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Fiscal Packages and the current state of Economy

The covid-19 pandemic in continuing to spread across the globe. It has brought and is continually bringing severe human and economic loss. It is threatening both public health and economic growth. The global economy is in the great recession. The economies of all countries are shrinking right now. As per a survey by Chamber of Commerce – more than 30 million small businesses in US could close permanently in the next six months. If it is the situation of US, imagine what will be the position of India.

To counter this, all the countries took several steps and issued relief packages not to restore the economy, but rather support and control further dip. The US has introduced $2.3 trillion or 11% of GDP into its economy under paycheck program and health care enhancement. It includes $300 billion direct cash transfer to individuals and $425 billion in corporate loans. Pakistan has announced a relief package of PKR 1.2 trillion on March 24. IMF is continuously watching all the steps which have been taken by its 193 member countries through its policy tracker.

India has also taken strong containment measures – broader closures and lockdowns to curb the spread of covid-19. PM Modi first announced a Janta-curfew on March 22 in his address to the nation on TV on March 19. He again addressed on March 24th and announced a 21-day complete lockdown beginning on March 25 to fight the covid-19 outbreak. The lockdown was extended by PM to May 3 and it was again extended by Ministry of Home Affairs on May 1 up to May 17 and now up to May 31. The 63-days lockdown has resulted in massive economic disruption. It is having crippling effects on millions of workers – both in formal and informal sectors.  However, it is a welcome step of the government to give relaxation to industrial activities in certain zones.

The finance ministry also came out with an estimate that the GDP growth would be around 2-3% less from the 6-6.5% given in the Economic Survey – 2019-20. Though, Government expected 10% growth rate of GDP in financial budget for FY21. However, the RBI is estimating a negative growth for FY 2020-21. Today the economy is in coma. All the sectors have been hit hard. Industrial production has decreased by 17%, manufacturing activities down by 21% and output of 8 core industries (coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity) dipped by 6.5% in March, 2020. Economists having optimistic approach believe that economy will bounce back. They expect that recovery will be in ‘U-shape’ with a sharp downturn in FY21 followed by a swift rebound in FY22 and FY23. But other economists like Prof Roubini feel that economy will stabilize in the next 8-10 years and recovery will be in ‘L’ shape.

The economy needs support from the government. The government had already announced a stimulus package of Rs 1.7 lakh crore, out of that Rs 1.2 lakh crore was a part of the budget for FY21. But it is not enough to mitigate the effects of coronavirus pandemic. Indian Inc is asking the government to announce a stimulus package. States are also asking the Centre to help them in this fight. Delhi CM Arvind Kejriwal said that the income of Delhi government has dipped to 300 crores from 3500 crore.

CII is demanding a government spending package of Rs 6 lakh crore or 3% of GDP to revive the industry. The economists belonging to India have come out with their own estimates. Raghuram Rajan is recommending a Rs 65000 crore package to help the poor section. Rathin Roy recommends that the government should spend 4-5% of GDP. Ex CEA – Arvind Subramanian and Ex Dy governor of the RBI – Rakesh Mohan are suggesting a fiscal relief programe of 5% of GDP.

To save the economy, the government should increase fiscal packages as soon as possible. The size of Indian economy in terms of nominal GDP is Rs 204 lakh crore. 5% of GDP is Rs 10 lakh crores. It is 38% of the provision of total expenditure of the government that made for FY21. It is not a big deal to spend this amount for the country to cope-up with the present crisis.

PM in his address to the nation on May 12, announced 10% of GDP i.e. 20.97 lakh crore fiscal package for the revival of the economy. Later, FM presented in detail the fiscal package in five tranches. After her announcement, we find that only 12.95 lakh crore was fiscal stimulus and rest amount was the monetary support. We need fiscal support. The government should immediately announce fiscal package to boost the economy. Any delay in announcement will lead to larger requirement of relief package. No doubt, the excess spending will increase fiscal burden.

The government can raise money through perpetual Covid bonds, like war bonds, liberty bonds and consols to finance fiscal stimulus. It can be issued through an emotional appeal to citizens to lend money to the government. War bond, liberty bond and consol are perpetual bonds having fixed income security with no maturity date. A war bond is a debt instrument issued by the government as a means of borrowing money to finance its defense initiatives during times of war. Liberty bond was a war bond issued in the US to support the allied crises during world war-I.  Consol is also a debt instrument having no scheduled return of principal and hence perpetual interest and no maturity.

The government can also ask the RBI to print more currency. The RBI is also keeping its eyes open on the present and evolving macroeconomic situation of the country. In order to increase liquidity in the market, RBI decided on May 22, to reduce – repo rate by 40 bps to 4%, bank rate to 4.25% from 4.65% and reverse repo rate to 3.35% from 3.75% with immediate effect.

No doubt, it will increase the debt of the government. It may go up to 80-90% of GDP in FY21. But do not forget, we have had earlier higher Debt-GDP ratio and that’s why we brought FRBM Act. The government should increase its relief packages, instead of maintaining debt-GDP ratio or controlling fiscal deficit. All the deficit should be financed by the RBI.

Once, the situation is under control and markets get normalized, the government can increase the target of disinvestment and raise money from the market. The government can raise money through the sale of 10% of its stake in LIC. The government can also divest the share of unlisted companies to bridge the fiscal gap to some extent.

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(Vinay K. Srivastava teaches Finance at ITS Ghaziabad. He recently published his next co-authored book – ‘Indirect Tax Reform in India: 1947 to GST and Beyond’. He may be reached at twitter @meetdrvinay)

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