Coronavirus relief package: Why banking on fiscally conservative policies is imprudent

Several economists and businessmen have expressed their disappointment with the contents of the financial package announced by the government to face the unprecedented economic crisis brought about by the Covid-19-induced lockdown, the suddenness and severity of which had itself surprised many epidemiologists.

The callousness toward the migrants and lack of immediate preparation to send them back – or at least feed and house them – before the lockdown have shocked many. The financial package includes many liquidity enhancement policies already announced by the Reserve Bank of India and new loan guarantees that are unlikely to be effective when demand deficiency discourages producers to take loans.

It also includes some otherwise-desirable structural reform proposals, like those for agricultural marketing, power distribution companies or privatisation of inefficient public enterprises. But as is well known, a fire outbreak is not the best time to sit down and talk about reforming the ways of running the fire station.

While the hype was about 10% of Gross Domestic Product, the fiscal package contained immediate relief of not much more than 1% of the GDP.

The case for cash infusion

In view of the severe job and income losses faced by the poor, many economists have stressed the need for larger cash assistance to those who do not have bank accounts. This can be done by sending a money-order by post or even dispensing cash with indelible ink on finger – particularly to urban workers and street vendors.

There should also be provisions for owners of micro, small and medium enterprises – one-third of which, surveys indicate, are beyond recovery – and wage subsidies to employers to discourage lay-offs. Instead, our rule-bound bureaucrats have been obsessed with inclusion error – that of money going to some non-poor people, even as hunger stalks the land.

While state governments are on the frontline of the public health battle, and social protection and agriculture and are near-bankrupt, the Central government has been very stingy in arranging for large and necessary fiscal transfers, starting with Goods and Services Tax arrears and shortfalls. The states will also be hurt by cuts in centrally-sponsored schemes. Even the corporate social responsibility donations can go to PM-CARES fund, but not to the Chief Ministers’ Relief Funds – chief ministers supposedly don’t care enough.

Politics of fiscal apathy

The raging question is why has the Central government in India been so tight-fisted, compared to many other countries? It is worth examining some of the usual political-economy rationales offered.

Even though the majority of academic and policy economists have asked for a more generous rescue package, there are fiscal conservatives in and around the government who are worried about the inflationary consequences of large fiscal deficits, particularly with tax revenues declining. The United Progressive Alliance government had a much larger rescue package after the 2008-’09 financial crisis, but what lingers is the memory of its inability to control the inflation in later years and the electoral price it paid.

During the financial crisis, some countries in Europe and elsewhere that adopted serious austerity policies, suffered severe adverse consequences, particularly for their poor workers. In India, under the current conditions of large food stocks and foreign exchange reserves and low international oil prices, inflation is not on the immediate horizon. The more the economic recovery is delayed by austere fiscal policies, the more acute will be the revenue shortfall and debt problem.

Of course, we are now facing both supply and demand constraints, but the supply constraints are likely to ease up much earlier – as the agricultural sector and rural areas have been significantly less affected by coronavirus than metropolitan areas, and as transport bottlenecks clear with the unlocking of the economy. Meanwhile, the demand deficiency problem will loom large. The supply constraint would also have been alleviated by more cash infusion, not just loan guarantees, into the micro, small and medium enterprises sector.

Large-scale public borrowing, both domestic and foreign is called for. As many as 66 countries have already received emergency financial assistance from the International Monetary Fund, while India has not even asked for it. The necessary fiscal space can be created to pay it back in the medium term by fresh taxation – such as wealth, inheritance and carbon taxes, for instance – and reduction of large subsidies that now primarily go to the better-off. Those who insist that there is no fiscal space are directly or indirectly covering for vested interests, expecting the poor to quietly bear the brunt.

Another possible reason for the relative fiscal apathy of the Central government for the poor may be that after the lifting of the lockdown, the problem is now in the hands of state governments. If things do not work out, they can be blamed. Moreover, the tragedy of the migrant workers may be politically tolerable, as they don’t usually vote at their places of migration. But some of the state governments run by the Bharatiya Janata Party – in power at the Centre – are also suffering from the resource crunch, and many migrants are going back to states run by the ruling party or its allies.

There may also be some overconfidence in the ruling party. After all, they have successfully overcome, with electoral impunity, earlier policy blunders – like demonetisation and implementation of the Goods and Services Tax – that also ended up assaulting mainly the poor. Then there is always the ultimate resort: the supreme leader’s magical oratory and some national security-related patriotic circus to go with it.

Pranab Bardhan is Professor of Graduate School at the Department of Economics at the University of California, Berkeley.