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The Big Story: Package deal
As of May 18
Covid-19 cases in India: 96,169 (up from 62,939 last week)
Recovered: 36,824 (up from 19,357)
Deaths: 3,029 (up from 2,109)
India’s national lockdown to reduce the spread of Covid-19 – which began on March 25 and is now set to continue until May 31, making it 67 days – was not put in place in consultation with the finance ministry.
How do we know this?
Finance Minister Nirmala Sitharaman admitted as much when she announced limited measures two days after the lockdown began. Sitharaman claimed that her ministry acted quickly to “respond” to the lockdown within 48 hours, making it clear that there had been no coordination beforehand.
Those measures, free extra rations and minimal cash support, amounted to less than 1% of India’s Gross Domestic Product, and were never going to be sufficient to make up for the massive economic shock caused by one of the world’s harshest lockdowns.
We wrote then about how many analysts were calling for a basic income package to prevent millions from falling into poverty.
Yet industry, analysts and the wider public were given no indication of what the government’s economic strategy was for nearly 50 days. In the interim, nearly every indicator made it clear that the Indian economy had fallen off a cliff and that GDP growth was likely to be negative.
Finally, last week, Prime Minister Narendra Modi turned up on primetime television to announce an economic package worth Rs 20 lakh crore, around 10% of India’s GDP, with the aim of building an Atmanirbhar Bharat, or a self-reliant India.
The amount seemed sufficiently large, and also appeared to fly in the face of comments from Modi’s economic advisors against a big stimulus package. Yet Modi didn’t announce any details, saying Sitharaman would do so over the coming days.
Without explaining why, Sitharaman split the announcements over five “tranches”, delivered at press conferences on consecutive days.
But before the very first press conference, it was clear that the Rs 20 lakh crore figure was exaggerated, since the government was including its earlier announcements as well as more than Rs 8 lakh crore of efforts by the Reserve Bank of India to provide liquidity.
Below are highlights from each of the tranches:
The first day’s announcements focused on the Medium, Small and Micro Enterprises sector, and set the tone by offering much-needed liquidity, loans and credit-guarantees. But there was nothing in the way of demand-side stimulus.
- Rs 3 lakh crore emergency working capital, primarily for Medium, Small and Micro Enterprises
- Rs 50,000 crore equity infusion through an MSME fund of funds
- A new definition of MSMEs that raises the investment limit and factors in turnover (causing confusion)
- No global tenders from the government if procurement is upto Rs 200 crore
- Full details here
Day 2 was a mixed bag of measures, aimed primarily at the poor and those hit hardest by the lockdown. Again, except for support in the form of rations, most announcements were on the supply-side.
- Much-awaited decision to give food rations to migrants, even if they don’t have a ration card (a demand we wrote about nearly a month ago)
- Affordable rental housing scheme for migrant workers
- Rs 5,000 crore credit facility for street vendors
- Rs 2 lakh crore concessional credit to farmers under PM-Kisan
- Full details here
The third day brought with it some major reforms focused on the agricultural sector, with some analysts likening to a “1991 moment”, referring to the liberalisation of the Indian economy. In keeping with the other days, however, these were medium- to long-term fixes, with limited stimulus.
- Essential Commodities Act to be amended, with agricultural foodstuffs – cereals, potatoes, onions etc – deregulated. Stock limits only under exceptional circumstances.
- A Central law allowing farmers to trade freely across states
- Legal framework for contract farming
- Rs 1 lakh crore Agri Infrastructure fund
- Full details here
This set took aim at eight sectors, but not the ones that were most affected by the lockdown, such as tourism or hospitality. Instead, Sitharaman appeared to package long-pending plans and previously announced reforms into tranche 4, with, again nothing that will stimulate demand right away:
- Commercial mining of coal to be allowed (cleared by the Cabinet in January)
- Increasing the Foreign Direct Investment limit in defence manufacturing from 49% to 74%
- Six more airports to be auctioned to run on PPP mode
- Viability gap funding for social infrastructure projects (announced in this year’s budget)
- Opening up space sector to private firms
- Full details here
The final set of announcements included some direct stimulus through the MGNREGS, the Mahatma Gandhi National Rural Employment Guarantee Scheme, which ensures 100 days of work a year for rural families, and support to states. Sitharaman also re-stated other longer-term plans like limiting the presence of public sector firms:
- Rs 40,000 crore additional allocation for MGNREGS
- Outlay for public health to go up (with no specific details)
- States permitted to borrow up to 5% of Gross State Domestic Produc (up from 3%), albeit under conditions
- New Public Sector Enterprise policy
- Full details here
All supply, little spending
On the final day, Sitharaman put out an accounting of how she arrived at the Rs 20 lakh crore figure. Some of this maths raises eyebrows.
For example, in a scheme to subsidise the interest rates for home loans, Sitharaman has included the entire amount that individuals are expected to spend – Rs 70,000 crore – as part of the economic package, rather than just the several hundred crores that the government will actually spend.
While the bigger figure may be useful to estimate, it certainly can’t be counted as government spending.
Calculations aside, after five days of press conferences, it was evident that the bulk of the announcements were on the monetary and supply side – providing access to cheap loans, credit guarantees and the like – with very little on the fiscal, demand side.
The Indian Express estimated that actual government expenditure in the package was just 1.1% of India’s GDP, a tenth of the 10% of GDP that Modi spoke about. Business Standard arrived at a similar number.
Ideology or compulsion?
The lockdown, however, wasn’t just a supply-side shock, of the sort that occurs when financial markets collapse. It also led to a huge compression in demand, which was already declining significantly in India, even before the unemployment and wage losses caused by the lockdown.
