Modi Government’s Calibrated Economic Relief Packages May Be Strategically Sensible

Faced with the Covid-19 economic disruption, the world has rolled out massive economic relief and stimulus packages. The US has announced a $2.2 trillion package, which amounts to 10 per cent of its gross domestic product (GDP). Germany has announced a $808 billion package, the United Kingdom $398 billion; and Japan has unleashed a massive $990 billion rescue, or 20 per cent of GDP.

In contrast, India has announced a Rs 1.7 lakh crore package for the poor and a three-month loan moratorium for borrowers. At current exchange rates, the relief package is around 0.8 per cent of GDP, or around $22 billion at Rs 76 to the US dollar.

Columnist Swaminathan Anklesaria Aiyar has called the Indian response “peanuts”. He wrote in The Times of India: “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 five-fold. Even a five-fold increase implies an additional stimulus of barely 5 percent of GDP, tiny compared to the US stimulus.”

The problem with these kinds of suggestions is that they bear no relevance to the Indian situation. It also implies that India has to follow the 'big bang' approaches preferred by the major economies.

It is to the credit of the Narendra Modi government that it has refused to be stampeded into making such large commitments which it cannot afford. For a resource-challenged nation, and also given the larger consequences of letting the fiscal deficit rip to the point of no return, this is a sensible approach.

The government’s approach was spelt out clearly by Chief Economic Adviser K Subramanian and Principal Economic Adviser Sanjeev Sanyal in various TV channels. Both emphasised that the government can and will do more, but the response to the crisis will be calibrated. To use Sanyal’s colourful expression, “we will not fire all our bullets” at one time.

The big bang approach is already finding its limits in the US. Small businesses have found that the $349 billion Paycheck Protection Program has already run out of funds barely weeks after the overall package was legislated.

In contrast, the first effort in India was to provide relief to the poorest of the poor. Liquidity easing measures to the tune of 3.2 per cent of GDP by the Reserve Bank of India (RBI) were followed up by a Rs 1.7 lakh crore package to put money and food in the hands of the poor. Most commentators felt this was too little to help the poor.

Today (17 April), the RBI announced more plans to ease liquidity and direct it to the right places. The Finance Ministry will follow up with its own fiscal package shortly. This contrasts sharply with the Western approach of a one-time massive dose of stimulus; the Indian strategy is to periodically release dosages based on a closer assessment of prioritising needs.

The reality is that India needs resources for later, when the economy has to be revived and reconstructed. Clearly, the Modi government is conserving its resources for the time when it will deliver maximum bang for the buck.

The calibrated strategy drawn up by Modi’s economic team — from the Finance Ministry to the RBI — is sensible for three reasons.

One, the consequences of spending like there was no tomorrow can be wholly negative for India compared to the West. The US can issue endless amounts of dollar-denominated treasury stock and the world lends it money as the US currency is considered a 'safe haven'. It can finance its economic stimulus package easily. The European Union and Japan are mostly in deflation territory. This means they can issue any amount of domestic currency debt and not stoke inflation.

This is not the case with India. Any excess borrowing or printing of money can lead to a debt rating downgrade and possible inflation in the medium term. The same people who are now egging the government on to borrow more will accuse it of economic mismanagement later when things go out of control.

Two, India has handled its Covid-19 challenge with reasonable aplomb; it has managed (so far) to minimise its infection and mortality rates, which are far better than the US, UK, France, and Italy, where thousands have died. Some Covid-19 hotspots have been barred from economic activity, but non-hotspot areas and green zones (those without any Covid cases) can reopen for economic activity after taking due care on safety precautions for the workforce.

Agriculture is opened up, which is over one-sixth of the economy. Manufacturing is slowly opening up. If, after June 2020, the pandemic’s spread has been clearly arrested, India can unleash its full reconstruction arsenal to revive economic activity. So far, it is timing its spending well.

Three, as a resource-scarce country, it makes sense to finance government expenditure through debt and high fiscal deficits only when growth is a sure bet. Only growth can generate the resources to finance debts. India is keeping its debt under control right now in order to use the firepower later when it can deliver more growth rather than merely more inflation.

The Modi economic strategy of calibrating monetary and fiscal stimulus in prudent dosages is likely to be a winner.