The global economy and the national economy are facing a crisis which by scale and nature is unprecedented in modern history. On one side, the pandemic and lockdowns have disrupted the supply chains. On the other side, millions have lost their livelihoods and demand has slumped. As a result Japan has already entered the third consecutive quarter of negative growth and is formally declared to be in recession. All OECD countries are on the track to recession. So are China and India. IMF has indicated that the world economy would contract by 5 percent. During the current quarter, the economies are going to shrink by anywhere between 10–50 per cent.
How have the policy makers and economists worldwide addressed the above calamity? There is near unanimity, even among the conservatives, regarding the importance of income transfers to the people so that demand picks up in the economy. American President Donald Trump, who detests all notions of a free lunch, is implementing one of the biggest income transfer schemes of about one lakh rupees for every citizen, besides unemployment allowance to more than 30 million workers who have lost their jobs. In nearly all countries, there are various schemes of quantitative easing or helicopter money (as it is now called) with the Central banks playing a direct role. Orthodox monetary policy is being given up, at least for the time being. Everyone is swearing by Keynes.
Perhaps the only country that has bucked the trend is India. Prime Minister Modi has declared a Rs 20 lakh crore stimulus package, equivalent to 10 percent of the GDP. Even the stock market, to which the rhetoric of reforms should have appealed, has signalled that the package is a hoax. The Sensex which gained 1,000 points after the Prime Minister’s announcement of Rs 20 lakhs crores, shed 2,000 points from the peak as Finance Minister Nirmala Sitharaman pealed the packaged onion in the next five days. Everybody understood the package for what it was worth – it had very little to stimulate the economy in the short run.
According to the research wing of the SBI, the largest of Indian banks, the direct fiscal impact of the package for the current year was only Rs 2,02,660 crores or 1.01 percent of GDP. The rest are all loans of the financial institutions or monetary support to these institutions or expenditure to be incurred in future. Of the Rs 2 lakh crores of direct fiscal impact only Rs 76500 crores (including free ration) involved direct money transfer to the people. This constitutes a paltry 0.38 percent of the GDP. This in a nutshell is what has been repeated by every spokesperson of financial firms who have been quoted in the various reports explaining the strange behaviour of the stock market.
The corporates have no reason to grumble after Rs 1.5 lakh crore tax concessions and a heavily subsidised lunch of the public sector, mineral resources and land. But for the farmers and MSME sector additional loans have been promised liberally but very little has been done to compensate their loss during the lockdown or to ease their debt burden.
The behaviour of the Central government makes no macro-economic sense, let alone, basic human empathy and concern for the poor who are today symbolised by the refugees on a flight on foot in their own country. Perhaps the same set of quacks who advised the Prime Minister on demonetisation are once again on the prowl. I was shocked beyond words to read a headline given to the statement of the new economic adviser. It read: “Big Stimulus will Cost Big; There’s no Free Lunch”. It is the duty of the government to provide free lunch to the millions of Indians who have lost livelihoods and income due to the virus and the lock down. What makes no sense to individuals and firms can be perfectly rational for the government from a macro-economic perspective. Was it not Keynes who famously said in the General Theory “The government should pay people to dig holes in the ground and then fill them up again”?
A new breed of “patriotic” leaders has fantasised that India in the post-pandemic world will be flush with capital, technology and jobs brought by firms fleeing from China only if we proved our unshaken allegiance to the fiscal deficit number game, demolish labour laws and privatise all sectors and institutions including public health. Everyone is free to have their dreams in the long run but we must survive the short run. This is what even the market that would have no problem in sharing the long run approach of the stimulus package has stated in loud and clear terms. Will the policy makers put forward a sixth instalment of the stimulus package that would address the demand side of the crisis?
The minimum we should attempt are the following: One, free public transport and food and pocket money for all migrant workers who want to go home. Two, transfer Rs 7,500 to every Jan Dhan account. Three, transfer half the last year’s wages of MGNREGS workers as advance in to their accounts. Four, free ration to all including those who do not have ration cards.
Yes, during this pandemic while formulating policy remember Gandhiji’s talisman - think of the poorest person you have ever seen and ask how the policy would benefit this person. The time to act is now.
Dr.T.M.Thomas Isaac is the Finance Minister of Kerala.
Syndicate: The Billion Press