Stimulus Package: The Benefits Are There To See, And Those Who Say Otherwise Are Ignoring Lockdown Impact

This article is motivated by the recent experience of participating in several discussions on economic issues — and a conventional argument made by those who disagree is that the first stimulus package has not reached or rather not benefited anyone.

Of course, the statement made by the opposing side is hyperbole as they themselves are aware that the package did reach the bottom one-third of the population. However, their contention is that the first two stimulus package(s) do little to revive economic activity in India.

Luckily, there is data that is available which can help us better understand the impact of the first two packages. But before we get to the data, let us take a look at the Google Mobility Data shown in Figure 1.

The data shows a steady normalisation of mobility across the indicators. Normalisation of mobility is critical for normalisation of economic activity and thus, this must be viewed as an encouraging sign.

The improvement in normalisation of mobility is also partly because of reversal of lockdown restrictions. This is important as the extent of the contraction in the first quarter gross domestic product (GDP) figures was an outcome of the lockdown restrictions.

The second quarter will also witness an economic contraction; however, it won’t be as severe as the first quarter.

Figure 1: Google Mobility Data for India

Let us recall the Atmanirbhar Bharat package, and the initial package of Rs 20 lakh crore was divided into fiscal, monetary and macroprudential support to Indian businesses.

Interestingly, Niranjan Rajadhyaksha made an important observation in his article where he highlighted how India’s policy support is consistent in terms of its size and scale with the one offered by other emerging market economies. However, the composition of the support was more similar to advanced economies.

A more nuanced discussion on this distinction is warranted and will be a subject of a later article.

However, the important fact is that the size and scale of fiscal support provided is similar to other emerging market economies.

A key component of the support under the original programme was cash transfers to the bottom one-third of the population, free food entitlements under the Food Security Act and support to businesses in the form of collateral free extension of working capital limits along with regulatory forbearance.

A major part of the policy support was thus directed towards the poor and vulnerable sections in the form of cash transfers, while the support for businesses was with the intention of trying to cushion the impact of the Covid-19 pandemic on the balance sheet of Indian companies.

There was a significant support that was extended to the rural sector — even as it could continue under the lockdown restrictions.

Subsequently, the agricultural sector grew at 3.4 per cent in the first quarter of financial year (FY) 2020-21 as against 3 per cent in the same quarter previous year.

This shows that policy support was indeed instrumental in stimulating the rural economy.

Would the rural sector have performed at even 3 per cent when rest of the economy was shut without the policy support? Probably not.

In fact, the support to rural economy translated into higher appetite for purchase of tractors and other such equipment — all of which are produced in the secondary sector of the economy.

So there will be some spill over benefits of the support extended to the rural economy onto the secondary and tertiary sector. However, the benefits will be small given the relatively lower share of gross value addition (GVA) in agricultural and related activities.

Another important indicator is of employment — and many times on such discussions, people point at the issue of jobs along with the contraction in the economy.

On the contraction of the economic activity, I have written earlier that it was bound to happen as 60-65 per cent of our economy was shut for a major part of the quarter.

In the absence of economic activity taking place, there is bound to be an economic contraction.

No amount of stimulus could have prevented it and even a demand stimulus where government gave every Indian a fixed amount would not have resulted in expansion of economic activity as production was shut.

Thus, there is no policy tool which could have prevented an economic contraction in the event of a lockdown — and the entire world has witnessed an economic contraction due to the lockdown.

However, what could be done was to contain the extent of economic damage that was permanent as a consequence of the pandemic and subsequent lockdown.

This is where the regulatory forbearance and supply side interventions come in handy — as they were employed by several advanced economies, as well as India.

Deferring tax payments, allowing for a loan moratorium and collateral free loans backed by the government were critical in preventing massive bankruptcies.

Of course, some firms may have shut shop — and that economic recovery is still underway, but imagine the extent of permanent scarring of economic activity in the form of a permanent loss of capital in the absence of such policy support?

To give a perspective on this, the unemployment rate in January 2020 in India as per CMIE was 7.22 per cent — the same figure for urban was 9.7 per cent and for rural it was 6.06 per cent.

These figures peaked in the month of April 2020 to 23.52 per cent for all India, 24.95 per cent for urban and 22.89 per cent for rural.

In the first quarter, the unemployment rate as per CMIE averaged 18.47 per cent as against 7.4 per cent in the second quarter of the financial year.

Incidentally, all India unemployment rate for September is at 6.67 per cent.

Table 1: Unemployment Rate (in %)

It could be the case that labour force participation rate may have reduced in September. However, even with that, the extent of reduction in the unemployment rate corroborates with the gradual normalisation of economic activity which is also consistent with the increase in goods and services tax (GST) collections.

What this data shows is that the government supply side interventions were instrumental to some extent in preventing the permanent scarring of economic activity to some extent or that it helped companies by cushioning a part of the impact of the pandemic.

In the absence of the policy support provided, the situation would have been far worse — as it has been in several parts of the world.

There is no doubt that the first round of the stimulus has had a positive impact on the economy and anyone who says otherwise is perhaps ignoring the stringency of the lockdown and its implications for companies that saw a severe cash-flow problem which could have forced them towards bankruptcies.

The focus, now, however, is on the growth recovery process as we attempt to address the key challenge of restoring economic activity to the pre-Covid-19 levels as quickly as possible.

It would be worthwhile to remember that this will remain a challenge till the pandemic is contained with the availability of a vaccine.

Nonetheless, a bulk of the policy support extended on the supply side would require now for demand to be back into the system to help restore the balance sheet of private companies.

The government has thus far decided to bank on government employees to drive the final consumption in its second stimulus and we will have to wait to see its impact over the coming few quarters.

However, the issue of providing support to the economy is far from over as government and the Reserve Bank of India will have to continue with the policy support well into the next financial year.