Covid Economic Response Scoreboard At Half-Time: Modinomics 2, Critics 0

Sometimes, commonsense is better than the advice of world-renowned, Nobel-winning economists.

Ever since Covid-19 laid the Indian economy low, the Narendra Modi government has faced two kinds of criticisms: one relating to the “harsh” lockdowns and the resultant fall in gross domestic product (GDP) growth, not to speak of spiralling infection rates all the way from March to September.

The other criticism was related to the size of the stimulus packages announced by the government, which was declared to be “miserly” and inadequate.

The score at half-time in the fight against Covid – both the health and economic fallouts – is Modinomics 2, Mindless Critics 0.

It is still half-time, for the war against Covid has not yet been won. But with active caseloads now falling well below 300,000 (it was 292,518 on 21 December), India is far ahead of America and Europe in the fight. The latter are not in full control of the spread, including its mutant variations.

Even economically, we are not over the hump. In first quarter (Q1) and Q2 of fiscal 2020-21, we had negative GDP growth; unless the third quarter (October-December 2020) shows a rise, and this is followed by another positive number in the last quarter, we can’t say the battle to revive growth has been decisively won. The budget will have to provide additional stimulus for growth.

The reason why critics of conservative Modinomics owe us an apology is simple: for quite some time now, they have been trying to stampede the government into making huge fiscal commitments to boost demand – and this when production is not fully cranked up.

School-book economics tells us that putting more money in the hands of people when supply kinks have not been fully ironed out, and when people are still cautious about spending on non-discretionary items, can only have two outcomes, both negative: higher inflation, or higher savings in order to repay old loans or to deal with future uncertainties.

But our Nobel laureates, from Amartya Sen to Abhijit Banerjee, from Raghuram Rajan to Kaushik Basu, both former chief economic advisers, and even economic commentators like Swaminathan Aiyar, wanted India to spend money hand over fist.

Hear what they said soon after the lockdowns were announced and the government announced a reasonable relief-cum-stimulus package.

Hear Raghuram Rajan on the government stimulus package of March 2020: “This has been meagre; primarily free foodgrains to poor households; and credit guarantees to banks for lending to small and medium (SMEs) firms, where the take down has been patchy.” He added that the government’s strategy of saving up resources for a possible future stimulus was “self-defeating”.

Hear Abhijit Banerjee on the stimulus: “We really haven’t decided on a large enough stimulus package. We are still talking about 1 percent of GDP. The US has gone for 10 percent of GDP… I think spending is the easiest way to revive the economy. Because then MSMEs get money, they spend it and then it has the usual Keynesian chain reaction. We cannot shut the entire retail sector because they are situated in the coronavirus red zone.”

Kaushik Basu: “...We do need a large fiscal stimulus. India has the FRBM Act, 2003, for fiscal management and to make sure that government does not overspend. But the FRBM is a sophisticated piece of legislation that recognises that, during times of natural calamity, we should be allowed to run up larger deficit.”

The worst advice came from columnist Aiyar in his Swaminomics column. He called the government’s stimulus “outrageously small; crumbs from a miser’s table; spineless obeisance to fiscal orthodoxy; cowardly fears of foreigners reacting badly to a massive fiscal stimulus.”

He wrote: “The lesson for India is clear. At least triple the relief package and put more money into the bank accounts of the needy. If the problem continues for six to nine months, increase the relief package fivefold. Even a five-fold increase implies an additional stimulus of barely 5% of GDP, tiny compared to the US stimulus.”

But unlike the rest, Aiyar at least had the honesty to admit he was wrong. He wrote recently in The Times of India: “The finance ministry has, from the start of the Covid-19 crisis, emphasised fiscal prudence, relying mainly on monetary measures and loan guarantees, rather than massive budgetary handouts. Having predicted that this would fail to check distress or stimulate the economy, I need to eat crow. Fiscal rectitude has kept government finances in surprisingly good shape, without producing a voter revolt in Bihar, or thwarting a sharp economic recovery. I still think the severity of the March lockdown and fiscal parsimony was grossly overdone. But actual outcomes have exceeded my gloomy expectations.”

The half-time verdict on Modinomics was delivered by T T Ram Mohan, in Business Standard, who called out the bad advice the high-profile critics offered the government soon after the lockdowns.

Wrote Ram Mohan: “In the initial months of the pandemic, there was a chorus of demands for an extra-strong fiscal response. Former chief economic adviser Arvind Subramanian and economist Devesh Kapur exhorted the government to spend an extra 5 percent of gross domestic product (GDP). Former Reserve Bank of India governor Raghuram Rajan was of the view that India’s fiscal stimulus was inadequate and the strategy of conserving the fiscal stimulus for a later date was self-defeating. Nobel laureate Abhijit Banerjee urged the government to emulate advanced economies that had resorted to a bigger stimulus. Leading economists based in India echoed these views.”

The low-profile economics brains-trust of Narendra Modi, led by Bibek Debroy and his part-time team at the Economic Advisory Council, and the Finance Ministry’s Chief Economic Adviser and Principal Economic Adviser, K Subramaniam and Sanjeev Sanyal, respectively, ignored this barrage of extravagant advice and did sensible things.

Concludes Ram Mohan: “The government kept its nerve in the face of a massive shock. It chose not to resort to a massive fiscal stimulus. It focused instead on providing liquidity support and easing restrictions on movement in stages. Give credit where it is due. The government got its policy response to the pandemic right.”

Exactly. The war is far from won, but at half-time, Modinomics and the team that provided the Prime Minister sane advice need to be congratulated. The critics need to pipe down. They got it wrong, and the least one can expect from them is a mea culpa.