India has introduced a Rs1.7 lakh crore ($23 billion) financial stimulus package to battle the coronavirus pandemic spreading its tentacles across the country. The country, with its dense population and creaky healthcare system, has already reported nearly 700 cases and is now in the midst of a 21-day national lockdown aimed at avoiding a colossal disaster.
The stimulus announced by finance minister Nirmala Sitharaman yesterday (March 26) partly covers some of the basics that the government desperately needs to get right under these circumstances: ensuring essential services remain operational, migrant workers’ welfare, functional public distribution system, etc.
This is in keeping with the assumption that the poor and the most vulnerable will bear the brunt of the lockdown. The idea being to achieve a semblance of equity in this difficult situation.
However, a few key issues with the package need to be looked into immediately.
- What a part of the measures announced actually represents “incremental” budgetary allocations? The answer to this is not straightforward. Wages under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), have gone up by Rs20 per day. The Act assures every rural household, whose adult members are willing, at least 100 days of wage employment every year. This hike in wages, an 11% increase assuming the same number of person-days of work, is hardly adequate, given that the government retains the power to suppress the number of days per worker. One would have hoped for far more concrete steps—increasing the number of days one can claim, a significant rise in the daily wage, etc. In rural areas, MGNREGA remains pivotal to alleviate distress, though its potential remains sadly underutilised. MGNREGA needs to focus on creating durable assets and providing as much employment as possible in these difficult times. However, first, the central government should clear all MGNREGA arrears—and we have heard nothing about that. According to data from the Public Financial Management System, payments start dipping from the third quarter of every financial year, and on average, 20% of the annual allocation is spent on clearing arrears of the previous years. Going by the expenditure of 2019-20, this would amount to around Rs15,000 crore of arrears already waiting to be paid. Further, given this economic crisis, the allocation for 2020-21 is inadequate, as governments need to gear up to provide additional days of work as soon as the public health crisis blows over.
- The proposed enhancements to cash transfers addresses an immediate priority—putting money in the hands of households immediately. The informal sector employs 83% of India’s labour force. These are workers who have no stable income, are not covered by formal safety nets such as pensions, or any form of wage protection.
While large companies may be encouraged to protect the incomes of their workers, they have little influence over their downstream supply chains. In order to support informal sector workers, a limited-term basic income scheme must be introduced. Putting cash in the hands of people not only spurs demand for goods and services but has a significant effect in buoying public sentiments. The finance minister’s proposals in this area are relatively small, bordering on the insignificant—there is no real increase in the budgets allocated for either pensions for senior citizens and widows, and the announcements made for SHGs.
There are some positives, of course. The cash transfers needed to go beyond existing schemes such as the Prime Minister Kisan Yojana for farmers, which only benefits landowners while neglecting daily wage earners. On this count, the government doesn’t disappoint, as the scheme only gets an on-time payment, while other forms of cash transfers have been enhanced, although by relatively minor amounts. Similarly, the enhancements to formal sector pensions benefit only a very narrow slice of the labour force.
The overarching issue is this though: Is this a knee-jerk reaction to an ill-planned lockdown? Soon after announcing the stimulus package, the government claimed credit for having done so within 36 hours of having imposed the nationwide lockdown. This unintentionally reveals the level of planning and preparation.
Any fiscal stimulus needs to meet two concurrent goals—one, to put more money in the hands of poor households immediately, and two, to identify a pro-poor mechanism of creating productive assets. The government seems to have addressed the first priority, and not quite the second.
Also, it seems quite clear that the government has not based its choices on any calculations of fiscal multiplier in designing this stimulus package. Research shows that whether one considers enhancements to revenue expenditure (recurrent expenses such as cash transfers) or to capital expenditure (that generates a future stream of economic benefits, such as asset creation), the fiscal multiplier is higher when states undertake the expenditure. This should have been the rationale to direct much of this stimulus through state government, and one is not sure this has been considered.
How would all this be funded? The state of the Indian economy is not great. GDP growth is below potential and tax revenue has languished. The Reserve Bank of India has announced that growth projections announced earlier are unlikely to come through. Might one suggest that the additional revenue the central government is looking to mop up through increasing excise duty on petrol—around Rs39,000 crores for this year—could be utilised to partially fund this fiscal stimulus?
However, it would require far more to fund a stimulus of this size. The government would have to look at all options to enhance tax revenue, such as higher tax rates for the super-rich and natural resource rents, while at the same time curtailing expenditure on wasteful subsidies.
World over, this is a crisis that has re-established the writ of the state, and state paternalism is exactly what the doctor ordered. An equitable economic stimulus involves trade-offs and, perhaps most importantly, they represent the social cost of an economic system that has by and large ignored basic public services. It is time to pay up.
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