government faces the challenge of finding the resources to plug the gaps. Though pandemic erupted from China, it successfully controlled it. This along with the its calibrated approach towards strategic progression is going to stand China in good stead.

Grappling with the “unknown unknowns”

• Several weeks before the advent of the COVID-19 pandemic, India’s Minister for External Affairs delivered a lecture.
• In the lecture, he had observed that “what defines power and determines national standing is also no longer the same. Technology, connectivity and trade are at the heart of the new contestations.”
• He did mention a point about “known unknowns”.
• But the pandemic has forced us to face the “unknown unknowns”.
• Within a few weeks, his prediction would be overtaken by a tectonic shift in the global situation thanks to a virus and a pandemic.

Impact on India’s economy

• What distinguishes the present pandemic from earlier ones is its economic impact.
• The economic impact is perhaps even more threatening than the human costs involved.
• In the case of India, all forecasts have had to be shredded.
• Job losses have been massive, specially in urban areas.
• India’s exports in the month of April, for instance, were the worst in the past 30 years.

Finding resources for the stimulus package

• Well before pandemic India had been witnessing a persistent economic downward slide.
• Prime Minister Narendra Modi’s announcement of a ₹20-lakh crore stimulus package was, hence, timely.
• Even though economists now believe that in real terms it amounts to around 2% of GDP rather than 10% .
• Finding resources for even this stimulus package will, however, not be easy.
• The Centre’s finances are not in the best of health. It has already had to resort to a second tranche of $1 billion loan from the World Bank to support COVID-19 relief measures.
• The finances of States are, to say the least, in a perilous state.
• Questions are, thus, bound to be raised as to whether adequate funds would be forthcoming for relief purposes.

China’s calibrated approach: Strategic progression

• Since its early recovery, China has followed a calibrated approach — one that stems from a policy of deliberate strategic progression conceived over the years.
• It may be worthwhile to understand the facts so as to underscore the gap that currently exists between China and India.
• In 2015, China’s President, Xi Jinping, had floated the idea of “a Community of Common Destiny of Mankind”.
• In this, he outlined China’s viewpoint on aspects such as economic globalisation and the information technology revolution.
• The Belt and Road Initiative — which encompasses policy, infrastructure, trade, financial, and people-to-people connectivity, and, implicitly also, security ties — was an adjunct to it.
• The 19th National Congress of the Communist Party of China (2017), thereafter, gave its assent, considering it essential to enable China to achieve pre-eminence status within the global order.
• Ever since, China has focused on-
• i) attaining economic and technological progress.
• ii) defining how power would be determined in the new globalised era through devising new international norms in many emerging domains such as cyber, space, artificial intelligence, etc.
• China also set about rewriting international rules, premised not so much on governing where global goods are made, but on setting standards that define production, exchange and consumption.
• China Standards 2035 plans to set new standards with regard to the Industrial Internet of Things (IoT) and define next-generation information technology and biotechnology infrastructure.
• China is hoping, to reap the “early bird” advantage, even as other industrial nations struggle to recover from the devastation caused by the COVID-19 pandemic.
• Internationalisation of Chinese standards would provide China a clear advantage by providing it an opportunity to set the standards in emerging industries such as high-end equipment manufacturing, unmanned vehicles, new materials, cybersecurity and the like.
• This would enable it gain a dominant position in the global economy.

India must plan well to cope with the China challenge

• Mounting an effective challenge to China at this time would require a well-conceived and carefully calibrated plan of action by India.
• As of now, this is not evident.
• India and China will certainly emerge from the pandemic more diminished than previously, but to varying extents.
• Each country will, no doubt, suffer an economic setback.
• But while both nations would be among the very few that would still have a positive growth rate in the near future.
• Which is 1% in the case of China and 1.8% in the case of India, according to the International Monetary Fund.
• Given the size of China’s economy, it does not translate into a massive shift in India’s favour.

Consider the question “Economies across the world have been bruised by the corona pandemic. There have also been talks of India being the beneficiary of changes in the global supply chains. In light of this, examine the issues and challenges that India may face in this regard.”

Conclusion

India would more than welcome some of the entities exiting China, but there are no “green shoots” to suggest that such a shift has, or is, about to take place. Many alternatives are available to these companies and it would be excessively optimistic on our part to hold on to the belief that India is the only alternative choice for most of them.

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What are the options available with the government to fill up the budgetary gaps created by the stimulus package? Well, one seems to be exercising its disinvestment or privatisations plans. But like always disinvestment comes with its own set of issues. The next could be raising the taxes and duties on the fuels. But this will defeat the very purpose of the package. Third option is borrowing. But borrowing in the external currency is another problem story. Let’s figure this all out with this article….

