Some steps forward
Package focused on reforms, not to boost demand immediately
Union Finance Minister Nirmala Sitharaman on Sunday completed her package constructed by the government to deal with the fallout of the Covid-19 pandemic and the economic consequences of the lockdown. Earlier, Prime Minister Narendra Modi had said that a ~20-trillion package was in the works. This, which would amount to 10 per cent of gross domestic product (GDP), was so large a sum that many were concerned about the fiscal implications. Now that the package has been announced in its entirety, it is clear that in fact the fiscal implications will not be so large. Most of it is in the form of guarantees or liquidity measures rather than outright new spending. This is wise from the point of view of fiscal restraint — but, equivalently, it means that there is no immediate positive news for the demand side of the economy. The relief package may help a few pockets of the economy manage these trying times, but overall problems could intensify in the absence of a demand revival. It is not surprising, given the announcement of the ~20 trillion number, that the government has not been entirely transparent about the fiscal accounting. However, that should change now.
Some major steps forward have been announced and those should be welcomed. There have been special efforts made in agriculture, with the promise to remove the sword of the Essential Commodities Act, which has long been used to harass private investors in the agricultural supply chain. Nationwide reform of the agricultural produce marketing system is also overdue, but here as before the devil is in the detail. Some of the other measures in the package have been announced earlier, including in the last Budget. However, it is to be hoped that this crisis will at least grant some urgency to their notification. For example, giving more freedom to companies that issue non-convertible debentures might technically strengthen the corporate bond market — which should be done as soon as possible, given the financing needs of the private sector.
Unambiguously big news, however, was the changes in the defence sector, which show the right intent. An increase in the cap on foreign direct investment was overdue; it is important that it comes with the assurance that the forces will set “realistic” requirements. Hopefully, this is where the new chief of defence staff institution will show its value. The other big step forward was in the assurance that the public sector would be reduced to “strategic” sectors, and there too the private sector would be permitted access. Of course, this depends on the definition of “strategic” but it is to be hoped that the government’s dire fiscal straits mean that at last genuine privatisation is on the horizon. There have been moves towards privatisation before in the tenure of the current National Democratic Alliance government, but in the end disinvestment, including mergers with or purchases by other state-owned enterprises, has been the chosen method. This can no longer be the paradigm. Getting the state out of non-strategic sectors means outright privatisation. The government, if it wishes to shore up sentiment, must release a small list of strategic sectors and a timeline for the others in the immediate future.