COVID-19: Time to address the dichotomies in India’s economic stimulus package

A Rs20 trillion (Dh968 billion) stimulus for the Indian economy, as announced by Prime Minister Narendra Modi in a televised address last Tuesday, is unprecedented in the country’s history. To put things in perspective, this mammoth figure is 10 per cent of the size of India’s gross domestic product. Such a financial boost at a point of time when Asia’s third-largest economy, like most other countries around the globe, is reeling from a body-blow inflicted by the coronavirus pandemic is indeed timely and constitutes a much-needed panacea, given the macroeconomic ramifications of a near-total shutdown of the country for 50 days and still counting. Job losses, pay cuts, unpaid leaves, stoppage in manufacturing and farming activities are all set to have a severe impact on the nation’s annual growth rate, which, even according to very modest estimates, is likely to plunge below 5 per cent during the quarter.

A stitch in time

So, given the circumstances, there is no denying the fact that a stimulus package of the size as announced by the Indian PM is a stitch in time. There can’t be any debate on the intent behind such a move.

However, there are some areas of concern and doubt so far as the execution part is concerned that need to be highlighted, which may be lost in the din of self-congratulatory and even jingoistic bluster that often accompany such radical policy decisions.

The first area of concern is purely mathematical. India’s current account deficit (CAD) for the third quarter of the 2019-2020 fiscal stood at $1.4 billion (Dh5.14 billion). This is in sharp contrast to the figures for the corresponding period a year ago, when the CAD stood at $17.7 billion. India’s balance-of-payments position underwent a sea change and for the better. But the reason behind such a dramatic shift was not due to any corrective measure per say, but primarily owing to the fact that there was subdued economic activity in the country, following which, India’s imports reduced at a faster rate than exports. Now that was before the coronavirus outbreak.

In the last two months, with manufacturing having already taken a hit due to a prolonged lockdown that started on March 24 and with market sentiments at a low due to a general macroeconomic slowdown in the country following the outbreak, the trajectory of domestic demand is almost certain to take a plunge in the short-to-medium term. If these negative sentiments continue for long then exports are also bound to take a hit — more so, with all of India’s export destinations in Europe, North America and the Middle East likely to undergo a significant shrinkage in demand in the respective markets.

Dwindling domestic demand

According to the Centre for Monitoring Indian Economy, by the end of April 2020, more than 122 million people had lost their jobs in India owing to the coronavirus crisis — 75 per cent of them being small traders and daily wage earners. Citing economic data on May 7, India’s the Hindu newspaper reported that average employment in India reduced from around 404 million in the 2019-2020 financial year, to 282 million last month. Similarly, the India Manufacturing Purchasing Managers’ Index fell to 27.4 in April 2020, from 51.8 in March. All these parameters are bound to have a negative impact on domestic demand that contributes 60 per cent to India’s GDP, as the country continues to be the sixth-largest consumer market in the world.

Fiscal deficit

Added to these is the fact that India’s fiscal deficit for 2019-2020 was around Rs7 trillion, which was 3.3 per cent of its gross domestic product.

So, overall, with exports stagnating, unemployment rate rising at a fearsome pace, domestic demand tumbling and manufacturing hitting a roadblock, the moot point is: From where is the state funding for this Rs20 trillion package going to come? So, is there going to be some mathematical mumbo jumbo to arrive at that mammoth Rs20 trillion figure? For instance, let’s say one particular nationalised bank announces that in view of the state stimulus package of Rs20 trillion, it will issue fresh consumer loans to the tune of Rs1 trillion at a reduced rate of interest. Then, will this Rs1 trillion be considered as part of the government stimulus package of Rs20 trillion? Or is this going to be over and above that? And here’s a more concrete example of what we are trying to drive at. Federal Finance Minister Nirmala Sitharaman announced on Friday a Rs1.5 trillion stimulus package for the agricultural sector. However, the entire corpus of this Rs1.5 trillion boost will be funded by the National Bank for Agricultural and Rural Development.

Boost for FDI

The second important aspect that needs to be addressed about the stimulus initiative is the inherent dichotomy in terms of an inherent policy message.

While there can be nothing wrong in terms of principle in trying to boost local industries and make an impassioned plea to countrymen to prefer all things ‘khadi’ (local handloom) over designer brands, the point is that this 'vocal for local' exhortation leaves a lot of room for the PM’s pitch to be viewed through the prism of ‘protectionism’.

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In her budget speech earlier this year, both, as a huge sop for foreign direct investment (FDI) and also as a policy outreach to boost market sentiments, Sitharaman had proposed abolition of dividend distribution tax, thereby helping foreign investors looking to repatriate their profits from India to foreign shores. A tax of 20.56 per cent on every rupee earned in India was indeed a major dampener for attracting foreign investments to India. This, combined with reduced tax rates, translated into a significantly less tax burden on foreign investors, thereby making the Indian market a more attractive destination for foreign funds. Now, juxtapose this policy statement with PM Modi’s pitch for being “vocal for local” in his latest address to the nation. While there can be nothing wrong in terms of principle in trying to boost local industries and make an impassioned plea to countrymen to prefer all things ‘khadi’ (local handloom) over designer brands, the point is that this “vocal for local” exhortation leaves a lot of room for the PM’s pitch to be viewed through the prism of ‘protectionism’.

A level-playing field

It has taken decades for the world’s fifth-largest economy to emerge out of a moth-balled ‘licence-permit’ raj (regime) and present a more business-friendly face of the establishment to entrepreneurs from within the country. Likewise, it has taken almost half a century for the country to present a level-playing field to enterprises from beyond its shores, by hanging out those ‘open-for-business’ signs for global investors to feel secure and confident about India Inc.

The big worry now is that in a bid to placate domestic sentiments at a time of grave socio-economic crisis, such as the one we are in right now, will this “vocal-for-local” clarion-call be misconstrued as an institutional grandstanding for a protectionist era?

We will wait and watch for an answer to that.