Stimulus Packages: Money that does not exist

Dr Santosh Kumar Mohapatra*

 

On the night of May 12, India’s Prime Minister Narendra Modi set the nation of 1.3 billion people abuzz with promises of unleashing a massive stimulus to resuscitate an economy facing its severest recession since independence. He asserted that packages will create Atmanirbhar Bharat Abhiyan or self-reliant India. The contents of the package were announced in five tranches by Finance Minister Nirmala Sitharaman. The entire package is said to be about Rs 21 lakh crores (Rs 20, 97,053 crore) ($277 billion), or 10 percent of India gross domestic product (GDP).

According to International Monetary Fund (IMF)’s fiscal monitor, fiscal policies are at the forefront of responding to the COVID-19 pandemic. Fiscal measures can save lives, protect the most-affected people and firms from the economic impact of the pandemic, and prevent the health crisis from turning into a deep long-lasting slump. A key priority is to fully accommodate spending on health and emergency services. However, the stimulus package declared by Finance Minister Nirmala Sitharaman does not involve any major increase in expenditure by the Central Government. Apart from providing liquidity support to various sectors of the economy with a minimal fiscal outgo, the focus was on a reform, which is not for betterment of people but for corporate honchos.

This stimulus package has drawn more criticism. Many have criticized it  by dubbing it as a gargantuan gimmick being played upon a desperate public with money that does not exist. These are designed to derive the maximum political mileage from a gullible public that knows absolutely nothing about the intricacies of economics.

The veteran Congress leader Sonia Gandhi described the packages as “cruel joke” on the country.  Kerala finance minister T M Thomas Isaac described it as package of numbers, not relief. CPI (M) General Secretary Sitaram Yechury said the Centre is “washing its hands off” its responsibilities. Former finance Minister P Chidambaram calls it “empty pages”, Akhilesh Yadav says it’s “empty speech”, Mamata Banerjee branded it as “zero”, and K Chandrashekar Rao says it’s “fake”. Rahul Gandhi tells the government, “hand over Rs 20 lakh crore in cash to the people directly, not lend it.”  Some other told that a monumental fraud has been committed.

However, views of politicians may not be free from bias so need to study what independent agencies reveal. In a report, global wealth manager, Credit Suisse Wealth Management said that the government’s stimulus package lacks major near-term support for the economy and may not be adequate to restore India’s growth trajectory. India’s response to the COVID-19 crisis lacks major or innovative near-term fiscal support, and fails to provide the much-needed impetus to stimulate growth and kick-start economic growth.

In response to size of package, the former RBI governor says more needs to be done, and faster, if India’s economy is not to be reduced to a shadow of its former self. India faces a major economic catastrophe, PMO can’t handle by itself. He further said almost any response is inadequate, particularly so in India’s case. He added the government must pull out all the stops.

While economists and experts have differing estimates, direct fiscal stimulus from the Centre will only be a little over 1 per cent of India’s GDP.  It means fiscal outgo will be marginally above 1 percent of GDP not 10 per cent. According to broader fiscal impact estimates that have been put out by a number of economists and market experts (Care Ratings, Emkay, SBI Research, HSBC India, the higher range is nearly Rs 2.40 lakh crore, which includes less conservative calculations).

According to Fitch Solutions, India’s ‘mammoth’ COVID-19 package is much smaller than it seems. The government’s packages lacks in addressing immediate concerns of the economy as the actual fiscal impact of the additional stimulus is only about 1 per cent of GDP as opposed to the claim of 10 per cent. The new fiscal stimulus announced is made up of the government loan guarantees, credit extensions to be led by banks and regulatory amendments. Fitch believes that  every delay to effective government stimulus will only deepen the downturn, which will eventually require more spending, resulting in widening the fiscal deficit.

However, Credit Suisse said the actual fiscal spending that the Indian government will do is around Rs 2 lakh crore, translating to just 1 per cent of the gross domestic product, indicating that the government is taking fiscal caution in dealing with the pandemic. According to the research wing of the State Bank of India, the largest of Indian banks, the direct fiscal impact of the package was only Rs 2,02,660 crore or 1.01 per cent of GDP. The rest are all loans of the financial institutions or monetary support to these institutions or, at best, expenditure to be incurred in future.

The estimated Central Government expenditure for the full year 2020-21 was placed at Rs. 30.4 lakh crores in the Union Budget presented in Parliament before the Covid-19 effects were felt. In order to augment expenditures beyond the budgeted level, the Government would have to raise more resources through additional taxation measures or borrowing.

