Finance minister Nirmala Sitharaman yesterday wound up the five-part announcement of stimulus and reform measures following Prime Minister Narendra Modi’s announcement of a Rs 20 lakh crore package. The stimulus aims to tide over the immediate challenges caused by the lockdown, while the structural reforms are to make India a more competitive economy. Both are essential and the overall aim of the government welcome. But several questions remain about whether the government’s diagnosis of the current economic situation is exacting enough and whether the measures outlined can actualise long-delayed reforms.
As is the case with other stimulus packages in the world, India has presented a mix of monetary and fiscal measures. However, context matters. India’s economy has lost momentum for three straight years and the financial sector has lurched from one crisis to another. Its lethargic condition raises doubts about the dependence of India’s package on this financial sector to spearhead a revival. This is why the government should consider more direct transfers. For industries such as aviation where revenue has disappeared and normalcy is far away, such support may prove critical. They need to survive now to benefit from reforms. The same applies to the poorest citizens.
When private spending’s squeezed, it’s enhanced public spending which offsets the decline in aggregate demand. State governments therefore are a key element in holding up demand. For this year their borrowing limit has been raised conditionally from 3% to 5% of GSDP. But since poorer states will face significantly higher interest rates than the Centre, a better alternative could be lowering states’ contribution to social safety nets like MGNREGA. This will allow for better implementation at a lower overall cost. As Sitharaman said, it is the states that are at the front end of fighting the pandemic.
Of the many pending structural reforms that found place in the finance minister’s package, dil maange more. For instance, to unshackle agriculture the Essential Commodities Act needs to be scrapped, not amended as is planned. Likewise increasing FDI in defence production to 74% from 49% will yield dividends only when combined with fixing decision-making bottlenecks that discourage private players. Exports crashed 60% in April, just one indication of the decline that has been taking place during the lockdown. Centre and states will need to work in tandem to revive economic activity and actually deliver on reforms. This is the only way to rebuild limping businesses and decimated livelihoods.