So why would the government focus almost entirely on supply-side measures?
One answer is ideology. There are elements of Modi’s economic advisory team that are fiscally conservative, and would rather create conditions for growth than offer entitlements, especially if doing so would come with high borrowing costs. This is why Modi’s Chief Economic Adviser KV Subramanian argued that there are “no free lunches”.
The other explanation is simply the situation in which India finds itself.
Even in good times, a developing nation would find it hard to pump a large amount of money into its economy without facing higher borrowing costs. But the Modi government’s failure on the economic front over the last six years has left India with little fiscal space. In fact, even before the Covid-19 crisis, Sitharaman had been forced to trigger an escape clause for additional borrowing .
Some have argued that in extraordinary circumstances, there are still avenues like monetising the deficit, i.e. printing money, to climb out of the current hole through additional spending.
But the government has chosen what it sees as a safer path.
Will MGNREGS be enough?
Safety, of course, lies in the eye of the beholder.
The government is hoping that liquidity will do enough to reassure firms and companies and provide them with sufficient capital to tide over this crisis. It has offered nothing in the way of income support to make up for the wages lost over the course of the chaotic, draconian national lockdown.
Of the few demand-side interventions, the additional Rs 40,000 crore pumped into the rural employment guarantee scheme is likely to be the most impactful. Reports suggest that the government had wanted to give direct cash transfers to migrant workers – who have been treated callously throughout this period – but did not have an ideal mechanism for this to work.
Whether this will be enough support to the rural economy – and whether the urban poor can make do with the liquidity push – will be the big question. Industry don’t seem to think so, with many expecting much more in the way of income support as well as bailouts for specific sectors to make up for what was lost during the lockdown.
In the absence of that, analysts believe the liquidity may not go very far, since companies will not want to raise spending if they are unsure what demand will end up being.
One way of looking at it is that the government appears exceedingly optimistic about the economy, (just as it did about GDP growth and tax collections for the last financial year, which ended up falling massively short of projections even before Covid-19).
It is hoping that as lockdown eases, demand will suddenly spring back and companies will only need access to cheap cash for the economy to rebound. But if this doesn’t happen, the fiscally conservative option will look like the opposite of safe – forcing the government to deal with loans that have gone bad and to intervene yet again to support a tottering economy.
Some of the medium-term changes might end up being significant, even if many of them involve repackaging reforms that have been on the cards for years.
The move to deregulate agricultural trade might be the most significant.
Farmers have very little leeway in who they can sell to in India, a legacy of policy decisions made when production and procurement were much more tentative and there was a constant fear of scarcity as well as hoarding.
Agriculture is a state subject, which is why reforming the sector has always been an extremely complex challenge. Here, the Centre is trying to make it possible for farmers to go beyond the traders in the Agricultural Produce Market Committee mandi of their district – whom they were locked into trading with before. It has altered trade policy rather than agricultural rules.
Here is Indian Express’ Harish Damodaran’s report:
“Barely seven months after imposing limits on the maximum quantity of onion any wholesaler or retailer could keep, the Narendra Modi government on Friday announced what may turn out to be a defining ‘1991 moment’ for Indian agriculture.
The Centre, Finance Minister Nirmala Sitharaman said, will amend the Essential Commodities Act to ‘deregulate’ agricultural foodstuffs — including all cereals, pulses, oilseeds, onions and potatoes — and allow clamping of stock limits on these only under ‘very exceptional circumstances’ like natural calamities and famines, which cause a ‘surge in prices’.
Sitharaman unveiled the third tranche of measures to cushion the impact of Covid-19 and the lockdown on the economy. As significant as the ECA amendment, was her proposed formulation of a Central law that will not bind farmers to sell their crop only to licensed traders in the APMC (Agricultural Produce Market Committee) mandis of their respective talukas or districts. The law once enacted will also remove all barriers to inter-state trade in farm produce.”
Earlier on this newsletter, we asked if the pandemic would prompt Modi to put away his centralising tendencies or reinforce them. One of the suggestions for what the Centre could do to address the economic shock of the lockdown was to give unconditional block grants to the states, which are on the frontlines of this crisis.
In the final tranche, Sitharaman spoke of giving states what they are due almost as if it was largesse from the Centre, but announced nothing in the way of grants. Instead, she said that the Centre would accept a demand allowing states to borrow up to 5% of their GDP, up from the 3% that was in place before.
This additional borrowing, however, would come with International Monetary Fund-style conditions:
- Ensuring sustainability of the additional debt through higher future Gross State Domestic Product growth and lowered deficits
- Promote the welfare of migrants and reduce leakage in food distribution
- Increase job creation through investment
- Safeguard the interest of farmers while making the power sector sustainable
- Promote urban development, health, and sanitation.
Because of the amount of leeway built into these conditions, this move will undoubtedly raise questions of fairness from the states.
“These conditions raise some practical questions. How is one to measure ‘higher future GSDP’ – you will only know that only in hindsight.
Who decides what level of migrants’ welfare is good enough?
What are the measures of urban development, health, and sanitation? And most importantly, how does one measure power sector reforms, while linking it to farmers. Will a state that refuses free power to farmers not qualify for the extra borrowing?
Even more important is whether the Centre has the moral authority to impose these conditions. The Constitution treats states and centre as co-equal sovereigns and the quality of a state government’s performance will be judged by its electorate, not the Centre.
And what is the Centre’s record on sustainable fiscal deficit? The CAG itself has called out the Central government on its repeated understatement of deficit.”
Since this edition focused entirely on the five-tranche economic package, that’s all we have for you this week on the Political Fix. Expect links and recommendations on an email later this week that you can get in your inbox here, and send feedback to email@example.com.