Busting the Myth Around India's 20 Lac Crore Package
On 14th April 2020, the International Monetary Fund (IMF) reported that all of the G7 nations had already entered or were entering into what was called a 'deep recession', alongside most of the western world with a significant slowdown of growth across developing and emerging economies. The IMF has stated that the economic decline is 'far worse' than the Great Recession of 2009. Besides, at that time, the Indian economy was in a much better place to be able to handle the crisis, as it had been growing steeply in the years leading up to 2008.
Business cycles are typically characterised by regular recessions and booms fuelled by speculations about, and manipulations of, the money market. Stock markets slow down, asset prices plunge, some access too much money fraudulently, some borrow and never pay back - all of these phenomena lead to an economic slowdown. But this time, the situation is quite different. The coronavirus recession is one that has been caused due to a complete halt of economic activity and hence does not represent a start or stop cycle.
The Confederation of Indian Industry (CII) has said the country's GDP could even shrink 0.9 per cent in case the outbreak extends and spreads further. As India deals with its second round of the nation-wide lockdown and it becomes clear that this will be the norm for quite a while, whether in totality or in localised hotspots, the issues of dire poverty, loss of livelihood on a mass scale, and disruption of supply chains become tragically evident. Further, the restrictions on the mobility of goods and people have resulted in domestic supply and demand disruptions on the back of weak external demand - expected to result in a sharp growth deceleration with the services sector particularly impacted. It said a revival in the domestic investment was likely to be delayed given enhanced risk aversion on a global scale and renewed concerns about financial sector resilience. In such a situation, the only silver lining is India’s Balance Of Payments (BOP) position which is expected to improve on weak domestic demand, low oil prices (owing to the initial OPEC-plus fallout and later production cuts), and COVID-related disruptions.
During the course of the fiscal year 2019-20, the Reserve Bank of India had cut interest rates five times to boost growth, and to add fuel to the dwindling Indian economy, this monetary easing was complemented by fiscal measures, including $20 billion of tax cuts for companies. The economy was reeling from a breakdown owing to a series of non-performing assets (NPAs) plaguing the public sector banks. High-frequency indicators had plunged and domestic credit conditions were tight, amid weak global demand. The last quarter of 2019 marked the slowest one for the economy - with forecasts pitching expansion based on the new base year of 2012 at a mere five per cent.
A welfare package from the government can help poorer households cope with short-term losses. However, India set aside just over 1 per cent of GDP for programmes, some economists doubt that the planned economic stimulus will be enough.
The World Bank suggested that with central banks providing room to extend credit in the region, state-owned banks may be the best vehicle to on-lend funds. For example, governments could create bonds to lend to affected companies and step up through state-owned banks.
The pandemic has prompted global investors to seek safe-haven assets, with even foreign portfolio investors turning into net sellers in the Indian markets. Further, to put tabs on the foreign direct investments and curbing opportunistic takeovers of Indian companies, at such a time, the Department for Promotion of Industry and International Trade (DPIIT) has decreed that all such investments have to be now undertaken via the government route and after attaining the required permissions, only.
According to experts, there is also the possibility of a W-curve in the spread of the pandemic, giving rise to a recurrence of the virus and hence making regular lockdowns a possible reality in the future as well - a factor that businesses should be keeping in mind to plan ahead. Speculating the global flow of capital, badly battered economies in the West could be overtaken in this case by countries like India, Japan and Indonesia - if they can act efficiently to pull the capital. Raghuram Rajan, former governor of the RBI has taken to warn businesses against bad costs and traditional working methods and urged Indians to usher in an insulated and protected economy post the pandemic, well-equipped with lean mechanisms and sound digital backing. Since small businesses have to work with thin capital reserves, he also urged the Micro, Small and Medium Enterprises (MSMEs) to have a look at how they can build some business reserves in the form of liquid reserves, to endure such disruptions in the business cycles in the future.
