India’s Prime Minister Narendra Modi sure enough left the cat loose in his address to the nation, and followed up by the Finance Minister Nirmala Sitaraman with her daily and elaborate tranches that continue to rock the corona conundrum economic debate. The stimulus package is roughly around 10% of the country’s gross domestic product (GDP) purportedly to infuse vigour into the economy as the country copes with the Covid-19 crisis. Well the debate ranges from evocative images of the desperate migrant workers and what is in store of the bottom half of the population, in terms of survival but also the reform push for a major economic revival of the country. Let us unravel the facts and not the fiction and also unravel the economic reality in terms of the international experience and thought of the past.
Some have even pointed out that this stimulus would tantamount to accounting jugglery or even voodoo economics. Yes, perhaps driven by ideologues and ideologies, politicians and political compulsions or brinkmanship or even realpolitik as was once underlined by the German writer Ludwig von Rochau and not by any scientific wisdom. Some even go on to sight, well how big is the Rs 20 lakh stimulus package. The audio visual and print media getting a cue from the opposition roar: Much Ado About Nothing, a headline with a blank page or that there is everything but nothing or that such a stimulus is not a fiscal stimulus but a liquidity infusion or a new makeup to the existing schemes or even a deferred loan. To counter the roaring headlines and the critics an editorial did sarcastically quip, that it is 10.75 times the Coalgate scam, 11.36 times the 2G scam, 28.6 times the CWG scam and 31.250 times the Bofors scam. Let us decode and unravel the facts from the prevailing fiction.
A glimpse in the backdrop of the COVID-19 outbreak, the subsequent nationwide lockdowns and notwithstanding the treacherous journey of the poor migrant labourers who have been left with no option but to return home, the Confederation of Indian Industries (CII) did announce its own projections that India’s economy will grow from a contraction of 0.9% to a growth of 1.5%, in the current financial year. Let us not forget the Dalal Street where the equity benchmark, Sensex surged over 483 points spurred by the stimulus, tracking gains across the board as expectations did enthuse investor sentiment.
Indeed, any stimulus by a nation in these pandemic times raises tremendous debate as also the concerns. But where lies the truth, let us examine. The economic travails would nominally refer to attempts at use of monetary or fiscal policy to stimulate the economic revival that may in many an instance border on the survival of the populace. Most of the Federal Reserve’s do ease the interest rates followed by quantitative easing so as to increase the money or credit. Colloquially ‘priming the pump’ as has been the case across the world, now facing the bitter pill of economic recession when demand has suddenly vanished and production coupled with employment are no longer sustainable.
Nonetheless, it will do well for the Finance Minister and her team to take all round criticism into account and in good humor to ensure that the reforms process continues in the best interest of our federal polity so well followed by the Prime Minister and the Chief Ministers thus far. Setting such an example in this time of crisis will do well not only for the country but to the looming future of the poorest of the poor as also an example for democracies across the world. The five pillars to support the Atma Nirbhar Bharat or Swarajya initiative not in a narrow sense but as a broad based approach, being criticized by some economists as mooted by the Prime Minister Modi, listed a growing new economy, creating a state-of-the-art infrastructure, setting up a technology-based delivery system, leveraging the young demography and exploiting domestic demand are indeed laudable in principle.
We need both revival and survival, to sustain livelihoods and improve demand would also imply a fiscal stimulus such as increasing public consumption through transfers and even lowering taxes. The side effect is a public debt burden in order to increase the rate of growth. Such an approach is considered to be particularly Keynesian on the assumption that the stimulus will cause economic growth due to the multiplier effect in the economy. Typically and of course, Keynesians are pro stimulus, in contrast to rational economists against it, and the mainstream economists take the middle path.
