Stimulus Package: Real or illusion

By Dr. Santosh Kumar Mohapatra*

The COVID-19 pandemic is the defining global health and economic crisis of our time and the highest global humanitarian challenge the world has faced since World War II. The virus has spread extensively, and the number of cases is rising daily as governments work to slow its spread. The human misery, wretchedness that unfolded recently due to the second wave of Covid-19 is immeasurable.

Indian economy that shrank by 7.3 per cent last year has shown very little signs of recovery over the next few quarters. There is a decline in jobs, a rise in inflation, squeeze in purchasing powers of people. As a result of which demands for products and services have dampened triggering concern among the industry. Industry or corporate honchos who believe in privatizing profits and socializing losses– the practice of treating company earnings as the rightful property of shareholders and company losses as a responsibility that society must shoulder-were baffled as demand for their products did not show any sign of improvement.

Industry bodies especially CII sought expansion of the RBI balance sheet to meet demand exigencies and suggested ways to accelerate Covid vaccination. It urged the government to provide a fiscal stimulus worth Rs 3 lakh crore, along with direct cash transfers to spur domestic demand. However, it did not suggest how to generate resources. It did not voluntarily suggest to tax the profit-making corporates at a higher rate or impose wealth tax on rich to generate resources as the Indian economy is plagued by a resources crunch.

It may be noted that though the outbreak of the Covid-19 pandemic and the subsequent lockdowns to contain its transmission dented India Inc’s sales and revenues in 2020-21, the decline in prices of raw materials and cost of capital boosted companies’ profits to a decade high. The combined net profit of the listed companies was up 57.6 per cent to Rs 5.31 lakh crore in 2020-21. As a result, the corporate profit share in India’s gross domestic product (GDP) hit a 10-year high of 2.63 per cent in the last financial year a record low of 1.6 per cent in 2019-20.

Hence, on June 28, Finance Minister Nirmala Sitharaman proclaimed a stimulus package worth Rs 6.3 lakh crore to create another illusion around her third stimulus package for a Covid-tattered economy that left the industry, economists, and the markets poring over the figures to understand how much was real and how much mere illusion.

She has announced an array of schemes for 15 sectors which include the creation of health infrastructure, small and medium industries, power sector, farmers, electronics industry reforms, and tourism. It is argued that the announcements are likely to help several Covid-affected sectors, businesses, and even individuals.

But Industry leaders and economists are not fully convinced that the fresh economic relief measures announced by the finance minister would help in significantly boosting the Covid-battered economy. They say the new loan guarantees and higher cap for the Emergency Credit Line Guarantee Scheme (ECLGS) will provide temporary relief but will fall short of booting economic growth over a longer period.

Like previous staccato announcements last year that formed part of the first stimulus package, more than three-quarters of the stimulus package is built around extending loan guarantees and concessional credit for pandemic-hit sectors and investments to ramp up healthcare capacities. Government guarantees are in the nature of promises that the Narendra Modi regime will provide a back-stop if creditors default on loans that they take from banks.

The package includes the reiteration of some steps that were already announced such as the provision of food grains to the poor till November and higher fertilizer subsidies. Ms. Sitharaman announced an expansion of the existing Emergency Credit Line Guarantee Scheme (ECLGS) by Rs 1.5 lakh crore, a new Rs 7,500 crore scheme to guarantee loans up to Rs 1.25 lakh to small borrowers through micro-finance institutions, a fresh loan guarantee facility of Rs 1.1 lakh crore for healthcare investments in non-metropolitan areas and sectors such as tourism, a separate Rs 23,220 crore for public health with a focus on paediatric care, which will also be utilised for increasing ICU beds, oxygen supply and augmenting medical care professionals for the short term by recruiting final year students and interns.

Indirect support for exports worth Rs 1.21 lakh crore over the next five years, free one-month visas for five lakh tourists, new seed varieties for farmers and additional outlays over the next two years to expand broadband to all Gram Panchayats, were also included in the package. The existing sop to spur employment, where the government bears EPF contributions for new employees earning less than Rs 15,000 a month for two years, has been extended till March 31, 2022.

These are credit-based stimuli of long and medium-term instead of provision of immediate relief to pandemic affected sectors. But all those are unlikely to change much on the ground. A report by Azim Premji University has advised that the government will need to roll out a relief package worth Rs 8 lakh crore to contain hardships being faced by lower-income groups due to the economic impact of COVID-19, it is a grossly under-funded set of measures that totalled Rs 6.29 lakh crore, or 2.82 per cent of the nominal GDP of Rs 222.87 lakh crore projected in this year’s budget. Economists, however, noted that the elements of direct stimulus in the package and its upfront fiscal costs in 2021-22, are likely to be limited.

Some experts estimated the real fiscal impact in this stimulus package at Rs 118,390 crore. This amounts to about 0.5 per cent of the estimated GDP for 2021-22. This was broken into three components: a sum of Rs 93,869 crore earmarked for the distribution of free food grain till November under the Pradhan Mantra Garib Kalyan Anna Yojana, the additional Rs 15,000 crore that the Centre intends to spend on the health sector, and half of the sum of Rs 19,041 crore that will be spent over the next two years under the Bharat Net programme which seeks to create rural broadband connectivity under public-private partnership.