Containing the fiscal deficit through privatisation

• Government is apparently hopeful that money could come partly from the new privatisation programme.
• Finance Minister recently said that privatisation — a policy that has already gained momentum in the last budget, would now be the order of the day.
• According to the new Public Sector Enterprises Policy (PSEP), a list of strategic sectors will be notified where there will be no more than four public sector enterprises.
• The PSEP is a strategic move intended to rationalise the public sector.
•  Before the COVID-19 crisis, the government needed the privatisation money partly because its revenue from GST among other things was declining.
• And this void could only partly be filled by alternative sources of tax revenues such as that on fuel.
• Today, the government needs this money in order to contain the fiscal deficit.
• So, the privatisation programme has suddenly been expanded.
• The Centre has set a budget target of Rs 2.1 lakh crore from disinvestment in the current fiscal year.

Progress made so far on disinvestment process

• Towards the end of 2019, the government approved the privatisation of BPCL and the Shipping Corporation of India.
• In addition to selling stakes in the Container Corporation of India, THDC and NEEPCO.
• The government had initially planned to complete its “strategic disinvestment” in BPCL and Air India by the end of this fiscal year.
• It now wants it completed earlier. Some estimate say that the government’s disinvestment in BPCL, SCI and CONCOR could fetch it Rs 78,400 crore.
• Should India’s flying Maharaja also find a buyer, the government could raise over Rs 1,05,000 crore.

Issues with privatisation

• The revenue from privatisation is a one-off benefit and generally, only profit-making units are sold at a good price.
• Privatisation is a two-way street — it requires a buyer and a seller. Who will be the buyers?
• Excessive political interference with the private sector makes owning an ex-government entity risky.
• A handful of Indian capitalists who are already at the helm of oligopolies may be in a position — financially and politically — to buy the big PSUs.
• If they were allowed to grow even more by acquiring public entities, sectors of the economy would be under the influence of quasi-monopolies.
• This could foster crony capitalism and may even result in the making of oligarchs.

Where else can the government find the money it needs?

1. Increasing tax and duties on fuel

• Government has already increased the excise duty on petrol and diesel by Rs 3 per litre — the steepest hike since 2012.
• The government imposed additional taxes while global crude oil prices fell.
• As oil prices can only go up after the last round of negotiations between Russia and Saudi Arabia, the Indian government will not be in a position to use this source of revenue again.
• Such a move would contradict the very idea of a relief and stimulus package anyway. Why?
• An increase in the excise duty or tax would affect purchasing power, when the package is supposed to help the poor and to boost demand.
• Low demand and lowest investment rate:  Even before the present crisis, industrialists complained that 25 per cent of their productive capacity was idle.
• And that’s why their investment rate had never been this low, in the 21st century at least.

2. Borrowing money and issues with it

• Even if some privatisation helps India financially, it seems that the country will need to borrow money.
• External borrowing, however, is problematic. There are three issues with external borrowing-
• 1) The only way governments pay back external borrowings is by wisely using borrowed capital to drive high GDP growth and generating revenues.
• Which is unlikely to happen any time soon as a recession is round the corner.
• 2) The rupee is at its lowest level compared to the US dollar.
• Any more devaluation will only make it harder for the government to pay back its debt.
• Since external borrowings must be paid back in borrowed currency, exports and foreign reserves or gold reserves are generally the only two reliable options.
• The third one being borrowing more to pay back the previous debts — a slippery slope to pay government debt.
• However, India should account for the inevitable global slump in international demand and a consequent drop in its exports.
• Other countries may also move towards “atmanirbharta” and over-regulate imports.
• 3)  Indian industries are already a bit debt-laden.
• Following factors compelled industries to resort to overseas borrowing-
• i)The risk in the banking sector, tight liquidity in debt markets,
• ii) Comparatively lower international borrowing rates
• iii) The RBI’s ECB rationalising measures.
• More overseas borrowing, combined with the industry’s high debt status, could lead to rating agencies downgrading India’s investment prospects — deterring foreign investments in the process.

3. Foreign reserves and other options

• On the positive side, India’s foreign reserves stand at an all-time high which could be strategically used to finance its needs.
• The rest may have to come from privatisation, taxation, loans and more international aid.
• Already, India is receiving more funds from the World Bank, the ADB and the Japanese ODA.
• India may help others, but it needs aid too.

Consider the question- “The government had to declare the relief and stimulus package in the wake of corona crisis. This expenditure leads to budgetary gaps. What are the options with the government to close this gap? Examine the issues associated with these options.”

Conclusion

The government must weigh each option with due consideration and explore all the possible avenues. Options like privatisation or borrowing must be exercised with caution. As these decisions could have severe consequences for the economy in the future.

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