Sample these headlines from the last few days: India’s Gross Domestic Product falls by 23.9% in April-June quarter, its worst-ever contraction. Fitch Ratings expects India’s GDP growth to contract by 10.5% in Financial Year 2020-’21. Goldman Sachs revises its GDP growth forecast for India from -11.1% earlier to a whopping -14.8%, saying real output in March 2022 will still be 2% below March 2020 levels.
Now read this report from the Indian Express on presentations to Prime Minister Narendra Modi by his Economic Advisory Council, the NITI Aayog – a government think tank – and the Chief Economic Advisor, at the end of June and beginning of July:
“One consistent message in the presentation by EAC, NITI and CEA was the need for a fiscal stimulus and support for the financial system... With almost a dozen Union Cabinet ministers attending these meetings, the participants stepped out with a sense of optimism because they saw it as a signal that the Prime Minister was building consensus within the government for a bigger stimulus... But the government has hardly made any announcements over the last six weeks based on these discussions.”
What explains Modi’s unwillingness to act when all of his top economic advisors made it clear that the Indian economy needs a fiscal stimulus?
One answer, trotted out even in May when the government’s much touted Atmanirbhar Bharat scheme ended up having an additional spend of only around 1% of GDP, is that finance ministry was keeping its powder dry – especially since the coronavirus crisis was continuing to grow. Chief Economic Adviser KV Subramanian even suggested that the country would have to wait for a vaccine before the government would commit to an actual stimulus, because anything before that might fail to stimulate demand.
Former Reserve Bank of India Governor Raghuram Rajan sounded a warning about this approach this week, comparing the economy to a patient with an illness.
“Without relief, households skip meals, pull their children out of school and send them to work or beg, pledge their gold to borrow, let EMIs [equated monthly installment] and rent arrears pile up... Similarly, without relief, small and medium firms – think of a small restaurant – stop paying workers, let debt pile up, or close permanently. Essentially, the patient atrophies, so by the time the disease is contained, the patient has become a shell of herself... if a patient has atrophied, a stimulus will have little effect.”
Even if the ‘keeping the powder dry’ argument made sense in May and June, it is now September and, despite all of the governments claims about its prescient Covid-19 efforts, the country has been registering more than 90,000 new cases daily this week with a graph that still points resolutely up, unlike practically every other comparable nation.
Even if there is a turnaround on this front over the next few weeks – unlikely as that may seem – the virus is not going to go away quickly, raising the question of how long the government is going to wait until it decides to take action. The Indian Express report offers the even more alarming news that Modi’s economic braintrust recommended stimulus six weeks ago, and he still chose not to move on it.
This suggests that the decision is now at the desk of the prime minister, the same person who seemingly unilaterally decided to take away 86% of Indian currency on a whim in 2016, with disastrous outcomes and nothing gained. The same person who announced that India was going into a massive, stringent lockdown when the country had just 500 cases, with four hours of notice, sparking off a humanitarian disaster for migrant workers.
Despite that dismal record, one has no option but to hope that Modi will at least now listen to his own economic team, recognise that the massive supply-side fixes pushed so far have had little effect and unveil a plan to provide relief as well as begin the process of spurring demand. Not doing so even now would be, to take Rajan’s analogy, like watching limbs drop off the patient even as the doctor waits for the weather to get better outside before offering treatment.