Covid Relief: Why Even Experts Crashed Against The Great Reef Of Modinomics

Rumour has it that a boatload of renowned Indian economists crashed against the Great Barrier Reef of Modinomics, which is just another name for commonsense conservatism. We can confirm that all of them are safe, with only minor bruises to egos and dents to reputations. And these bruises and dents can easily be covered up by producing more 'research' and opinion on how the Indian economy is doing worse than before, how Covid-19 deaths may be 20x reported numbers, and how India is already a fascist state.

An article by Ruchir Sharma, global investment strategist for Morgan Stanley, published by the Financial Times, confirms to us that “Emerging markets that stimulated most aggressively got no pay-off in a faster recovery, owing in part to the downsides of overindulging. The big spenders tended to suffer higher inflation, higher interest rates and currency depreciation, at least partly cancelling out the sugar high of stimulus.”

Sharma notes: “Throughout the second quarter this year, the median recovery in the big spenders amounted to 12 percent of GDP, compared with 19 percent in the light spenders. Among the heaviest spending emerging markets were Hungary under Viktor Orban, Brazil under Jair Bolsonaro and the Philippines under Rodrigo Duterte — all populist governments. Each of these nations spent at least 16 percent of GDP on stimulus, including both new government spending and asset purchases by the central bank.”

From the start of the pandemic, many emerging nations watched the US and other large developed countries 'go big' on economic stimulus, and wished they could afford to follow. It turns out they were lucky if they couldn’t and wise if they chose not to.

Sharma does not say much about India, but against these parameters, India’s gross domestic product (GDP) in Q1 grew over 20 per cent in April-June this year (no doubt, on a much lower base last year) shows up as a strong recovery even when the second wave was yet to peak. Retail inflation, though worrisome, is nowhere near dangerous territory, with the September 2021 consumer prices index at 4.35 per cent, just marginally above the Monetary Policy Committee’s 4 per cent medium term target.

Tax revenues were buoyant, goods and services tax numbers are steadily rising, and foreign investment is pouring in, boosting foreign exchange reserves to nearly two-thirds of one trillion dollars ($641 billion, at last count). The markets are booming, and India created 28 new unicorns (companies with over $1 billion valuations) up to end-September.

What made India different was probably India’s decision under Prime Minister Narendra Modi to keep direct fiscal spending at a lower level of GDP than advised by world-renowned economists, who were talking about spending like crazy last year, including throwing the kitchen sink at the problem of slowdown and the possibility of a lurch towards hunger and corporate bankruptcies, especially in the micro, small and medium scale (MSME) sector.

Even better, the Modi government decided to opt for massive economic reforms, from labour to farms, from boosting manufacturing to providing relief to non-bank financial companies, even while ramping up health infrastructure to meet the challenges of Covid.

As noted in an article in Swarajya last December, this is what several eminent economists said last year, when the first Covid wave struck.

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”.

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 most egregiously wrong advice came from Swaminathan Aiyar in his Times of India 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 percent of GDP, tiny compared to the US stimulus.”

But Aiyar was gracious in defeat later, when the economy proved more resilient that he thought it would be. He wrote in The Times of India later last year: “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.”

His reputation for forecasting may be dented, but his reputation for honest self-appraisal is intact.

The real mistake these economists made was to benchmark India’s stimulus with the initial US stimulus which was more than 10 per cent of GDP. But not all countries can do what Uncle Sam with a globally acceptable hard currency can do — though America may still pay a price for its profligacy.

The fact that Modi was careful with fiscal spends last year was what made it possible to meet the even more massive second wave this year without any significant fiscal threats looming. If we had actually spent over-the-top last year, the fiscal resources for the second wave would have been an albatross around our necks — and India’s perennial doomsayers would have been thrilled that we are tripping on our own boot-laces.

Reality is no respecter of global reputations. Common sense economics often trumps expert advice, especially when that advice comes from experts with a bias against the Modi government.