Allocate resources, rationally and efficiently
Give money to state governments, protect the vulnerable sections, and don’t be hostile to businesses
Prime Minister Narendra Modi’s speech on May 12 had two central messages: India will have to learn to live with the coronavirus disease (Covid-19), and India must pivot towards economic recovery.
The recovery strategy will be pursued through a package of fiscal and monetary measures and a reforms package. In some ways, this is an intensification of existing efforts. Since 2017, consumption expenditure financed by the government has grown rapidly — at an average real rate of 10.6%. Big reforms — the Goods and Services Tax (GST), insolvency reform, inflation targeting — have been implemented. India’s rank in the Ease of Doing Business index has improved from 130 in 2016 to 63 in 2019.
But economic growth has slowed down from 8.3% in 2016-17 to 5% in 2019-20. As a percentage of GDP, new project announcements by the private sector were the lowest in 2019-20 since the Centre for Monitoring Indian Economy began the data series in 1995-96.
This central paradox of recent years needs to be considered while assessing the recovery strategy. We need to worry about how the policies work, and not just admire the list of announcements.
On fiscal support, three facts are important to consider.
First, no matter which nuclear option is used to expand resource availability, fiscal resources will be scarce. Tax, dividends, spectrum auction and other receipts will fall sharply. A significant part of the expenditure is committed, including ₹7.1 lakh crore of interest expenditure in 2020-21. Expenditure on schemes such as the employment guarantee scheme and food subsidy will increase.
Second, since the crisis is destroying considerable value in the economy, there will be many competing demands on fiscal resources. To avoid a fiscal crisis later, the government must spend its limited resources efficiently.
Third, our expenditure system is plagued with a number of allocative and operational inefficiencies. This crisis necessitates comprehensive expenditure management reforms.
Considering the above will give the government a sense of the budget constraint in which it can support the economy. Given that we may need to live with Covid-19 for another year, there seem to be three good uses of money at this time.
First, the government can help restart economic activity while Covid-19 is still a threat. Many who are rightly worried about attracting the wrath of the virus may stay away from economic activities. We need to lower the subjective probability that people place on getting the virus, and dying from it. This requires intensifying public health measures (screening, testing, quarantine and treatment efforts); expanding public transport deficits to ensure social distancing; and increasing resources for public order. These efforts can reduce the economic costs of the crisis, and preserve economic value. While firms, communities and families can contribute, these efforts will cost fiscal resources. Most of these activities are in the realm of state and local governments, which are resource-starved at the moment. So, a large part of the fiscal package should be given to the states to spend.
Second, while the government has announced relief measures, it is becoming obvious that many vulnerable sections, especially informal and migrant workers, are falling through the cracks.
As the unemployment rate is around 25%, and many households are struggling to make ends meet, there is a duty to ensure relief reaches them in a timely manner. One of the systems that must be reformed urgently is the integrated management of the public distribution system, so that food subsidy can be availed anywhere across the country. More cash transfers may also be required.
Third, since uncertainty is limiting the effectiveness of liquidity measures, they need to be supplemented with fiscal measures. Solutions such as creating a bad bank or doing anticipatory recapitalisation cannot reduce this uncertainty. The government has announced a scheme to give complete guarantees for loans given to micro, small and medium enterprises (MSMEs). This leaves little incentive for banks and NonBanking Financial Companies to identify the firms that are likely to survive the crisis with loan support.
It would be better to give partial guarantees. Similarly, the government needs to be hardnosed about spending money. It is perhaps not a good idea to infuse resources into weaker MSMEs (₹20,000 crore subordinate debt) during such a crisis.
On the reforms package, two points are worth keeping in mind. First, the government should send a message to its enforcement authorities that this is a moment to be pragmatic about their approach to businesses, as they struggle to cope with this crisis. The de jure policy changes are not enough, unless the overall political stance towards businesses and market changes.
In the last few years, there has been a rise in the government’s hostility towards the private sector, as evidenced by the rise in tax disputes and actions of enforcement authorities. Second, the implementation and de facto integrity of reforms matter, as the example of GST shows. Reforms do not automatically lead to good outcomes.
Unless we are careful, we may do more harm than good in our response to this crisis. This is about achieving rational action when fear is all around us. The question for us, as a country, is to paraphrase Rudyard Kipling: Can you keep your head when all about you are losing theirs?