Though India has announced numerous relief measures since the March 2020 lockdown, they have not matched the economic disruption brought about by the severe lockdown.
The stimulus package of ` 20 lakh crore announced on May 12, 2020 accounts for 10 per cent of the GDP of India. The package included the various liquidity measures announced by the RBI in February, March, and April, and also the earlier fiscal package announced on March 27, 2020. The various liquidity measures announced by the RBI over the months of February March, and April accounted for ` 8.02 lakh crore. The first stimulus package announced by the union finance minister on March 27, 2020 amounted to ` 1.93 lakh crore and constituted of ` 1.70 lakh to distribute free food grains, and direct transfer of cash through Jan Dhan accounts to famers, women and the elderly, distribution of free LPG cylinders, and 85 per cent of train fares of migrant labourers returning to home. It also contained a healthcare package of ` 15,000 crore for building health infrastructure. The revenue loss incurred on account of various tax concessions was factored in at ` 7.8 thousand crore. In May 2020, a series of announcements amounting to ` 11.03 lakh crore, were made by the union finance minister over the week (following the May 12 announcement by the prime minister). So, the total package amount wentn up to ` 20.97 lakh crore.
However, estimates of the fiscal outlay, including provision of free rations under the PDS since the lockdown, the Pradhan Mantri Garib Kalyan Yojana of March, and the direct fiscal amount involved in the AatmaNirbhar Bharat, do not exceed around 1.7 per cent of GDP! So, there is a very large gap in what was announced and the actual fiscal billing of the relief measures, say critics.
The major portion of this package was dedicated to liquidity measures, with just a small part for infusion of money into the economy to boost spending. This amounts to just ` 66,250 crore, and includes the advance tax refunds and provident fund rebates, which amounted to ` 62,750 crore. It is to be seen that even the remaining amount of ` 3,500 crore was not meant for direct cash transfer, it instead accounted for the allocations of cereals and grams for families.
Of the demand-side interventions in the AatmaNirbhar Bharat package, an important one was the ` 40,000 crore of additional outlay for MGNREGS; all other such interventions have to do with consolidation of existing funds, their re-routing or frontloading, etc. The Garib Kalyan Rojgar Yojana, for instance, launched on June 20, 2020, to boost employment and livelihood opportunities for migrant workers, consolidates projects spread across various sectors.
The measures by RBI (` 8 lakh crore) included liquidity boosting and credit related measures like cuts in interest rates and a special liquidity facility for mutual funds.
Various experts feel that the severity of economic hardships required infusion of spending power into the economy, but the focus of the government remained entirely on liquidity measures. In case of RBI’s rate cuts also, the desired outcome could not be attained. But, the central government showed a reluctance in adopting direct methods of spending money and mainly depended on financial institution.
Cash Transfers have constituted the largest category of support in the case of other countries: on average, such transfers amounting to 30 per cent of monthly GDP per capita touching 46 per cent in the case of lower-middle-income countries—for an average of 3 months. In India, in the same period, a much lower figure was assigned for cash transfers which in actual implementation has been lower still.
Other countries have expanded coverage of their cash transfer programmes in a significant manner from pre-COVID-19 levels: the number of beneficiaries increased in Bangladesh by 163 per cent and in Indonesia by 111 per cent. Cash schemes in the latter covered 60 per cent of the population; new unconditional cash schemes were set up to reach another 20 million individuals in rural and urban areas. Of 621 measures across 173 countries, half were cash-based measures.
Developing countries have resorted to drastic means to finance COVID-19 responses even as India has shown muted fiscal response and limited monetary measures. It appears that Government of India (GoI) chose to follow countries like US, Canada, and the UK in this regard. The Chief Economic Adviser (CEA) to the GoI, Krishnamurthy Subramanian assessed some of these packages and observed that the actual fiscal effect of the package announced by the UK (projected to be 15 per cent of the GDP) was only 3.7 per cent of the GDP. In the same way, the package announced by the US government amounted to 6 per cent of the GDP, and not the projected 10 per cent.
One reason cited for GoI adopting limited monetary and fiscal measures is its high debt-to-GDP ratio—higher than that of most developing countries. But aggregate demand and confidence in the economy being low, recovery may take time. So, additional fiscal outlays, such as cash and in-kind transfers and expanded public works scheme are needed to see that the slowdown of the economy does not stretch on. Not spending now, such as through cash transfers, can have a worsened impact on the debt-to-GDP ratio if growth remains low.
The central government is rightly concerned about the rising fiscal deficit, but in such extraordinary times, it may not be the best course of action. In case revenue falls due to narrowing demand, these would be a considerable increase in fiscal deficit anyway, even if the government highly restricts the spend ending.
Many critics are of the view that government would soon resort to direct monetisation of deficit option.