On May 9, the government revised its estimated market borrowings to Rs 12 lakh crore from Rs 7.8 lakh crore as announced in Budget 2020-21. In a way, this puts a ceiling to the size of the fiscal package at 2.1 per cent of the GDP (Rs 4.2 lakh crore), provided targeted revenue receipts are realized. It is noteworthy, gross tax revenue had fallen by Rs 2.98 lakh crore , while net tax revenue by Rs 1.45 lakh crores  and total expenditure by Rs 88,000 crore over the target kept in budget 2019-20 before  affliction of Corona.

Hence, in 2020-21, there will be huge shortfall of revenue not less than Rs 3 lakh crore. Indeed, much of the additional borrowing of Rs. 4.2 lakh crores would be needed to counterbalance the revenue losses alone, which are going to be hefty. So, actual packages turn out to be around Rs 1.2 lakh crore. If it turns out to be more than this, then other expenditure will cut by huge margin accommodate various schemes declared in stimulus packages or revenues shortage may be less than Rs 3 lakh crore as we think.

There was a difference between providing stimulus to the economy and merely infusing liquidity or equity support or giving loans and credit to people. While fiscal outgo leads to higher expenditure and leads to rise in demand, monetary measures address only supply side problems. This will have impact only when people experience in rise in purchasing power leading to rise in demand.

The benefits from fiscal measures are more direct and result in overall stimulus which is larger than the original amount due to multiplier effects. Monetary and credit based measures have indirect effects as they depend on behavioural responses of various stakeholders including targeted beneficiaries, banks and NBFCs.

However, defending the inclusion of monetary measures such as infusion of liquidity as part of package, expenditure secretary TV Somanathan said globally both fiscal and monetary measures are clubbed while announcing a stimulus package. Ideally, stimulus should be a balanced combination of monetary and fiscal measures or a combination of actual fiscal outgoes and liquidity provisions. In case of India, it is imbalanced, skewed with monetary components accounting major share of package.

According to IMF report, by end of April, the total value of packages globally now is about $9 trillion. The breakdown looks like this:  While the direct budget support or fiscal support is currently estimated at $4.4 trillion globally, and additional public sector loans and equity injections, guarantees, and other quasi-fiscal operations (such as non-commercial activity of public corporations) amount to another $4.6 trillion. It means fiscal package constitutes marginally lower than 50 percent in the world. But in India, it constitutes marginally higher than 10 percent of total packages.

 In response to Finance Minister Nirmala Sitharaman’s argument, made in an interview, that loans and credit guarantees would have a greater multiplier effect on tackling the problems of the poor than cash payments, Raghuram Rajan said loans take time to work. Hunger, on the other hand, is an immediate problem. Rajan said giving food grain to unemployed migrant workers, the poor and vulnerable was not enough. They also need vegetables, cooking oil, and, most importantly, money and shelter. For this huge expenditure is needed.

The benefits from fiscal measures are more direct and result in overall stimulus which is larger than the original amount due to multiplier effects. Monetary and credit based measures have indirect effects as they depend on behavioural responses of various stakeholders including targeted beneficiaries, banks and NBFCs.

Further the monetary measures such as liquidity infusion, reduction in CRR, reverse repo rate, repo rate cannot create any dent unless purchasing power is escalated and demand is enhanced. Even before Covid-19, such measures have failed to curb slowdown, unemployment. Recently, the International Monetary Fund reported that low interest rates will reduce profitability of banks and banks taking excessive risks to offset the reduced profitability may prove catastrophic. Further low interest rate affects depositors or savers adversely too but only benefits the corporate behemoth by reducing the cost of their borrowing.

At the time of reduction of reverse repo rate on April 17, banks were parking around Rs 6 lakh crore in RBI at reverse repo rate each day. On May 5, 2020, banks have parked a staggering Rs 8.5 lakh crore in RBI. This indicates that reduction of reverse repo rate failed to increase credit offtake. Too much of liquidity infusion or forced lending will only exacerbate the NPAs’ problem and teeter banks on brink of disaster.

Actually, stimulus initiatives relied heavily on monetary and credit measures, so not balanced one. Hence, government will need to strike the right balance between policies that enhances spending, provide health, education facilities at cheaper rate, ensures food security, shelter for all,  strengthens health infrastructure so that people can live with corona and get immediate treatment, testing facilities. Without colossal expenditure such things are not feasible.

 

 

 

The author is an Odisha-based columnist/economist and social thinker. Email: [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.