Aditi Nayar, the chief economist at ICRA, the Indian arm of rating agency Moody’s, said the new measures would have an impact of around Rs 60,000 crore rupees ($8.08 billion) on government finances, and their success would hinge on offtake, or actual spending. “Most of the fiscal support is still below the line and in the form of loan guarantees, and not direct stimulus,” she opined.

India’s 2020 stimulus package has not been able to solve the problems of informal workers, MSMEs, and food security. The government had maintained that the package was equivalent to 13 per cent of India’s gross domestic product (GDP) or around Rs 27 lakh crore. However, economists had estimated that its fiscal component was barely 2.2 per cent. In contrast, this was 4.7 per cent on average in emerging market economies.

The weak fiscal stimulus did not change even with the 2021-22 Budget, if you look at the expenditure in absolute rupee terms, it is just 0.1 per cent more than last year’s. It means some other important expenditures have been cut in last year and will be punned this year too. The finance minister has not mentioned, how she is going to generate resources. Further, borrowing will push India to the quagmire of the debt trap.

If India’s fiscal impact of all packages are taken into consideration, it will be around 2.75 to 3 percent of GDP not 15.82 percent of GDP. In absolute number, it will be around Rs 3.5 lakh crore but not Rs 33.30 lakh crore. Rest is in terms of loans, credit guarantees, infusion of credit, etc. If we compare with other countries India’s position is abysmal.

Comparisons can be tricky as in some countries, generous social safety nets that were already in place have kicked into gear during the pandemic, easing the need for massive spending pushes. According to an article in The Washington Post (6 April 2021), written by Adam Taylor reveals that The United States appears to have spent more than anywhere else on coronavirus relief. The fiscal response in 2021 so far in the United States is massively larger than what any other country has done to date or is currently discussing. President Joe Biden’s $1.9 trillion coronavirus relief package, which he signed last month, alone is larger than most countries’ annual economic output.

And it is only the latest U.S. measure. In December, Congress passed a $900 billion relief bill, on top of more than $2.5 trillion of aid authorized during President Donald Trump’s final full year in office. Before Biden’s relief package the United States had committed to around 18.22 percent of its GDP — the 13th largest share among 168 countries being tracked. The new $1.9 trillion packages add to that, pushing America’s fiscal response above 27 percent of GDP, according to Elgin’s calculations. That’s nearly four times the share implemented in response to the 2008 financial crisis.

Japan, which approved a $707 billion stimulus in December on top of two previous packages that amounted to $2.2 trillion, would come in second according to official numbers, but some analysts have said Japan’s figures are inflated as they include more than just government coronavirus spending such as loans, industrial investment, and government guarantees. An analysis by economists from Peterson initially put Japan’s fiscal outlay at less than 30 percent of GDP. However, the economists adjusted their estimate in early April, revising their figure to 16 percent of GDP.

In brief, according to Ceyhun Elgin, Gockce Basbug, and Abdullah Yalaman (The Washington Post), the fiscal response as percentage of GDP in Japan is 54.9 per cent followed by US (27.9 per cent), Singapore (27.05 per cent, Slovenia (24.54 per cent), Guyana (23.42 per cent), Sweden (23.01 per cent), Finland (21.28 per cent), Lithuania (20.95 per cent), Germany (20.32 per cent), and Australia (19.91 per cent). In case Japan, some say, it is less than 20 per cent of GDP. All figures are as on February 2021 while for US, it includes the recent $1.9 trillion packages.

A number of factors affected countries’ economic activity over the past year, including the scale of their coronavirus outbreaks and the severity of their measures in response. Amid a pandemic that has wrought severe economic damage around the world; many governments have made dramatic spending pledges. The full scale of relief spending, with various plans yet to be implemented around the world, remains unknown.

In the case of the U.S., a lot of these stimulus checks went to a pretty broad population. Many European countries already have robust universal social programs in place. Many European countries paid companies to keep workers on, as opposed to the U.S. approach, under which the laid-off could seek bolstered benefits. This has led to the United States taking one of the worst hits among major economies on labour force participation. Some people have had trouble accessing unemployment benefits. But the flexibility of the U.S. system enabled more money to be sent out and without a clear ill-effect on rehiring, the U.S. system has the slight edge.

Given the limited efficacy of monetary easing, continued countercyclical fiscal policy support , there is a need to rebuild confidence amongst the people so that the consumption demand gains traction on a sustained basis. Economists think stimulus aimed at survival. There should be jobs push, tax cuts on fuels, wage support to small corporations, cash transfers to the poor, increase in MGNREGA allocations, and universalisation of Ayushman Bharat. Industry and opposition leaders also have sought tax cuts on petrol and diesel, and cash transfers to the poor to boost consumer demand.

Soaring pump prices, a threat to India’s recovery and inflation. Any package without reducing oil prices, price of essential commodities, and providing financial assistance to the family affected by Covid -19 (infected or expired) will serve no purpose. Higher oil prices have cascading effect on the economy, in form of erosion in purchasing power of people, reduction in demands, rising prices, inflation input cost, etc. A government cannot claim to be pro-poor which allows oil prices to climb that decimates poor first. In short, the government’s stimuli continue to weigh on the supply side rather than boosting demand.

 

The author is an Odisha-based eminent columnist/economist and social thinker. He can be reached through e-mail at [email protected]

DISCLAIMER: The views expressed in the article are solely those of the author and do not in any way represent the views of Sambad English.