“The budget … will have to go down to the people,” FM Sitharaman told TOI, answering this newspaper’s question on whether GoI should provide a large economic stimulus. Her point being that critics asking for a fiscal boost should recognise that we are just two months into the new financial year, and that the budget’s expenditure package, designed for a “Covid-affected economy”, should be allowed to play out.
She’s not wrong. Her February budget was widely praised for its focus on spending. The thing is, India in June is a different country from India in February. Hence the question: Is that budget, good as it was, sufficient for these times?
Four months after Sitharaman’s best budget, the worst sort of uncertainty confronts every economic decision-maker, from migrant workers to middle class professionals to maharajas of India Inc.
This uncertainty is defined both by direct material costs of the second wave – businesses and job-creation hit by local lockdowns and falling sales, household budgets and consumption hit by current and anticipated Covid medical care – as well as by fearful questions about the near future.
How quickly and sustainably will the pace of vaccination grow? Will enough Indians, including those below 18, be vaccinated before a much-feared third Covid wave? Will a third wave hit in and around the festive season, India’s biggest seasonal economic booster? When will millions of entrepreneurs and employees in India’s high-contact service sector, which has been decimated by the second wave, see normal business conditions again? Can we really assume, given shaken consumer confidence post-second wave, that there will be another big round of revenge shopping? Can we assume any industrialist will be ready to bet on a big capital expenditure when he/ she confronts so much that is currently unknowable?
None of these was relevant in February, when India seemed to be on the cusp of an unexpectedly robust economic recovery. All of this, and much worse, is front and centre in June.
That’s why, the budget’s spending programme notwithstanding, we need an economic stimulus. Look at the budget’s key number.
GoI said in its February budget it will spend Rs 34,83,236 crore in 2021-22. It spent Rs 34,50,305 crore in 2020-21. That translates into an extra spending of Rs 32,931 crore this financial year. Given the misery wrought by the second wave, that doesn’t look like sufficient extra spending.
Economists, infamously, tend to debate forever among themselves. But all economists, bar those drunk on the Kool-Aid of extreme fiscal orthodoxy, agree that the best weapon against massive economic uncertainty in a depressed economy is massive spending.
In layperson terms, if governments provide easy money, economic agents will easily spend it. The extra cash cushions the uncertainty, boosts consumption and, with a lag, investment. Job-creation and economic growth get a boost.
The other thing sensible economists agree on is that an economic stimulus has to be timed right. Sitharaman told TOI that GoI will be ready to spend extra if required. That’s good. But when is a good time for that extra spending?
The best time is before massive economic uncertainty compounds into something toxic. In India’s current context, that means a stimulus should kick in before the Covid curve starts creeping up again, bringing with it a fresh round of fear and anxiety.
In other words, the best time for big, out-of-budget spending is now. No one knows what’s in store a few months down the line. And if even a part of the worst fears come true, if strict lockdowns and newer SARS-CoV-2 mutations reappear, even easy government cash may not enthuse economic agents.
The timing question acquires more urgency because government spending programmes have to be carefully designed. They are always a complex exercise in political economy. That takes time. Plus, even straight injections of cash – say, a three to six month cash transfer to the urban poor – need time to show up as spending in the economy.
So, if an out-of-budget spending programme is readied in June, the July-September quarter is when India will experience the feel-good that comes from a serious stimulus package. Given experts’ fear of a third wave around September, a stimulus timed this way will be just what the doctor ordered.
How should such a spending programme be designed?
First, the government will have to clearly tell markets, rating agencies and other relevant actors that it is further relaxing its deficit targets to bring the economy back on track. It should also seriously consider the option of RBI printing cash to finance a stimulus programme. In many ways, given current government spending patterns and borrowing schedule, RBI is in a quasi-printing-cash-to-finance-GoI mode anyway. GoI should have no qualms about formalising this and expanding its scope.
Second, GoI should provide cash transfers to as many low-income households as possible, whether rural or urban. The typical preference for rural/ farming households won’t do when the urban poor is among the worst affected.
Third, that cash transfer should be both realistic and time-bound. An excellent recent report – State of Working India, 2021 – from the Azim Premji University suggests Rs 5,000 per month for three months to “as many vulnerable households as can be reached with the existing digital infrastructure, including but not limited to Jan Dhan account”. The typical government monthly cash transfer, usually less than Rs 1,000 a month, won’t cut it.
Fourth, there should be employment guarantee schemes beyond the MGNREGA. For example, the urban poor, who largely finds employment in the informal service economy, urgently needs a jobs programme.
Of course, February’s fiscal math for 2020-21 will be upended by such a stimulus programme. But the country that stares back at us in June calls for a different fiscal math.
India needs a stimulus. Now.
Views expressed above are the author’s own.
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