It was Milton Friedman who felt that the Great Depression almost a century back was accelerated as the central bank did not counter the sudden shock in time through a monetary stimulus to improve money supply and its velocity. More recently, a decade back during the subprime crisis Ben Bernanke had argued that the issue was actually lack of credit, not money supply, and therefore, the Federal Reserve pumped in more credit, to prime the pump instead of adding more liquidity as a stimulus. This was for revival indeed and not really for survival, considering the state of the Banks who were the real culprits in the first place. Yes the economy was back on track in next few years because of the aggressive and well directed policies. However, in India it is as much a question of survival particularly when it comes to the millions of the daily wage earners and the masses driven to destitution and who are even below the poverty line. Let us therefore have a more holistic approach. In this context, It was Jeff Hummel who developed an academic insight into the different implications of the two conflicting approaches. Also I may cite Jeffrey Lacker, who with Renee Haltom, criticized Bernanke’s approach because “it had encouraged excessive risk-taking which had in the past contributed to financial instability.” Thomas Humphrey and Richard Timberlake had a more critical point of view in their book “Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder 1922-1938” on the real bills doctrine as the causative factor in the Great Depression.
It is often argued that fiscal stimulus typically increases inflation, and hence must be counteracted by a typical central bank. Hence only monetary stimulus could work. Counter-arguments say that if the output gap is high enough, the risk of inflation is low, or that in depressions, inflation is too low but central banks are not able to achieve the required inflation rate without fiscal stimulus by the government. Let us in this context also agree as to why monetary stimulus is perhaps more neutral as decreasing interest rates do tend to make new investments more profitable. The fiscal stimulus where the government driven by the popular mandate takes over the investment decisions more due to populism, may also lead to corrupt practices. In a country as ours a lot depends on the very nature of the decision making process, when the government of the day, would in all probability also take forward its vision as such to include new roads, ports, airports or the railways to benefit the industrialization process as also the public at large who cannot pay for them, to choose investments driven by long term benefits that are more beneficial however not profitable in short term. Here is a lesson for India and provides a pragmatic way forward
The stimulus in India may act as a magic wand only if delivered with wisdom and sincerity. Spread over a year or two years timeframe to stress, most critically on self dependence atma nirbharta, swarajya and swadeshi where the focus of the government is on labour, land, liquidity and law. An inherently positive approach, that may even attract the 500 million plus revenue multinationals from China. These enterprises will not only enrich India with cutting edge technology employ our entrepreneurial youth for a much sought after demographic dividend. The real but bitter truth has been that our vast work force remains in the unorganized sector and abysmally unregulated and unprotected more so, due to the inflexible and myopic policies and at times existing unrealistic labour laws of the past.
The economic stimulus is a bold mix of revival and survival to a new deal beginning now and a passage to reforms that broadly announces a departure from the extant mindset of indecisiveness.
Indeed, such an initiative with the right mindset, bureaucratic honesty and political sincerity will surely deliver to put India on the right course to leap frog. To be on a developed road map for all time to come and to prove to be both for revival and survival in these testing times there is a long road ahead. We may also see that to supplement and supplant the quantum stimulus from Prime Minister Narendra Modi, there will be incremental reform measures from the states also, in our federal polity beyond the political divide. These will for sure help improve India’s competitiveness, bolster these reforms for the other Bharat and catapult the country on the high road to progress.
My take, India that is Bharat can convert the pandemic challenge into a never before opportunity given the right political will sincerity and unity of the opposition and the ruling. In this adversity on the back of the world’s fourth largest economic stimulus and boosters for reform despite India’s diversity and enormity, economic revival concomitant with the survival of the poorest is possible by the centre and the states joining hands, a wining preposition for our democracy and federal polity.
The author, Dr. Anoop Swarup, Vice Chancellor of Jagran Lakecity University in Bhopal, is in the Advisory Council for International Cities of Peace. He is also Chair of the Center for Global Nonkilling founded by the late Glen D. Paige.
In 2007, Swarup was appointed by the UN Secretary General Ban Ki Moon as UN Finance Expert for implementation of UN Security Council Resolution to stop the genocide in Darfur.