There are many suggestions and expectations around the stimulus package deal to revive the economy crippled post corona pandemic. While everyone agrees over the need of stimulus but there are several opinions and suggestion around the various aspects of the package like size, time, source of revenue etc. But we must be mindful of the pitfalls and constraints while thinking about the stimulus package. So, what are the suggestion and expectation and what are the limitations? Read to know!

1. Supply-side constraints on stimulus

• It is argued that a fiscal stimulus package has to follow the timeline.
• But you cannot ‘stimulate’ an economy during a supply-side lockdown.
• And that there are ‘announcement effects’ — both good and bad — that go with the stimulus.
• So, any ‘good stimulus’ can only come into effect post lockdown and extensive consultations are on with everyone for that.

2. What should be the size of the stimulus package?

• While thinking about the stimulus, we cannot forget that government revenues too will be seriously hit.
• The government revenue will be hit by 2-3% of GDP, given that disinvestment target itself is 1% of GDP and the realisation is likely to be close to zero in the current financial year.
• So, the effective fiscal deficit is going to be somewhere around 7.5 % if you take into account all the off-balance sheet borrowings.
• The U.S. government has set aside $2 trillion for bailouts or 9% of its GDP.
• India’s starting point is going to be at around 7.5% of GDP fiscal deficit, then how much more can we afford on top of that?
• On top of this is all the ‘merit expenditure’ on health and direct income support to the poor cannot be reduced.
• Can we still formulate a stimulus package comprising 10% of GDP, to be footed by the Central government alone?

  Monetising the deficit and debt-to-GDP ratio

• From 1947 to 1997, the Central government always routinely monetised its deficit, without leading to high rates of inflation, much less hyperinflation.
• The Fiscal Responsibility and Budget Management (FRBM) limits are hardly a success and routinely all governments have broken the barrier.
• Other countries with huge debt-to-GDP ratios like Japan (>200%) and U.S. (125%) get away with barely a rap on the knuckles.
• But India is pulled up for minor slippages on a 70% debt-GDP ratio.

3. Should we pay attention to needs and forget about affordability?

• Some have argued that bailouts should be based on need and not affordability.
• Can printing money be a solution out of this situation?
• Possible dangers of printing money: The currency could plunge, inflation soar high and rating agencies could downgrade us to junk.
• So, shouldn’t there be a more nuanced approach to what constitutes a ‘good’ stimulus?

4. The problem of low credit flow despite high liquidity

• There is a lot of liquidity in the economy, but limited credit is flowing due to anaemic lending.
• Thus, another mantra being espoused is that bank managers should be incentivised to lend and the government should indemnify loans given during this period.
• This could well lead to bogus companies springing up overnight to grab the stimulus in collusion with banks.
• The government owes about ₹1 lakh crore on tax refunds and also had promised to make up for any difference to the States, if the GST did not grow by 14% per annum.
• This is the time for it to transfer this to the States as a grant, for one year, to offset the revenue loss to States.

5. Should we go to the IMF?

• There is talk of going to the International Monetary Fund (IMF).
• Do we really need the IMF’s bailout which comes with conditions when there is no foreign exchange crisis for financing rupee expenditure?
• Moreover, there is a perceived global stigma attached to doing so.
• Won’t the conditionality-led cure be worse than the disease?

Consider the following question based on the issue “Economic crises accentuate the role of governments. Covid-19 has not been different. In light of the above statement, discuss the various issues that the government faced while coming up with a stimulus package to revive the economy. What are the sources of revenue to be tapped by the government?”

Conclusion

Fate is what happens to us. Destiny is what we make in spite of our fate. India’s destiny appears relatively safe, if we cast the mind’s eye around the globe. Lifting the lockdown will be the first step towards a good stimulus and one does need to un-handcuff a billion people to save their lives too.

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