If the government focuses on demand, and does enough to put more cash in the hands of people and businesses, coupled with the medium- and long-term measures already announced, the Indian economy will survive 2020-21, recover in 2021-22, and jump to a different level of growth after that
In the past week, the Indian government unveiled historic reforms. It has sought to reform agricultural markets and make small industry, the back of the Indian economy, more competitive and also profitable. It has spoken of land and labour reform, and will likely follow up on both. Indeed, many states have signalled their intent by suspending all but the most basic of labour laws (which may be too much reform, by any measure).
It can be argued that all of this should have been done before. In 1991. Between 2004 and 2014. Or in 2014, when, for the first time in three decades, one party won a majority in India’s Lower House of Parliament. It wasn’t, and we should leave it at that. Now, it has been. And that should be welcomed.
So, bravo, National Democratic Alliance-3, well done, and more power to you. But all of these reforms will help in the medium- to long-term.
The problem is, all of India — from the migrant workers trudging back home to large companies that have seen zero (or close-to-zero) revenue in May — needs short-term succour.
They have needed it ever since it became clear that the coronavirus disease (Covid-19), and the lockdown imposed to tackle its spread, would have a serious impact on the economy. According to Nomura, a securities firm, the Indian economy will shrink by 5.2% in 2020-21. We are in recession territory.
On Tuesday, Prime Minister Narendra Modi unveiled a ₹20 lakh crore relief and stimulus package. Starting Wednesday, Finance Minister Nirmala Sitharaman has presented various modules of the package. She has announced radical reforms. She has announced large schemes. And she has enumerated the millions of enterprises and individuals who will benefit.
Yet, economists, who rarely agree among themselves, concur that the fiscal cost of the ₹17-18 lakh package announced thus far is just between 10% and 25%. And the upper end of this range, 25% is a very aggressive estimate of what can and will be implemented this year.
Indeed, according to an estimate by HSBC economists led by Pranjal Bhandari, for the ₹17.826 lakh crore announced till Friday, the fiscal cost is a mere ₹1.541 lakh crore, roughly 0.8% of the country’s GDP.
Chanakya usually likes to restrict his references to the classical but, making an exception, in the immortal words from Jerry Maguire: “Show me the money”.
It has been explained that one, the government has more monetary room now than fiscal; two, that there’s the fear of credit rating agencies downgrading India; three, that the monetary measures will unleash a wave of economic activity; and four, that the reforms will transform both farming and manufacturing in India.
The first and fourth are true. According to research by India’s largest lender, State Bank of India, the Centre’s fiscal deficit could more than double to 7.9%.
The third is debatable.
As for the credit rating agencies — India should just tell them where they get off.
Thus far, none of the measures announced focus on the demand side. There isn’t enough of income support or, in the case of enterprises, wage protection (in the absence of which, even large firms are going to be laying off people) or equity support.
In short, no one has as yet been shown the money, not enough of it. Or, in other words, there has been a lot of focus on liquidity and creating the right kind of ecosystem (for everything from agriculture to manufacturing), but not enough cash.
Businesses will be familiar with the challenge facing the government — it is all about managing across horizons, a concept that was first used to explain how companies could innovate, and which, it has since become clear, can be used for pretty much everything. The government’s response to the crisis scores reasonably well when it is seen in the context of what is needed in the medium-term.
It scores extremely well when seen in the context of what is needed in the long-term.
But it scores poorly when it is evaluated against the immediate needs and concerns of individuals and businesses.
The secret to effectively managing across horizons is to not ignore any of them — if the short-term isn’t managed well, the medium-term will become that much more challenging, and there may not even be a long-term.
If the government focuses on demand, and does enough to put more cash in the hands of people and businesses, coupled with the medium- and long-term measures already announced, the Indian economy will survive 2020-21, recover in 2021-22, and jump to a different level of growth after that.
But it all depends on the here and now.