After nearly 50 days of one of the world’s most stringent lockdowns to combat Covid-19, during which the Indian economy went into freefall, Prime Minister Narendra Modi announced an economic package that would put the country back on its feet and make it self-reliant.
For Modi’s most ardent fans, the narrative logic that followed seemed to make sense: at the 20th minute of the 20th hour of the day, Modi announced that his government would offer up an economic package of Rs 20 lakh crore. It was, he declared, “20 lakh crore for 2020”.
However, Modi offered no details of the economic package in his speech. He left it to Finance Minister Nirmala Sitharaman to confoundingly provide information through “tranches of announcements” spread over several days.
There was no explanation given for why the announcements couldn’t be made in one day, or why Sitharaman told reporters on the first day that they would have to wait until the very last announcement to get an accounting of how the government will be funding a Rs 20 lakh crore package.
After two days of announcements from the finance minister, it seems clear that the Rs 20 lakh crore number is essentially meaningless – a bit of narrative and mathematical jugglery that amounts to little.
For one, the number includes liquidity announcements already made by the independent Reserve Bank of India so. In an effort to ensure that firms have easy access to credit, the central bank has moved in a big way over the last month to provide cheap money for banks to borrow. Its operations alone account for nearly half of the Rs 20 lakh crore package that Modi referred to.
Few major economies would count central bank liquidity operations as part of their post-lockdown rebuilding packages, so including this fiture in Modi’s announcement was questionable from the start. Moreover, as business journalist Vivek Kaul has pointed out, little of this money is actually being used to shore up the economy. It has instead just been parked with the central bank. Technically, this brings down the package to Rs Rs 14.53 lakh crore .
Then there are the dodgy calculations.
Can deferring tax by a matter of months, as has happened with the discount on Tax Deducted at Source, be counted as part of a government package given that this does not actually lowering the tax rate? Can a reduction in the mandatory Provident Fund contribution rate – money that already belongs to you – be counted as government spending? If the government is offering a subsidy on interest rates for home loans, should the package calculations include only the amount the state spent on the subsidy or the figure that people are expected to spend on home loans?
After two days of announcements, the total amount of actual new spending by the government appears to be between Rs 40,000 and Rs 50,000 crore. That’s a tiny percentage of the stated Rs 20 lakh crore figure.
This might reduce the impact on the fiscal deficit (which was already in tatters before the Covid-19 crisis hit). But it also means that the government simply isn’t using the tools available to it to put money into people’s hands.
Loans, liquidity and credit guarantees are useful, as is a much belated decision to offer food rations to those who don’t have ration cards. But will they be enough to lift the Indian economy out of this crisis? Or do they simply push government spending down the road, forcing the state to pick up the pieces if a lack of demand ends up pushing individuals and firms into insolvency?
When Modi announced the Rs 20 lakh crore package, it seemed as if he was disagreeing against those in his government who have argued against “free lunches”. Instead, he gave the hope that the government would announce big measures that offer cash transfers, income support and fiscal stimulus of the sort that even hawkish economists are now calling for. Many analysts have even drawn out ways in which the government can find the funds to pay for such crucial initiatives.
But the details suggest more of the same approach to economics that drove India into the ditch before Covid-19.
Sitharaman, who is slated to make more announcements as well as explain how the government will pay for its package, may yet announce something major on the spending side to boost demand.
So far, however, it seems evident that the government has privileged narrative – 20 lakh crore at 20:20 for 2020 – over a genuine effort to lift India out of the mess.