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An insufficient relief

  • IASbaba
  • May 23, 2020
  • 0
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ECONOMY/ GOVERNANCE

Topic: General Studies 2,3:

  • Indian Economy and issues relating to planning, mobilization, of resources 
  • Government policies and interventions for development in various sectors 

An insufficient relief

Context: Union government announced a relief package of Rs 20 trillion, about 10 per cent of the country’s GDP, for the economy in crisis

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Did You Know?

  • The US has committed to the largest rescue package by any country in pure dollar terms of USD 2.7 trillion at an estimated 13% of GDP.
  • Japan has announced a package equivalent to 21.1% of its GDP totalling USD 1.1 trillion
  • Sweden – stimulus equal to 12 per cent of its GDP and Australia (10.8 per cent).
  • Germany has announced a spending of around USD 815 billion, equal to 10.7 per cent of its GDP.

Criticism of the relief package

  1. The design of this relief package seeks to focus on the supply side, with an emphasis on providing liquidity through lines of credit
    • This is with the aim of minimising the cost to the government.
    • Even in normal circumstances, the speed of adjustment of the supply-side is slow because supply responses take time
    • Also, producers would not wish to pile up inventories of unsold goods
    • Rather it should have focused on the demand side by stepping up government expenditure
  2. Difficulties in Agricultural package implementation
    • There is relief for agriculture in the form of a concessional credit line of Rs 2 trillion, but loans are neither automatic or assured
    • Agri-marketing reforms and infrastructure creation are long-term promises. 
  3. There is nothing for the corporate sector in manufacturing or services. 
  4. The distressed sectors such as airlines, automobiles, hotels, restaurants, and tourism have been ignored. 
  5. There is very little for public health, already in a dilapidated state.
  6. Structural difficulties of MSME sector
    • The MSME sector, the backbone of the economy that provides 25% of employment, 32% of the GDP and 45% of exports. 
    • For MSMEs, lenders are not always supportive in extending loans, despite government announcement of Rs 3 trillion line of credit for loans without collateral.
    • Also, buyers (central and state governments, public sector firms and the private sector) owe MSMEs as much as Rs 5 trillion. 
    • MSMEs just do not have the resources to pay wages or meet fixed costs on electricity, rent or interest during the lockdown period and relief package does not address this.
  7. There is a recycling of ideas or schemes from earlier budgets
  8. There is little cohesive focus on stabilisation and revival of the economy in the short-run
  9. Insufficient Fiscal Stimulus (government spending)
    • There are 12 estimates by analysts in financial sector institutions, suggesting that the fiscal stimulus is in the range of 0.7 to 1.3% of the GDP
    • Even then the fiscal stimulus’ contribution to domestic demand will be minuscule, given that private final consumer expenditure in India is about 60 per cent of the GDP.

Suggestion is Extra Fiscal Stimulus

  • The extra fiscal stimulus should have been Rs 7-9 trillion (3-4 per cent of the GDP)
  • This enlarged fiscal deficit cannot be financed by market borrowing, which would simply drive up interest rates and nip recovery in the bud. 
  • It would have to be financed by monetising the deficit – RBI buying government T-bills & printing money
  • The concerns about inflation and downgrade by rating agencies are often exaggerated given that the entire world is going through similar phase

Connecting the dots:

  • 1930s Great Economic Depression
  • Expansionary & contractionary fiscal (or monetary) policy

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