I have not come across one economist who says liquidity acts on the demand side.’
You said in the morning that the stimulus package has left a lot of people high and dry and not enough has been done to create demand. The government’s argument, however, is that term loans will be given and working capital loans are also being provided by banks through the package so that companies can use these to pay wages, buy raw material. They also say demand does not increase or get spurred at an individual level, you can do that at an institutional level, and that is exactly what the government is looking to do. Do you agree with the government’s argument?
I absolutely disagree. First disabuse yourself of the notion that the package is worth Rs 20 lakh plus crore. It is only Rs 1,86,650 crore. Unless each of my line and item in my statement is contradicted, I am going to stick to that number. Secondly, what is the problem with the Indian economy today? It is already in a slowdown. The government seems to think the economy was a roaring at 7-8 per cent when coronavirus struck us. The economy has been on a decline for nearly two years. For seven successive quarters, GDP growth had declined and had the March figures come in May, that would have shown a further decline. So this is a lockdown upon a slowdown. Even without corona, this economy would have required a massive stimulus. With corona it requires a super-massive stimulus and that they have not given.
They are talking about liquidity. I have not come across any economist who says liquidity acts on the demand side. Liquidity acts on the supply side, but what is the use of stimulating supply side? There has to be consumers on the other side. People have to consume. Rural and urban consumption has fallen according to every survey and every review. So the first thing to do is put money in the hands of the people and stimulate demand. As long as they do not do that, these solutions are useless and would fail.
The government also says instead of giving money in the hands of people to each and every one, the government is making sure that wherever money goes out, it has a multiplier effect. Is not that really a differentiated policy approach? More than the willingness in providing relief in such a crisis, is not it the fact that the government is looking at perhaps empowering people? I just want to get your sense on that.
Buzz words! People today are hungry, they have run out of cash. Many of them are destitute. In a month or so, they have been devastated. Lower middle class families have started to borrow. Now families below the lower middle class are practically on the brink of devastation. The answer is to stimulate demand so that people can consume more goods and services. Unless people consume more, nothing will work. The government seems to think that just because it has provided liquidity, banks will lend. Well, RBI provided the liquidity and banks returned the compliment by depositing most of that money in RBI. Are they lending? They would not lend. Because the future is uncertain, the future of demand is uncertain, and most of all, the government has damaged, denigrated and vilified the banking system, or the banker so much in last five to six years that no banker wants to lend today.
The government’s argument, however, is that now they are providing some sort of a cushion to the banks. They are providing a sovereign bank guarantee as in the case of MSMEs and that will help spur demand and will allow banks to also not be so uncomfortable in lending. So they have done whatever they could to the best of their abilities at this point of time.
Their ability is no measure of wisdom. If your ability is limited, well hand over the reins to someone in your party or government who is more able. Today, banks will not lend, and you have provided a collateral-free loan facility of up to Rs 3 lakh crore backed by credit guarantee. This is for 45 lakh MSMEs. That leave out 5.8 lakh MSMEs. The 5.8 lakh MSMEs employed about 10 crore of the 11 crore people. Unless they start functioning, where is the question of supply improving as well as demand improving? As long as these 10 crore workers remain unemployed, as long as migrant workers in other sectors — construction, delivery, retail services, domestic services — remain unemployed, how will demand pick up? I think everybody has made this point. What is required now is to act on the demand side, and the government seems to think it knows better than all the economists of the world. Well so be it, and we have to live with our fate.