A well-balanced stimulus package
Paper: III
Mains: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Context:
Economic stimulus package will minimise the human cost of the COVID-19 crisis and also pave the path for structural reforms. Shaped by these two priorities, the stimulus is a carefully crafted, well-balanced, yet bold package that will, in the coming days, achieve both objectives.
Key Points:
- It is widely recognised that the present crisis has seriously impacted both the supply and demand side of the economy.
- The stimulus package effectively addresses both these aspects.
- Several measures have been announced to lift the sagging demand in the economy.
- It is important to point out that total effective demand is made up of demand for consumption, investment and intermediate goods.
- This has to be taken note of by those who consider only the cash in hand of consumers as the sole means for reversing the declining demand in the economy.
- Therefore, additional credit lines provided to micro, small and medium enterprises (MSMEs) or to street vendors or to farmers (additional credit of ₹2 trillion) will also surely contribute to the strengthening of aggregate demand in the economy.
Limitations of a developing economy:
- Developed countries, like the U.S. bestowed with unlimited resources, have the luxury to issue debt without any thought of its consequences on their macroeconomic balances.
- S. whose currency, the dollar, still enjoys the enviable status of being the global reserve currency. This affords the U.S. the ultimate luxury to issue debt without any thought of its consequences on its macroeconomic balances.
- India does not have these many degrees of freedom.
- Cognisant of its constraints and compulsions, the government adopted a twin mantra for shaping its stimulus package, rolled out in five phases plus one earlier phase.
Reforms:
- The announced measures aim to convert this crisis into an opportunityby implementing bold structural reforms, which have been pending for a while.
- The size of the stimulus being around 10% of the GDP compares favorably with packages announced by other emerging economies.
- The stimulus package effectively addresses both the supply and demand side of the economyas against concerns expressed by some sections, of the package being heavily focused on reviving only supply.
Economic stimulus-impact
- Several measures have been announced to lift the sagging demand in the economy.
- As against the conventional argument, that increasing the cash in hand of consumers is the sole means for reversing the declining demand in the economy, the additional credit lines provided to micro, small and medium enterprises or to street vendors or to farmers (additional credit of Rs. 2 trillion) will contribute to the strengthening of aggregate demand in the economy.
The total effective demand is made up of demand for consumption, investment and intermediate goods.
- Measures announced for ramping up consumption demand directly include:
- 1.73 lakh crore for improving the incomes and welfare of the most vulnerable, including the 20-crore female Jan Dhan account holders who will be receiving money directly into their bank accounts.
- The reduction of TDS and TCS by 25% would lead to Rs. 50,000 crore additional incomes in the hands of the people.
- 40,000 crore additional allocation for MNREGA will provide jobs to the migrant labourers returning to their villages from metros and cities.
- These measures will trigger demand, which could trigger recovery in economic activity.
- The package has guaranteed the survival of existing productioncapacities and laid strong grounds for attracting fresh investment to bolster growth.
- The government declared agriculture and all related activities as essential servicesimmediately upon announcing the lockdown.
- This permitted the successful harvesting and efficient procurement of the critical Rabi crop. Procurement operations also pumped in Rs. 78,000 crores into the crucial sector.
- The measures aimed at aiding the farmers will help ensure the nation’s food security.
- Indian farmers will get the much-needed freedom, flexibility and financial strength to propel India’s economic recovery in the post-COVID-19 period.
- The governmental measures will help prevent the liquidity crunch from converting to insolvencies and bankruptcies.
- Moratorium measures have been announced for businesses for their debt servicing obligations to commercial banks.
- Additional credit line of Rs. 3 trillion has been given to MSMEs without any fresh collateral.
- New equity fund for MSMEs via the Rs. 50,000 crore funds of funds.
- 90,000 crore credit package has been extended to state electricity utilities to enable them to clear their dues to private sector power producers.
- The measures would significantly help improve the ecosystem for private producers and investors,both in agriculture and manufacturing.
- The liberalization of regulations like the Essential Commodities Act, 1955and liberalisation in the defence production sector will help India achieve higher self-reliance in this strategic sector and also emerge as an exporter.
- The opening up of business opportunity to the private businesses via the Public Sector Enterprise Policywill help revive investment sentiments.
- The stimulus package will help the Indian firms operate in an ecosystem that will help them become ‘Glocal’, thereby helping Indian brands command a larger share in the global markets and participate successfully in global value chains.
Conclusion:
The size of the stimulus at ₹20.97 trillion is larger. At more than 10% of the GDP, it compares favorably with packages announced by other emerging economies. Indian farmers will get the much-needed freedoms, flexibility and financial strength to propel India’s economic recovery in the post-COVID-19 period. And buoyed by the stimulus, Indian firms will operate in an ecosystem that will help them become ‘Glocal’, thereby helping Indian brands command a larger share in to global markets and participate successfully in global value chains.