The economic package unpacked
It is for this reason that an economic package for the economy emerging out of the lockdown requires a stimulus enhancing demand across the economy. The best way to have done this would have been to spend on infrastructure. Infrastructure spending uniquely creates structures that raise productivity and extends spending power to the section of the population most affected by the lockdown, namely daily wage labourers. The crucial difference is that while liquidity infusion in the form of credit is an input made available, a stimulus is an injection into the income stream. The substantial increase in the allocation for the Mahatma Gandhi National Rural Employment Guarantee Scheme is a stimulus all right, but cannot, by itself, make much difference.
The lockdown has lowered aggregate demand, and a fiscal stimulus is needed. However, much of what we have seen by way of a policy response is something akin to a “backstop” in finance. This is unequal to the task of reviving an economy that has experienced a shock valued at around ~28 lakh crore, the estimated direct loss of output during seven weeks of lockdown. Only a fiscal stimulus of approximately ~20 lakh crore could have achieved this in relatively quick time.
Many observers, including this writer, had imagined the package announced on May 11 to be just that stimulus. We have been proven wrong. The conclusion is that the government is keen on signalling fiscal prudence by sticking as far as possible to the deficit in the budget announced. We can now see that behind the finance ministry’s announcement last week that it is raising the public borrowing limit for the financial year is the reality that the government’s revenues are set to fall behind its expenditure, and not any preparation for the stimulus to come. This is mere rearguard action rather than acting on the imperatives of the present.
Now that the government’s package is unpacked, we may surmise that the adverse economic impact of the lockdown will last longer than the lockdown itself. This because of the likely presence of effects in market economies, whereby low output today depresses production for some time into the future. The missing plan for economic revival is a governance failure. By declaring the lockdown, the State took away access to livelihood. Even if this was done to save lives, the social contract behoves the State to restore the livelihoods lost.