Not enough: Why Covid-19 package is being criticised

On May 12, Prime Minister Narendra Modi announced Rs 20 lakh crore special Covid-19 package to revive Indian economy. Over the next five days, Union Finance Minister Nirmala Sitharaman and her deputy Anurag Thakur provided details of the Covid-19 package ending up with measures worth Rs 21 lakh crore for an Aatm Nirbhar Bharat.

Over the last few days, financial experts and groups have expressed disappointment over the Covid-19 package with some economists dismissing the government’s claim that the measures are a stimulus equalling 10 per cent of GDP. Some have pointed out that the actual Covid-19 package is about 1 per cent of the GDP. The rest are repackaging and appropriation of liquidity measures announced by the RBI.

Fitch Solutions is the latest to join the band wagon denouncing the special Covid-19 package saying it lacks steps to address immediate concerns of the Indian economy. It said the actual stimulus package is about 1 per cent and that “every delay to effective government stimulus will only deepen the downturn”.

Another ratings agency, Moody’s Investors Service, said the Covid-19 package is likely to ease asset risk but is “not enough” to offset the negative impact of coronavirus lockdown.

Earlier, Japanese firm Nomura found “no silver bullets” in the Covid-19 package of the Modi government. The brokerage firm said the measures announced in five tranches by Sitharaman were an attempt by the government to have “maximum bang with minimum buck”.

The analysts at the Bank of America too thought that the Rs 20 lakh crore Covid-19 package was more beneficial in medium term over three years than the short term requirements.

Industry leaders have also raised their objection with the package saying this is too liquidity centric while the lingering problem with the Indian economy is not of liquidity but of demand. Reuters quoted Biocon chairperson Kiran Mazumdar Shaw as saying, “Demand is going to play a very big part in economic revival, and if we cannot kick-start demand I fear then we cannot have economic revival. I think we have lost a big opportunity.”

What has happened with the special Covid-19 package is that it draws from already provisioned money in the Budget, the RBI measures or other announcements by the government. They were – or most of them — already in place even without Covid-19, when economy was going down the hill.

With coronavirus lockdown, the economic activities in the final week of March, whole month of April and half of May had come to a halt practically. Exports were going on.

In fact, a Barclays report says India will have a record surplus of about $20 billion (around 1 per cent of the GDP) – a major departure from usual current account deficit. This is primarily due to fall in crude oil prices and curtailed imports.

Under the impact of coronavirus lockdown, most experts have predicted a contraction in India’s GDP. This means the gross value added – this roughly the money that we earn through the year from services, industry and agriculture sectors – will also decline.

Low income means cut in expenditure by millions of households – more in rural areas and little less in the cities. This is what translates into decline in demands that economists often talk about.

Decline in demand stalls fresh investment proposals of the businesses. They are the ones in India with additional money for investment. If they curtail investment, fresh jobs would not come. The government is already in austerity mode for few years.

Low demand and low investment mean less revenue generation or income for the government. Since private money cannot be invested forcefully, the government is the only agency left to give a boost to economy – of families and the country.

The government would need to borrow money. But as seen with the Covid-19 package, the government is sensitive about fiscal deficit, which disturbs the credit ratings, which have another set of cascading effect.

“The fiscal rules to threshold deficit levels of 3{b1ee4ac4d8d7b8e1af61a560a11ca52574b8103b547ccac8037ce0cdf9e7ba58} fiscal deficit to gross domestic product (GDP) is acting as a constraint,” said a recent paper on Covid-19 by the National Institute of Public Finance and Policy.

The National Council of Applied Economic Research (NCAER), a think tank, estimates that India may need an economic package equaling 3 per cent or more of the GDP above and over already provisioned in the Union Budget and measures taken by the RBI to keep Indian economy in the green zone and rescue it from the Covid-19 shock.

But it is huge challenge especially when the top contributors to India’s GDP – Maharashtra, Tamil Nadu, Delhi, Gujarat – are also the worst affected states by Covid-19 with no definite sign of relent in its spread.

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