Coronavirus stimulus: How effective will Rs 20.9 lakh crore COVID-19 package be?

The Prime Minister Narendra Modi-led government has unveiled Rs 20.9 lakh crore coronavirus stimulus in five daily doses. The final tranche of the relief package came on Sunday, the 54th day of the nationwide lockdown. In Modi's own words, the package is meant to give a fresh impetus to India's journey in becoming self-reliant or Atma Nirbhar. But, don't get carried away by the loftiness of Atma Nirbhar. India's stimulus package, like stimuluses offered by every other country fighting the global pandemic, has to achieve certain basic objectives before self-reliance and long term growth plans can play out.

The first is the effective tackling of the pandemic. Unless that happens, economic disruptions will continue, taking a toll on both life and livelihood of people. The second is to help Indian economy withstand the current crisis, by helping not just individuals, but also enterprises, primarily small and medium scale units. This is because they also need to retain the jobs they provide, manage recurring costs and absorb the lockdown linked production losses. Money in the hands of people is a precondition to  restore demand, which is an essential condition to restrict the cycle of demand-supply based economic growth. There has to be a stimulus to re-start the economy in the post-lockdown period too.

India seems to have managed the first challenge, that of fighting COVID-19, better than several other countries, at least until now.  The comparatively moderate increase in the number of coronavirus cases suggests that despite its weak health infrastructure, India's efforts have so far been impressive at a global level. The government has been able to ramp up production of masks, personal protection equipment (PPE), medicines. It also significantly increased the number of COVID-19 tests. In addition, it announced a Rs 15,000 crore health package and a Rs 50 lakh insurance per person scheme for up to 22 lakh health workers fighting COVID-19 much before the structure of the coronavirus stimulus was rolled out. A World Bank supported scheme to strengthen India's epidemic preparedness by setting up testing laboratories even at a district level has also been sanctioned. In short, at the moment, India looks fine with its health response.

That leaves us with the other two objectives, both meant to revive and strengthen Indian economy - to put more money into the hands of people and businesses to reduce the impact of the economic distress caused by the lockdown and stimulate demand, and to adopt measures to speed up the economic recovery post-lockdown while attempting to become Atma Nirbhar. Broken supply chains is also a problem, but it is temporary in nature. It is likely to get restored automatically once the lockdown gets lifted.

Is the stimulus good, big and focused enough for a demand-led economic revival and growth? There may not be an easy answer. In fact, the stimulus is a mix of direct transfer of money and food grains, indirect support to enable businesses and individuals to borrow more money from banks and other financial institutions to tide over liquidity crisis, and a bunch of policy measures to help private industry and attract foreign investments into India. However, unlike most developed countries, the component of direct cash transfer, is very small in India's stimulus package.     

Direct Support

The very first announcement by the central government after India's coronavirus cases began to rise was a Rs 1.7 lakh crore Pradhan Mantri Garib Kalyan Yojana (PMGKY). The initial set of measures included the supply of free food grains - 5 kg wheat or rice and 1 kg of preferred pulses every month for three months - for 80 crore poor people, Rs 500 each as cash transfer to 20 crore women Jan Dhan account holders for three months, increase in MNREGA wages to Rs 202 a day from Rs 182 to benefit 13.62 crore families, an ex-gratia of Rs 1,000 to 3 crore poor senior citizen, poor widows and poor disabled and front-loading Rs 2,000 each payment to 8.7 crore farmers under existing PM Kisan Yojana. The last tranche of announcement said that the government has increased the allocation to the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) by another Rs 40,000 crore to meet the additional demand for the job guarantee scheme due to lockdown linked reverse migration to villages. The free ration was also extended to all poor irrespective of whether they have a ration card or not.

The direct support in this manner ends with the economically weaker sections of the society. For everyone else, in varying measures, there are support measures in place, either through interest subvention, or through initiatives like collateral free loan schemes, partial credit guarantee scheme, postponement of mandatory payment deadlines, working capital credit facility for MSMEs, etc. The schemes are broadly meant to help revive the businesses, but not to compensate for the losses during the lockdown period. The success hence depends on the ability of the enterprises to survive the crisis, which may lead to more job losses, and hence pull down the demand further.

Private Sector Push

The most important component of the government's initiatives and recurring theme across most tranches of stimulus announcements was the thrust towards promoting private businesses by easing regulations and drafting new ones. The assistance given to companies that will set up farm supply chain infrastructure, for instance, will have a positive impact on every stakeholder - from industry to farmer to consumer - but cannot materialise overnight. Similarly, encouraging private participation in the mining, aviation, space or defence sector, cannot be a solution to the immediate problem. A lot of legal and policy tweaks, like a new policy for the strategic sectors where public enterprises should remain, a new law to help businesses bypass the existing Agricultural Produce Market Committee (APMC) mandi system, or amendment to Essential Commodities Act are all meant to encourage private businesses and competition in the sectors but are medium to long term in nature.

Support to State Government

State governments play a major role, perhaps a bigger role in managing the economic and health crisis at the ground level. But the Centre continues to have a leash on the way states can spend their resources. In fact, the fifth tranche of stimulus did provide for an increase in the borrowing limit of states from the existing 3 per cent to 5 per cent of the  state gross domestic product (SGDP), but linked to certain milestone achievements. The conditions, which include one nation, one ration card, payment to power distribution companies etc are all needed. But if seen from a COVID-19 response prism, the ability of these actions to cushion the losses in the economy seems to be less.

As the finance minister herself said, of the Rs 20.9 lakh crore stimulus, Rs 8 lakh crore pertains to the liquidity injection measures adopted by the Reserve Bank of India (RBI). Of the rest, the bulk comes as a credit facility, and its success depends on the ability of the businesses, and the farmers, to utilise the facility.

The government's measures will be good enough to trigger demand if the lockdown ends on May 17. Each extra day will call for further interventions; the longer, the bigger.

Also read: Coronavirus lockdown extended till May 31

Also read: Economic stimulus Tranche IV: Old wine in new bottle