On 13th May, in his address to the nation, Prime Minister Narendra Modi said the country should view the ongoing crisis as an opportunity to nudge economic self-reliance and addressed the important practice of promoting ‘local’ products. Announcing the Atmanirbhar Bharat Abhiyan (Self-reliant India Mission) he notified that the Finance Ministry would be announcing the details of a financial package worth INR 20 Lakh Crore, after including the first package of relief funds announced by Finance Minister Nirmala Sitharaman and the RBI earlier last month. This meant the total amount of additional money - that is over and above what the government would have spent - is substantially less than INR 20 Lakh Crore. A rough estimate suggests that the RBI’s decisions have provided additional liquidity of INR 5-6 lakh crore since the start of the COVID-19 crisis as well as added to this is the INR 1.7 lakh crore amount from the first fiscal relief package announced by the Centre on March 26th. That leaves an effective amount of INR 12 lakh crore which has been allocated to the agricultural, MSMEs, and other sectors through a set of five trenches by the Finance Minister.
While it is obvious that the government only has control over the fiscal policy aspect of things, the inclusion of the RBI’s spending on the crisis into its ambit, comes as a problematic angle to the situation. For instance, when the United States had announced a relief package of $3 trillion, it only referred to the money that will be spent by the government and had nothing to do with the spending that the Federal Reserve might have made with regards to the crisis.
Even as the restrictions on the movement of goods in certain areas have been lifted and the flow of the economic activities in the countries is restarted with the onset of phase four of the nation-wide lockdown, the start is sluggish. Pegged at 10% of GDP, the Atmanirbhar Bharat Abhiyan ranks among the biggest in the world in terms of economic stimuli - as a standalone. It ranks behind Japan, the US, Sweden, Australia and Germany. Coupled together, the lockdown inertia and the economic roadblocks have created a foggy future for the nation.
The amount of money the government will be spending this year will range anywhere between Rs 16,500 crore to Rs 55,000 crore. This is because most of the measures announced are credit-focused and aimed at solving liquidity concerns faced by MSMEs and the NBFC sector. By nudging the financial system to lend more money, none of these announcements actually require the government to carry out any DBTs at the moment. The actualisation of how much these stimuli cost the government is a considerable notion for the future. It also remains to be seen whether the crisis pans out in India’s favour, or otherwise.
 Gita Gopinath, The Great Lockdown: Worst Economic Downturn Since the Great Depression, IMF BLOG (Apr 25, 2020, 7:41 PM) https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-the-great-depression/
 Faisal Islam, Coronavirus recession not yet a depression, BBC News (Apr 25, 2020, 7:45 PM)
Sandeep Singh (with input from agencies), Growth Below 1% Or Recession? India Stares At COVID-19 Impact On Economy, NDTV PROFIT (Apr 22, 2020, 7:51 PM) https://www.ndtv.com/business/coronavirus-crisis-india-gdp-to-shrink-0-9-in-2020-21-if-covid-19-get-prolonged-says-cii-2216882
M Suresh Babu, Economic policy lessons India can learn from Covid-19 pandemic, INDIAN EXPRESS (Apr 22, 2020, 7:51 PM)
 Bloomberg, India is heading for an economic growth of below 5%, BLOOMBERG (Apr 25, 2020, 7:47 PM)
Indian economy: India is heading for an economic growth of below 5%, Auto News, ET Auto
 Bloomberg, India is heading for an economic growth of below 5%, BLOOMBERG (Apr 25, 2020, 7:47 PM)
indian economy: India is heading for an economic growth of below 5%, Auto News, ET Auto
Amartya Sen, Raghuram Rajan, Abhijit Banarjee, ‘Huge numbers may be pushed into dire poverty or starvation…we need to secure them’, INDIAN EXPRESS (Apr 25, 2020, 8.01 PM)
Views expressed are solely those of the author.
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About the Author
Bhavya Pandey is a student of Economics at Daulat Ram College, University of Delhi. A voracious reader and declamatory writer, she has grown up exploring and opining on a plethora of subjects ranging from environment to economics. She is a trained Indian classical dancer in Kuchipudi, under the tutelage of Padmabhushan Gurus Raja Radha Reddy and has been performing for more than a decade. Bhavya enjoys penning down poetry besides affixing a monocle and combing library bookshelves in search of classics in her free time. She is also currently serving as the Joint Secretary for the Women’s Development Centre of Daulat Ram College and editing for three collegiate level magazines. Bhavya can have endless conversations about the internet and food.